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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998 COMMISSION FILE NO. 333-27341
TELEX COMMUNICATIONS, INC.
(FORMERLY KNOWN AS EV INTERNATIONAL, INC.)
(Exact name of registrant as specified in its charter)
DELAWARE 38-1853300
(State or other jurisdiction of (I.R.S. Employer
incorporation or Identification No.)
organization)
9600 ALDRICH AVENUE SOUTH, BLOOMINGTON, MINNESOTA 55420
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 884-4051
Securities registered pursuant to Section 12(b) of the Act
NONE
Securities registered pursuant to Section 12(g) of the Act
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of Common Stock held by non-affiliates on May 31,
1998 was $0.
As of May 31, 1998 there were 110 shares of Telex Communications, Inc. Common
Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TABLE OF CONTENTS TO FORM 10-K
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PART I .........................................................................................................1
ITEM 1. BUSINESS.................................................................................1
ITEM 2. PRODUCTION AND FACILITIES...............................................................17
ITEM 3. LEGAL PROCEEDINGS.......................................................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................20
PART II ........................................................................................................20
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.....................................................................20
ITEM 6. SELECTED FINANCIAL DATA.................................................................21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.....................................................23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.............................................................................31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.....................................................31
PART III ........................................................................................................32
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS........................................................32
ITEM 11. EXECUTIVE COMPENSATION..................................................................35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..............................................................................43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................44
PART IV ........................................................................................................47
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.............................................................................47
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As used in this Form 10-K, unless otherwise indicated or the context
otherwise requires, references to (i) "Holdings" shall mean Telex Communications
Group, Inc., a Delaware corporation and the corporate parent of the Company;
(ii) "Old Telex" refers to the Delaware corporation formerly named Telex
Communications, Inc., a wholly-owned subsidiary of Holdings, and its
subsidiaries with respect to periods prior to the Mergers (as defined in Item 1.
Business); (iii) the "Company" shall mean Telex Communications, Inc., a Delaware
corporation formerly named EV International, Inc. ("EVI") and successor by
merger to Old Telex, and its subsidiaries and includes, as the context may
require, predecessor and successor companies; (iv) "Old EVI" shall mean EV
International, Inc. and its subsidiaries in respect of periods prior to the
Mergers and includes any predecessor companies; and (v) "EV Holdings" refers to
EVI Audio Holding, Inc., the direct parent company of EVI prior to the Mergers.
In connection with the Merger (as defined in Item 1. Business), the Company
changed its fiscal year end from the last day of February to March 31 and as a
result the Company has included the results of operations for the one month
transition period of March 1997 in the period from February 11, 1997 through
March 31, 1997 under the new basis of accounting. Unless otherwise indicated,
all references in this Form 10-K to Fiscal 1994 through 1997 are to the fiscal
years for the 12 months ending on the last day of February of each year (e.g.,
Fiscal 1997 refers to the fiscal year ended February 28, 1997) and all
references to Fiscal 1998 are for the fiscal year for the 12 months ending March
31, 1998. Unless otherwise indicated, all references to amounts reported for
Fiscal 1994 through Fiscal 1996 are based on the reclassified predecessor basis
of accounting, all references to amounts reported for Fiscal 1997 include the
reclassified predecessor basis of accounting for the period March 1, 1996
through February 10, 1997 and the reclassified new basis of accounting for the
period February 11, 1997 through February 28, 1997. Such reclassified amounts
conform to the Fiscal 1998 presentation. These reclassifications had no impact
on the previously reported operating profit, net income, EBITDA or shareholder's
equity (deficit) (See Note (a) to Selected Historical Financial Data).
PART I
ITEM 1. BUSINESS
CORPORATE HISTORY:
The Company, formed as a result of the February 2, 1998 merger of Old
Telex and Old EVI (see Management's Discussion and Analysis of Financial
Condition and Results of Operations--"The Mergers"), is a leader in the design,
manufacture and marketing of sophisticated audio, wireless and multimedia
communications equipment to commercial, professional and industrial customers.
The Company provides high value-added communications products designed to meet
the specific needs of customers in commercial, professional and industrial
markets, and does not participate in the competitive retail consumer electronics
market. The Company offers a comprehensive range of products worldwide for
professional audio systems as well as for multimedia and other communications
product markets, including wired and wireless microphones, wired and wireless
intercom systems, mixing consoles, signal processors, amplifiers, loudspeaker
systems, headphones and headsets, tape duplication products, talking book
players, LCD projectors, wireless LAN and PCS antennas, hearing aids and
wireless assistive listening devices. Its products are used in airports,
theaters, sports arenas, concert halls, cinemas, stadiums, convention centers,
television and radio broadcast studios, houses of worship and other venues where
music or speech is amplified or transmitted, and by professional entertainers,
television and radio on-air talent, presenters, airline pilots and the hearing
impaired in order to facilitate speech or communications. The Company is a
wholly owned subsidiary of Holdings, a holding company whose assets prior to the
Mergers consisted primarily of its investment in Old Telex.
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Prior to February 10, 1997, the business of Old EVI was conducted as part
of the business of Mark IV Industries, Inc. ("Mark IV"), through a number of
operating divisions and subsidiaries which made up Mark IV's professional audio
business, referred to in this Form 10-K as the Mark IV Audio Group. On February
10, 1997, pursuant to a purchase agreement dated December 12, 1996, an
acquisition subsidiary wholly owned by Greenwich Street Capital Partners, L.P.
("GSCP") and certain affiliated investors acquired from Mark IV and one of its
subsidiaries all of the issued and outstanding capital stock of Gulton
Industries, Inc. ("Gulton"), the former parent of Old EVI, and each of its
subsidiaries for an initial cash purchase price of $151.5 million, plus $4.9
million in estimated adjustments paid on the closing date, which aggregate
amount is subject to further post-closing adjustments. The acquisition
subsidiary subsequently merged with and into Gulton, and Gulton then merged with
and into Old EVI, with Old EVI continuing as the surviving corporation. The
predecessor company of Old Telex 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 Old Telex. On May
6, 1997, Old Telex completed a recapitalization pursuant to an agreement among
Old Telex, Holdings, GSCP and certain other investors. Additional information on
the Old EVI acquisition and Old Telex recapitalization is set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
On February 2, 1998, Old EVI merged with Old Telex, a wholly owned
subsidiary of Holdings and an affiliate of GSCP, with Old EVI surviving (the
"Merger"). In the Merger, EVI changed its corporate name to "Telex
Communications, Inc." and in such capacity is referred to in this Form 10-K as
the "Company". The Merger was effected pursuant to an agreement and plan of
merger, dated January 29, 1998 (the "Merger Agreement") under which Greenwich I
LLC ("G-I"), a subsidiary wholly owned by GSCP and certain affiliated investors,
exchanged all of the issued and outstanding common and preferred stock of EVI
Holdings, the former parent of Old EVI, for 1,397,400 shares of common stock of
Holdings, par value $0.0005 per share (the "Common Stock") and 13,000 shares of
Series A Pay-in-Kind Preferred Stock, par value $0.01 per share, of Holdings,
respectively, and EVI Holdings was merged with and into Holdings, with Holdings
continuing as the surviving corporation (the "Parent Merger", and together with
the Merger, the "Mergers"). The Mergers have been accounted for essentially as a
pooling of interests from May 6, 1997, the date on which Old EVI and Old Telex
came under common control of GSCP, and the financial statements of the Company
for Fiscal 1998 accordingly include the results of Old Telex from May 6, 1997.
In connection with the Mergers, the Company determined to change its
fiscal year, effective as of March 31, 1998, from the last day of February to
March 31, the fiscal year historically utilized by Holdings. This report covers
the fiscal year ended March 31, 1998 and the one month transition period of
March 1997. In this report, the business, operations and financial results for
such one month transition period are included in the period from February 11,
1997 through March 31, 1997. The Company filed an Annual Report on Form 10-K and
Form 10-K/A with the Securities and Exchange Commission (the "Commission") on
May 29, 1998 and on June 19, 1998, respectively, which report covered the fiscal
year ended February 28, 1998. The Company filed a Transition Report on Form 10-K
with the Commission on May 4, 1998, which report covered the business,
operations and financial results of Old Telex from April 1, 1997 through
February 2, 1998 immediately prior to the Merger, but after giving effect to
certain Merger-related transactions. Such Transition Report contains disclosures
concerning Old Telex which may be helpful in better understanding the
information concerning the Company included in this Form 10-K.
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.
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CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company may have included certain forward-looking statements in this
Form 10-K and includes this provision pursuant to the "safe harbor" provisions
of the Private Securities Reform Act of 1995. Whenever, in this Form 10-K, the
Company or its management express an expectation or belief as to future results
or future events, while made in good faith and with a reasonable basis based on
information currently available to the Company's management, there is no
assurance that the statement of expectation or belief will be achieved or
accomplished. Various risk factors could cause actual results and events to vary
significantly from those expressed in any forward-looking statement. The
following factors, in addition to those discussed elsewhere in this Form 10-K,
could affect the future results of the Company, and could cause results to
differ materially from those expressed in such forward-looking statements: (i)
the timely development and market acceptance of new products; (ii) the financial
resources of competitors and the impact of competitive products and pricing;
(iii) changes in general and industry specific economic conditions on a
national, regional or international basis; (iv) changes in laws and regulations,
including changes in accounting standards; (v) the timing of the implementation
of changes in operations to effect cost savings; (vi) opportunities that may be
presented to and pursued by the Company following the Mergers; (vii) the
Company's ability to access external sources of capital; and (viii) such risks
and uncertainties as are detailed from time to time in the Company's Commission
reports and filings.
SEGMENT INFORMATION:
OVERVIEW
Subsequent to the Mergers, the Company reorganized what had been
classified as Old Telex's four strategic business units and Old EVI's four
principal lines of business into the following two business segments:
(i) Professional Sound and Entertainment, which includes Old
EVI's three principal lines of business within the overall
professional audio market: (1) Fixed Installation; (2)
Professional Music Retail; and (3) Concert/Recording/Broadcast
and Old Telex's Broadcast Communications Systems and Sound
Reinforcement product groups (these businesses were previously
part of Old Telex's Professional Sound and Entertainment Group);
and
(ii) Multimedia/Communications, which includes all of Old Telex's
Multimedia/Audio Communications, RF/Communications, and Hearing
Instruments Groups, the Tape Duplication product group from Old
Telex's Professional Sound and Entertainment Group and Old EVI's
Other Applications line of business, consisting of handheld
microphones and earphones for field and aircraft communications,
both military and civilian, equipment for high-speed duplication
of audio tapes, and components marketed to original equipment
manufacturers for incorporation into their products.
A more detailed discussion concerning the Company's two new business segments
follows.
PROFESSIONAL SOUND AND ENTERTAINMENT
Professional Sound and Entertainment combines Old EVI's three principal
lines of business within the overall professional audio market (i.e., (i) Fixed
Installation, or permanently installed sound systems in public venues; (ii)
Professional Music Retail, or sound products used by professional musicians and
sold
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principally through retail channels; and (iii) Concert/Recording/Broadcast, or
sound products used in professional concerts, recording projects and radio and
television broadcast); and the Broadcast Communications Systems and Sound
Reinforcement product groups from Old Telex's Professional Sound and
Entertainment Group (i.e., advanced digital matrix intercoms used by
broadcasters, including all major television networks, to control production
communications; intercoms, headsets and wireless communications systems used by
professional, college and high school football teams and stadiums and other
professional and school sports teams; and wired and wireless microphones used in
the education, sports, broadcast, music and religious markets).
Fixed Installation. Fixed Installation encompasses permanently installed
sound systems in airports, sports arenas, theaters, concert halls, cinemas,
stadiums, convention centers, houses of worship and other venues where music or
speech is amplified. Within the Fixed Installation line of business there are
varying requirements, ranging from concert halls and theatres, which need the
highest quality of fidelity output and broad frequency response, to mass transit
facilities and office buildings, where sound communication is important but need
not be full-range output. The products sold for each type of installation vary
widely in characteristics and price; however, management estimates that the
majority of Fixed Installation contracts generally generate less than $25,000 of
product sales. In this business line prices for the Company's products range
from $65 for a basic microphone to $110,000 for a large-scale, multi-functional
mixing console. The Company's products in the Fixed Installation line of
business are sold through professional audio contractors and distributors. For
example, in the high growth area of cinema sound, the Company's products are
purchased by seven of the ten largest movie theater chains (by number of
screens) in the U.S.
The market for Fixed Installation products is generally driven by new
construction and upgrades of existing installations. In the United States, new
uses of audio products are spurring growth. More dynamic sound and music,
requiring more sophisticated audio products, are increasingly being used in
cinemas, religious services and sporting events. Abroad, the development of
infrastructure and the upgrade of existing facilities, such as auditoriums,
public places, theaters and sports facilities, in emerging economies is also a
source of increasing demand. Another source of growth in the Fixed Installation
business line is the U.S. cinema market, where the number of U.S. movie screens
is forecast to grow by approximately 12% during the years 1998 through 2000.
Many cinemas periodically update their sound amplification systems to realize
fully the new sound technology in motion pictures. Management believes that
houses of worship are another important source of retrofits. Historically, sound
technology has been used in houses of worship to provide sound reinforcement to
the sermon. In contemporary worship services, the sermon is increasingly
complemented by music that demands more sophisticated sound.
Professional Music Retail. Professional Music Retail products are used
mainly by musicians for live performance, recording and reproduction of
recording material and are generally sold directly to end users through
specialized retail stores that market to musicians, bands and local
entertainment venues. Professional Music Retail products appeal to performers
seeking an improved level of sound system performance, reliability and quality.
The Company's Professional Music Retail products generally range from $85 for a
basic microphone to $1,800 for a loudspeaker system and are sold through its
sales representatives and distributors to retail outlets.
The demand for Professional Music Retail products is driven primarily by
an increase in both the number of new users and the number of users upgrading to
take advantage of enhanced sound technology. Most of the end users targeted in
this business line are 18 to 30 years old. In addition, sales are also driven by
demand for smaller and lighter weight products which are easier to perform with
and transport.
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Concert/Recording/Broadcast. The Concert/Recording/Broadcast lines of
business include sound systems for musical concerts and theater productions,
sound recording and radio and television broadcast and production. The Company's
sales of these products are generally made through its distributors and
retailers or directly to touring companies. The Company's
Concert/Recording/Broadcast products range from $65 for a basic microphone to
$110,000 for a large-scale, multi-functional mixing console. Management believes
that sales in the Concert/Recording/Broadcast line of business to established,
high-profile touring companies influence and stimulate purchases of products by
smaller groups and lesser known professional musicians. Management estimates
that the Company produces over 50% of the microphones used for electronic news
gathering by major U.S. television networks and radio station personalities.
Concert/Recording/Broadcast demand is driven by a combination of the
factors that determine growth in the Fixed Installation and Professional Music
Retail lines of business, including technological improvement and an increase in
product applications. For example, most professional sporting events now include
musical performances that require increased sound quality and amplification.
Management believes that audiences have become increasingly accustomed to
improved sound quality while event producers and live musicians have become
accustomed to more advanced technology. The demand for smaller, lighter weight
products is another driver of growth as such products reduce operating costs for
touring applications. In addition, an increase in popularity of remote
electronic news gathering is driving the demand for wired and wireless
microphones as well as portable broadcast mixers.
Broadcast Communications Systems. The Company 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) TW intercom system, is used by
larger broadcast network affiliates, larger sporting venues and production
studios. This system is also used in broadcast trucks as a remote, portable
studio for news gathering or sporting events, and typically provides
communications links for 50 to 60 people at a time. The Company's high-end
product, the RTS(TM) ADAM(TM) (Advanced Digital Audio Matrix) intercom system,
is used by the major networks in order to cover large events such as the
Olympics and the Superbowl. The 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.
The Company 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. In
1996, the Company began providing NFL, college and high school 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.
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.
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The Company believes that it offers one of the industry's most extensive
lines of wireless microphone, receiver and transmitter systems, including a wide
variety of handheld, lapel and guitar microphone options. The Company offers
microphones (including noise canceling) with a wide variety of directional
patterns to meet the needs for general sound reinforcement as well as the
specific needs of users such as drummers, vocalists and public address
announcers. Many of these lines incorporate the Company's Posi-Phase(TM) true
diversity antenna circuitry which produces a stronger signal for higher quality
sound over a longer distance without the signal dropouts or the switching noise
common in other systems. Some of the Company's wireless microphones also
incorporate an advanced proprietary multi-crystal tuning system that allows any
specific frequency to be used within the operating limits of the receiver. The
crystal control and associated radio frequency filtering provide superior radio
frequency performance and maximum protection from interference.
The second product group in Sound Reinforcement is wireless assistive
listening devices, sold to arenas, theaters, churches, funeral homes, hotels and
other public facilities. The Company's principal product in this product group
is the Telex(R) SoundMate(R) wireless assistive listening 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.
BRANDS AND PRODUCTS
The Company has built a broad and diverse product line through the
development of new products and the selective acquisition of product lines. The
following table sets forth the Company's primary Professional Sound and
Entertainment product offerings and principal brands and the business lines to
which they relate. Management estimates that worldwide sales of its Telex and
Electro-Voice brands accounted for approximately 40% of the Professional Sound
and Entertainment segment's net sales in Fiscal 1998 and that the balance of
this segment's net sales are approximately evenly split among the Company's
other Professional Sound and Entertainment brands.
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PRINCIPAL BRAND PRIMARY PRODUCTS BUSINESS LINE
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Telex Wired and wireless microphones, Fixed Installation
headsets, headphones, wireless assistive Professional Music Retail
listening devices Concert/Recording/Broadcast
RTS Intercoms, microphones, headsets Concert/Recording/Broadcast
Fixed Installation
Electro-Voice Microphones, mixing consoles, signal Fixed Installation
processors and amplifiers, loudspeaker Professional Music Retail
systems Concert/Recording/Broadcast
Other Applications
Dynacord Mixing consoles, signal processors and Fixed Installation
amplifiers, loudspeaker systems Professional Music Retail
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PRINCIPAL BRAND PRIMARY PRODUCTS BUSINESS LINE
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Altec Lansing Mixing consoles, signal processors and Fixed Installation
amplifiers, loudspeaker systems
Klark-Teknik Signal processors Fixed Installation
Concert/Recording/Broadcast
Midas Mixing consoles Concert/Recording/Broadcast
Vega Wireless microphones Fixed Installation
Professional Music Retail
Concert/Recording/Broadcast
Other Applications
DDA Mixing consoles Fixed Installation
Concert/Recording/Broadcast
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Microphones. Microphones are the most common method of converting audible
sound waves into electrical signals that can be processed, modified and
amplified. Microphones come in a variety of sizes and shapes, from handheld or
mounted models of all sizes to very small models meant to be hidden from view.
The Company also produces wireless microphones under the Telex and Vega brand
names that use radio instead of cable. The technology employed in the Company's
wireless microphones results in audio quality that, management believes, is
indistinguishable from that of a wired microphone and is targeted to the needs
of the working professional in broadcast and production, concert sound, live
theater, theme parks and related applications.
Mixing Consoles. The primary function of a mixing console is to accept
input of electrical signals from a number of microphone sources, such as
multiple singers and instruments in a band, and blend them together to achieve
the desired balance of sound output. Other sound inputs can be fed into a mixing
console as well, such as recorded music. A mixing console also serves as the
center of a sound system, as it sends the electrical signals it receives back
out to the other components of the system. The Company's top-end mixing consoles
are marketed under the Midas brand name, which are used mainly for touring
applications. The Company also sells mixing consoles under the DDA brand.
Signal Processors and Amplifiers. Signal processors modify sound signals
to increase or decrease volume or mix them with other sound signals. The signal
processor with which most people are familiar is the bass and treble adjustment,
or "tone control." In a professional signal processor, the tone control may be
divided into 31 or more bands, allowing separate adjustment of each. The
controls used to effect these adjustments are called "equalizers." Another
familiar signal processor is called the reverberation unit, which can adjust a
signal to make a sound seem as if it were performed in a large hall. Yet another
function of a signal processor is to provide signal delay so that sound arrives
at the same time for an entire audience whether they sit in the back or front of
a venue. The Company markets signal processors under the Dynacord and
Klark-Teknik names, and was one of the first manufacturers, in 1987, to
introduce a reasonably priced signal processor using digital technology.
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The level of signal output from mixing consoles or signal processors is
too low to drive loudspeakers and must be increased by amplifiers. The Company
produces amplifiers under the Altec Lansing, Dynacord and Electro-Voice brands,
many of which contain built-in digital signal processors necessary to achieve
low-frequency output that is often missing in non-digital amplifiers.
Loudspeaker Systems. Loudspeaker systems convert the electrical signals
created from audible sound waves back into sound audible to the human ear. In a
large professional sound system, specialized loudspeakers called horns direct
sound to parts of the audience so that the level of sound in a large venue can
be equalized. The Company produces its high-end loudspeakers under the
Electro-Voice and Altec Lansing names. Certain of these products use
technologies developed by the Company, including "constant directivity" and
"variable intensity," which help deliver uniform frequency and level of output
across an audience, and manifold technology, which delivers louder output. See
"--Product Development."
MULTIMEDIA/COMMUNICATIONS
Multimedia/Communications combines all of Old Telex's Multimedia/Audio
Communications, RF Communications and Hearing Instruments Groups, the Tape
Duplication product group from Old Telex's Professional Sound and Entertainment
Group and Old EVI's Other Applications line of business (consisting of handheld
microphones and earphones for field and aircraft communications, both military
and civilian, equipment for high-speed duplication of audio tapes, and
components to original equipment manufacturers for incorporation into their
products).
Within the Multimedia/Communications segment, the Company 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 3Com. In addition, the
Company sells its LCD projectors to corporate and educational training
specialists, while principal customers for the Company's aircraft products are
the major aircraft manufacturers and airlines, including Boeing, American
Airlines and Delta, as well as airport fixed base operators. Within this
segment, the Company also offers a broad line of acoustic accessories and
antennas for various communications needs and applications. The Company markets
such products to wireless 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 Company
also produces audio products for the Library of Congress' talking book program
as well as a broad line of high value, technologically differentiated hearing
aids and other assistive listening devices for the hearing impaired including
in-the-ear, behind-the-ear and in-the-canal hearing aids, as well as FM wireless
auditory trainers and personal assistive listening devices. The Company's
patented Adaptive Compression(R) technology offers superior signal processing
and provides the user with superior intelligibility and understanding of speech
in the presence of background noise. The Company's hearing instruments business
dates back to 1936, making it one of the oldest hearing aid manufacturers in the
United States.
Within the Company's new Multimedia/Communications segment, the Company
targets nine principal product markets; (i) computer audio, (ii) tape
duplication, (iii) multimedia presentation/training, (iv) aviation
communications/other applications, (v) wireless LAN and PCS antennas, (vi)
talking book players, (vii) wireless communications, (viii) hearing aids and
(ix) wireless assistive listening devices.
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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, Gateway, 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 in the computer audio market 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 3Com, who then package
these microphones with their modems, to ensure compatibility of the application
to the end-user.
Tape Duplication. The Company's cassette duplicators and copiers are
primarily used to copy the spoken word and serve two principal markets:
religious (houses of worship, missionaries and tape ministries) and training
programs/seminars (professional seminar presenters, self-improvement programs,
teachers, legal documentation and law enforcement). The Company produces a line
of high-speed audiocassette duplicators designed for "in-cassette" copying of
standard audiocassette tapes. This is in contrast to the high volume music
cassette duplication market, where bulk audiotape 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.
Multimedia Presentation/Training. The Multimedia Presentation/Training
product group manufactures and markets projection products, such as the
Firefly(TM), a lightweight portable data/video projector, and Caramate(R) slide
projector products, which are used in many types of educational, training
institutions and presentation settings, primarily for corporate and educational
markets. The Company's LCD projector line also includes other lightweight and
boardroom data/video projectors.
Aviation Communications/Other Applications. The Company supplies a broad
line of aviation communications headsets, intercoms and microphones to major
commercial and commuter airlines and pilots as well as to airframe
manufacturers. 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. In addition, the Company produces hand-held
microphones and earphones for field and aircraft communications, both military
and civilian and sells its components to original equipment manufacturers for
incorporation into their products.
Wireless LAN and PCS Antennas. At the end of 1994, Old 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 world. 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.
9
<PAGE> 12
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. Old Telex began providing talking book players to the LOC
in 1969. In April 1998, the Company entered into a new contract with the LOC
with a maximum term of five years. While the revenue from this program in recent
years has been relatively stable, the program supplies a steady source of cash
flow. 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
Road King(R) CB microphones, have high brand name recognition within their
respective markets. The Company's wireless technology is driven by acoustics and
antenna design capabilities developed over Old Telex's 25-year history in the
military antenna business. The Company distributes wireless communications
products through over 1,100 dealers.
Hearing Aids. Hearing aid devices are generally segmented by ear
positioning and sound enhancement capabilities. Ear positioning takes two forms,
either in the ear or behind the ear. Sound enhancement is based on two types of
technologies, linear amplification, which only amplifies the sound, and
compression technology, which modifies the actual sound received by the user.
The Company believes that its patented compression technology, Adaptive
Compression(R), offers superior signal processing circuitry and provides the
user with superior intelligibility and understanding of speech in the presence
of noise. In October 1996, Old Telex 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 distributes its
hearing aids through 9,000 hearing instrument dispensers throughout the United
States.
The Company has recently created one of the smallest hearing aids
available in the marketplace, marketed under the Acapella(TM) name. The device
fits completely in the canal, making it essentially undetectable. The Acapella
hearing aids offer not only improved appearance but its compression technology
and advanced design offer superior sound as well. In addition, in October 1996,
Old Telex 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.
Wireless Assistive Listening Systems. The Company also produces and
distributes wireless assistive listening systems, such as auditory trainers and
personal assistive listening devices for the hearing impaired, which help the
user in environments with high levels of background noise and poor building
acoustics. Auditory trainers allow the user to hear directly from a sound
source, such as a teacher, via wireless FM transmitters. Personal assistive
listening devices amplify a certain source, such as a speaker. The Company
serves the educational and consumer marketplaces for wireless assistive
listening systems by providing cost-effective, technologically differentiated,
and functionally superior products maintained by excellent customer service. The
Company's principal focus is on the educational market, where many
10
<PAGE> 13
schools and a number of large city (such as New York and Los Angeles) and county
school systems use the Company's products.
As with hearing aid products, the Company believes that it is able to
differentiate its products from its competitors' products through higher ease of
product use and technologically strong design. Its ClassMate(R) line of auditory
trainers offers state-of-the-art RF/wireless designs, compression technology and
synthesized frequency selection in a wireless FM behind-the-ear device, which is
specially designed for older students who have rejected other models based on
the appearance of body-worn auditory trainers.
Prior to the Mergers, Old EVI operated in a single industry segment, the
professional audio market. Subsequent to the Mergers, the Company has
reorganized its principal lines of business into two new business units, as
described above, solely as a result of the addition of Old Telex's businesses in
connection with the Mergers. Financial information about the Company's two new
business units for Fiscal 1998 and for the period from February 11, 1997 through
March 31, 1997 is set forth in Note 13 to the Consolidated Financial Statements
included elsewhere herein.
INTERNATIONAL OPERATIONS
The Company's products are marketed in over 80 countries worldwide, which
reduces the Company's dependence on any single geographic market. The Company
has substantial assets located outside of the United States and a substantial
portion of the Company's sales and earnings are attributable to operations
conducted abroad and to export sales, predominantly in Western Europe and Asia.
In Fiscal 1998, over 40% of the Company's net revenues consisted of sales made
outside the United States, predominantly in Western Europe and Asia. Unlike many
of its competitors, which use independent foreign distributors that generally
sell a variety of competing products, the majority of the Company's foreign
sales efforts are conducted through its foreign distribution subsidiaries.
During Fiscal 1998, the Company's total net sales into each of its
principal geographic regions were as follows: Europe - $67.2 million, Asia
Pacific - $48.8 million, Canada - $9.1 million, and other foreign - $11.7
million. See Note 13 and Note 6 to the Consolidated Financial Statements.
PRODUCT DEVELOPMENT
The Company believes that it is one of the most active developers of new
products in the industry. The Company has over 230 product development projects
planned or currently in progress. Of these, approximately 40 are designed to
yield new technological developments, including numerous applications of digital
technology, which are intended to exploit the industry-wide transition from
analog to digital processing. Other engineering and development projects
principally are for design maintenance or to achieve product enhancements that
have been requested by customers, both of which are important activities in
sustaining the Company's product lines. Because the Company produces a
comprehensive range of products, management believes the Company has the
capacity to integrate technologies from one product line to another product
line, which ultimately leads to new products that are often less expensive,
lighter or otherwise more desirable.
The Company has a history of technological innovation and strong product
development and has introduced numerous technologies that are used throughout
the audio industry, including constant directivity and variable intensity horns,
manifold technology in loudspeaker systems, the application of neodymium in
loudspeaker systems and microphone magnets and titanium in compression driver
diaphragms.
11
<PAGE> 14
The concept of constant directivity in horn design was introduced to
professional audio by Old EVI in the 1970's. Constant directivity is a
characteristic of horn performance that distributes frequencies evenly over the
coverage pattern of the horn. Variable intensity is a characteristic of horn
performance that distributes sound pressure (the level of the sound) evenly over
the coverage pattern of the horn. In combination, constant directivity and
variable intensity provide accurate and uniform sound throughout the listening
area. Manifold technology is the practice of coupling multiple loudspeakers to a
single acoustic horn resulting in significantly higher sound pressure as
compared to the case of one loudspeaker and one horn. The advantages of manifold
technology are the elimination of interferences often found when using multiple
sources and a considerably smaller size and lower weight per unit of sound
pressure. The technology is employed mainly in loudspeaker systems used by
concert musicians. The Company believes Old EVI was the first to employ
neodymium (N-DYM), a rare-earth element, in lieu of conventional magnets in the
manufacture of loudspeaker systems and microphones. This innovation resulted in
products achieving higher acoustic output and lighter weight than previously
possible. Titanium diaphragms represent an improvement over conventional
aluminum compression driver diaphragms because they have a higher
strength-to-weight ratio. Lighter-weight diaphragms produce extended high
frequencies more efficiently than heavier ones.
In professional audio products there is a growing trend toward broader use
of digital technology, which is more flexible and easier to manipulate than
analog technology. The Company offered its first digital product, a digital
signal processor, in 1987. During the intervening years, the Company has
introduced increasingly complex additional digital processing and control
products for a growing range of applications. These products have generally been
specialized signal processing components intended to fulfill a specific role in
a sound system. In the past, the high cost of digital devices has made it
impractical to utilize the technology fully. Recently, the cost of digital
devices has decreased, and such devices have become more powerful, which has
enabled designers to develop products that more fully integrate digital
functions into a sound system. The first of the Company's fully integrated
digital products, an integrated signal processing, routing and control system to
be marketed under the name Merlin, is currently being sold into numerous
customer installations worldwide.
The Company has also 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 specific
integrated circuit design and active noise reduction technologies. This
increased investment in engineering and technology has enabled the Company to
design new products offering enhanced features, quality and reliability and
lower costs.
As of March 31, 1998, the Company's engineering and development
organization consisted of 189 employees located in seven locations around the
world, including 166 engineers, each of whom specializes in a certain type of
product and application. In Fiscal 1996, 1997 and 1998, engineering expenses
were $8.5 million, $8.5 million and $17.3 million, which includes $7.9 million
of expenses of Old Telex, respectively.
12
<PAGE> 15
MANUFACTURING
The Company manufactures most of the products it sells and most of the
active acoustic components that they contain. As of May 21, 1998, this is done
in fifteen facilities located in the United States, Mexico, Germany and Great
Britain. Manufacturing processes are substantially integrated and, in addition
to the assembly processes more typically found among the Company's competitors,
include die casting, fiberglass plastics molding, transformer and coil winding,
sheet metal stamping and forming, metal machining, cabinet fabrication, painting
and plating. The Company purchases certain electrical components, magnets,
lumber and plastics.
Management believes that the Company's integrated manufacturing
capabilities are important factors in maintaining and improving the quality,
performance, availability and cost of its products and decreasing the time to
market of new product introductions. Management also believes that the Company
can respond more effectively to changing customer delivery and product feature
requirements by doing the majority of its own manufacturing and that this gives
it an advantage over many of its competitors. The Company continuously assesses
its manufacturing operations to control or reduce costs.
The Company also sells under its brand names a limited number of finished
products purchased from outside suppliers, including certain electronic products
and loudspeaker systems, where low cost is an essential attribute of the
product. In addition, certain other finished products of non-Company brands are
purchased to supplement the offerings of the Company's distribution operations
in Japan, Hong Kong, Switzerland, Australia and France.
COMPETITION
The markets within the professional sound and entertainment and
multimedia/communications segments are both highly competitive and fragmented
and the Company faces meaningful competition in both segments and in most of its
product categories and markets. Management believes that it is one of a few
manufacturers that carry a comprehensive line of professional audio products and
that the key factors for the Company to maintain its position in its various
markets are the recognition of its various brand names, superior distribution
networks, large user base and large number of products, together with its
extensive experience in designing safe and reliable products, dealing with
regulatory agencies and servicing and repairing its products.
While many of the Company's current competitors are generally smaller than
the Company, certain of the Company's competitors are substantially larger than
the Company and have greater financial resources. The Company believes that its
major competitor in providing a full line of professional audio products is
Harmon International Industries, Incorporated, one of whose three segments
competes in the professional audio products market. 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.
Sony is the Company's only significant competitor in the tape duplication
market.
The Company believes the principal competitive factors within each of its
two business segments are the factors referred to above, as well as product
quality, product reliability, product features, reputation, distribution,
customer service and support, ability to meet delivery schedules, warranty terms
and price. The Company believes that it currently competes favorably overall
with respect to each of these principal competitive factors.
13
<PAGE> 16
PATENTS, TRADEMARKS AND LICENSES
Among the Company's significant assets are its intellectual property
rights. The Company relies on a combination of copyright, trademark and patent
laws to protect these assets, and to a significant degree, on trade secrets,
confidentiality procedures and contractual provisions which may afford more
limited legal protections.
The Company owns several trademarks in the United States and various
foreign countries, including Adaptive Compression(R), Altec Lansing(R),
Audiocom(R), Caramate(R), ClassMate(R), Dynacord(R), Electro-Voice(R),
Hy-Gain(R), Klark-Teknik(R), MagnaByte(R), Manifold Technology(R), ProStar(R),
Road King(R), SoundMate(R), University Sound(R) and Vega(R). A number of these
trademarks Company are identified with and important to the sale and marketing
of the Company's products. See "Professional Sound and Entertainment Brands and
Products."
The Company's operations are not dependent upon any single trademark other
than the Telex and Electro-Voice trademarks. A significant number of products
sold by the Company are sold under the Telex trademark pursuant to a
royalty-free license granted to the Company by Memorex Telex Corporation
("MTC"). On October 15, 1996, MTC filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code. While management does not believe that its
rights under such license will be materially impaired by such filing, the
Company's ability to enforce such license could be adversely affected by such
filing. In addition, the Company has licensed certain of its trademarks,
including the Altec Lansing trademark, for use on products such as consumer
audio products not otherwise manufactured by the Company, pursuant to a
perpetual, royalty-bearing license. From time to time the Company also has
granted patent or technology licenses to, and has licensed technology or patents
from, other parties. The amounts paid to or by the Company on an annual basis in
relation to its licensing activities have not been material.
The Company has not registered many of its significant trademarks in all
foreign jurisdictions in which it does business, although management believes
that the Company's most significant marks generally have been registered in the
jurisdictions where their sales are the strongest. The Company is aware that, in
certain foreign jurisdictions, unaffiliated third parties have applied for and
or obtained registrations for marks identical with or similar to marks owned or
used by the Company. Use or registration of the Company's trademarks by the
Company in such jurisdictions may be prohibited, and the Company's business may
be materially adversely affected thereby. The Company does not believe that any
of its products currently infringe upon the proprietary rights of third parties
in any material respect.
The Company's operations are not dependent to any significant extent on
any single or related group of patents, licenses, franchises or concessions. The
Company believes its most significant patents are four patents relating to high
output compression drivers, manifold technology products, variable intensity
horns and time division multiplex digital matrix intercom system which expire in
2003, 2006, 2009 and 2014, respectively. The Company also owns a number of
patents related to the design and manufacture of several of its products,
including headsets, headphones, boom-mounted microphones, various transducer
devices, multiple-band directional antennas, multimedia projectors, computer
audio microphones, adaptive compression circuitry for hearing aids and certain
intercom-related devices. The Company does not believe that the expiration of
any of its patents will have a material adverse effect on the Company's
financial condition or its results of operations.
14
<PAGE> 17
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 $136.9 million for Fiscal 1998.
The Company's five largest suppliers in Fiscal 1998 accounted for 11.8% 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 5.1% of the total cost of supplies purchased by the
Company in Fiscal 1998. This percentage is expected to decrease in Fiscal 1999
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 16 years. One of the Company's largest suppliers
provides parts and components used in certain products in the Company's LCD
projector products. The Company's purchases from this supplier constituted 3.0%
of the total cost of supplies purchased by the Company for Fiscal 1998.
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 operations. The Company's purchases from this supplier in
Fiscal 1998 comprised 1.8% of the total supplies purchased by the Company. The
Company believes that it could locate alternative sources of supply for these
components. Doing so, however, could result in increased development costs and
product shipment delays.
BACKLOG
As is the case with other companies in the Company's businesses, backlog
is not necessarily a meaningful indicator of the conditions of the business
since the Company typically receives and ships orders representing a major
portion of its quarterly non-contract revenues in the current quarter. As of
March 31, 1998, the Company had a backlog of approximately $35.8 million
compared to approximately $16.0 million as of March 31, 1997. Excluding the
impact of Old Telex, backlog as of March 31, 1998 was approximately $17.6
million.
ENVIRONMENTAL MATTERS
The Company and its operations are subject to extensive and changing U.S.
federal, state and local and foreign environmental laws and regulations,
including, but not limited to, laws and regulations that impose liability on
responsible parties to remediate, or contribute to the costs of remediating,
current or formerly owned or leased sites or other sites where solid or
hazardous wastes or substances were disposed of or released into the
environment. These remediation requirements may be imposed without regard to
fault or legality at the time of the disposal or release. Although management
believes that its current manufacturing operations comply in all material
respects with applicable environmental laws and regulations, environmental
legislation has been enacted and may in the future be enacted or interpreted to
create environmental liability with respect to the Company's facilities or
operations. The Company
15
<PAGE> 18
believes that compliance with federal, state and local environmental protection
laws and provisions should have no material adverse effect on the Company's
results of operations or financial condition.
The Company recently had Phase I Environmental Site Assessment and
Compliance Reviews conducted by a third-party environmental consultant at a
number of its manufacturing sites and is aware of environmental conditions at
such sites that require or may require remediation or continued monitoring. The
Company is undertaking or is planning to undertake remediation or monitoring at
these sites. In particular, the Company's site in Buchanan, Michigan has been
designated a Superfund site under U.S. environmental laws and the Company has
agreed it is a de minimis responsible party at a number of other currently or
formerly owned or utilized sites which have been designated as Superfund sites.
Mark IV has agreed to fully indemnify the Company for environmental liabilities
resulting from the Buchanan, Michigan Superfund site and certain of the other
sites at which the environmental consultant indicated monitoring or remediation
was necessary. Specifically, Mark IV has agreed to indemnify the Company fully
for environmental liabilities resulting from (i) any operations, assets or
business not related to the business of Old EVI prior to the Acquisition Closing
Date, (ii) certain Old EVI sites at which the Company is currently conducting
remediation, including the Superfund site discussed above, or is expected to
conduct remediation in the near term and (iii) certain sites not currently owned
or related to the business of the Company but at which Old EVI presently or in
the past has incurred environmental liability or for which third parties have
claimed Old EVI has responsibility.
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 results of operations 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. In December, 1997, the Company entered into an
Administrative Order on Consent with U.S.E.P.A. under the Resource Conservation
and Recovery Act to further investigate and remediate the Lincoln facility and
an adjoining property. The Company is not able at this time to determine the
amount of additional expenses, if any, that may be incurred by the Company as a
result of these actions.
Through March 31, 1998, the Company had accrued approximately $1.7 million
over the life of the project for anticipated costs to be incurred for the
Lincoln, Nebraska cleanup activities, of which approximately $1.3 million had
been incurred. See Note 12 to the Consolidated Financial Statements of the
Company included elsewhere herein.
The Company estimates that it will incur, in Fiscal 1999, approximately
$150,000 of environmentally related capital expenditures in addition to those
costs associated with the Lincoln, Nebraska cleanup activities described above.
The Company also incurs approximately $30,000 per year of expenses associated
with the disposal of hazardous materials generated in conjunction with its
manufacturing processes.
EMPLOYEES
As of March 31, 1998, the Company employed 2,979 persons worldwide, of
which 2,158 were employed in the United States, 192 were employed in the United
Kingdom, 332 were employed in
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<PAGE> 19
Germany, 144 were employed in Mexico and 153 were employed in other countries.
On a functional basis, approximately 2,237 were employed in manufacturing, 189
in engineering and product development, 387 in sales and marketing and 166 in
administration and finance.
As of March 31, 1998, the Company employed approximately 1,018 unionized
employees, of whom approximately 611 were in the United States, 265 were in
Germany and 142 were in Mexico. In the United States, employees at the Company's
manufacturing facilities in Newport, Tennessee; Sevierville, Tennessee;
Buchanan, Michigan; Mishawaka, Indiana; and Oklahoma City, Oklahoma are covered
by collective bargaining agreements that expire in June 2000, July 2000, June
2000, October 2000 and June 1998, respectively. In addition, in April 1998, the
Company announced the closure of the Oklahoma City, Oklahoma facility, to be
completed in the third quarter of Fiscal 1999, and the movement of its
production and other operations to the Company's other facilities. There are no
material grievances pending with respect to any union employees. The Company has
not experienced any work stoppages in recent years and believes that its
relationship with its employees has been good.
ITEM 2. 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>
UNITED STATES:
Bloomington, Minnesota Owned 50,000 Corporate Headquarters/
Product Development/Sales Office
Blue Earth, Minnesota Owned 150,000 Manufacturing/Distribution
Buchanan, MI Owned 28,500 Product Development
Buchanan, MI Owned 144,000 Manufacturing/Sales/ Marketing/
Administration/Distribution/Service Center
Burnsville, Minnesota Owned 14 acres Vacant land
Glencoe, Minnesota Owned 100,000 Manufacturing
Lincoln, Nebraska Owned 120,000 Manufacturing/Distribution/Product
Development/Sales Office
Newport, TN Owned 49,000 Manufacturing
Oklahoma City, OK(a) Owned 143,000 Manufacturing/Product Development/
Distribution/Service Center
Rochester, Minnesota Owned 30,000 Manufacturing/Distribution
Sevierville, TN Owned 44,000 Manufacturing
</TABLE>
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<PAGE> 20
<TABLE>
<CAPTION>
SIZE
LOCATION OWNED/LEASED (SQUARE-FEET) FACILITY TYPE
-------- ------------ ------------- -------------
<S> <C> <C> <C>
Sun Valley, CA(b) Owned 27,000 Manufacturing/Sales/Marketing/
Administration/Product Development/
Distribution/Service Center
Austin, TX Leased 95,000 Manufacturing/Distribution
Buchanan, MI(c) Leased 9,600 Sales/Marketing/Distribution/Service Center
Burbank, California Leased 2,500 Sales Office
El Monte, CA Leased 23,000 Manufacturing/Sales/Marketing/
Administration/Product Development/
Distribution/Service Center
Mishawaka, IN Leased 20,000 Manufacturing
Newport, TN Leased 40,000 Distribution
Sun Valley, CA(d) Leased 20,600 Distribution
INTERNATIONAL:
Gananoque, Ontario, Canada(e) Owned 16,000 Sales/Marketing/Administration/
Distribution/Service Center
Straubing, Germany Owned 95,000 Manufacturing/Sales/ Marketing/
Administration/Product Development /
Distribution/Service Center
Guangzhou, China Leased 280 Sales/Marketing
Hermosillo, Sonora, Mexico(f) Leased 32,500 Manufacturing
Hohenwarth, Germany Leased 7,600 Manufacturing
Ipsach, Switzerland Leased 3,400 Sales/Marketing/Administration/
Distribution/Service Center
Kidderminster, England Leased 35,000 Manufacturing/Sales/Marketing/
Administration/Product Development/
Distribution/Service Center
Kowloon, Hong Kong Leased 18,300 Sales/Marketing/Administration/
Distribution/Service Center
London, England Leased 200 Sales Office
Nagoya, Japan Leased 500 Sales/Marketing
Osaka, Japan Leased 1,200 Sales/Marketing
Paris, France Leased 3,500 Sales/Marketing/Administration/
Distribution/Service Center
Singapore Leased 2,300 Sales Office, Distribution and Service
Straubing, Germany Leased 10,700 Warehouse
Sydney, Australia Leased 8,000 Sales/Marketing/Administration/
Distribution/Service Center
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
SIZE
LOCATION OWNED/LEASED (SQUARE-FEET) FACILITY TYPE
-------- ------------ ------------- -------------
<S> <C> <C> <C>
Tokyo, Japan Leased 14,800 Sales/Marketing/Administration/
Distribution/Service Center
Toronto, Ontario, Canada Leased 4,000 Sales Office, Distribution
</TABLE>
(a) In April 1998, the Company announced the closure of this facility, to be
completed in the third quarter of Fiscal 1999, and the movement of its
production and other operations to the Company's other facilities.
(b) In April 1998, the Company sold its Gauss audio cassette duplication
product line, the principal products manufactured at this site, and
announced the closure of the remaining operations conduced at this site,
to be completed in the third quarter of Fiscal 1999.
(c) In April 1998, the Company announced the closure of this facility, to be
completed in the second quarter of Fiscal 1999, and the movement of its
operations to the Company's other facilities.
(d) In December 1997, the Company announced the closure of this facility, to
be completed in the first quarter of Fiscal 1999, and the movement of its
operations of the Company's other facilities.
(e) In April 1998, the Company announced the closure of this facility, to be
completed in the first quarter of Fiscal 1999, and the movement of its
operations to the Company's other facilities.
(f) Subject to a five-year lease, scheduled to expire in 2001 if the Company
does not exercise its renewal option.
The Company is committed to achieving International Organization for
Standardization ("ISO") certification at all its principal manufacturing
facilities. The Sevierville, Tennessee and Kidderminster, England and
Hermosillo, Sonora, Mexico facilities have been certified under ISO 9002 and the
Rochester, Minnesota and the Straubing, Germany facilities have been certified
under ISO 9001. The Company's Newport, Tennessee facility is well into the
certification process and expects certification in 1998.
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.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is a party to various legal actions in the
normal course of business. Gulton Industries, Inc. ("Gulton"), a predecessor to
the holding company that was merged into and with the Company, was sued by a
company for infringement of a U.S. patent that Gulton was using to produce
products unrelated to the business of the Company for a business line that was
transferred out of Gulton prior to the Acquisition. At trial, the plaintiff was
awarded $3,023,773 in damages. The matter was appealed and upheld with the issue
of calculation of damages remanded to the District Court. Mark IV, which is
prosecuting the claim on behalf of Gulton, has agreed to indemnify the Company
fully for any losses or liabilities arising from this litigation. The Company
believes that it is not currently a party to any litigation which, if adversely
determined, would have a material adverse effect on the liquidity, results of
operations or financial condition of the Company.
For a discussion of certain environmental matters, see "--Environmental
Matters."
19
<PAGE> 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of either
the Company or Holdings during the fourth quarter of Fiscal 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
100% of the Company's common stock is held by Holdings. There is no
established public trading market for the Common Stock of Holdings. The Common
Stock of Holdings is not listed on any exchange and it is unlikely that an
active trading market will develop in the foreseeable future for such
securities.
Holdings has not paid dividends on its Common Stock and the ability of
Holdings and the Company to pay dividends of their respective common stock is
restricted under the Company's Senior Secured Credit Facility (as defined
herein) and the indentures governing the EVI Notes and the Telex Notes. Holdings
and the Company plan to use any retained earnings for working capital purposes
and to make payments under the agreements governing the Company's long-term
indebtedness.
20
<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data of the
Company for each of the fiscal years ended the last day of February 1994, 1995
and 1996, the period from March 1, 1996 through February 10, 1997, the period
from February 11, 1997 through March 31, 1997, and the fiscal year ended March
31, 1998. The statement of operations and balance sheet data set forth below are
derived from and should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto included elsewhere in this
Form 10-K and "Management's Discussion and Analysis of Financial Condition and
Results of Operations". The statement of operations data for the period from
March 1, 1996 through February 10, 1997, the period from February 11, 1997
through March 31, 1997, and the fiscal year ended March 31, 1998 and the balance
sheet data as of March 31, 1998, are derived from and should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included elsewhere herein which have been audited by Arthur Andersen
LLP, independent public accountants. The statement of operations data set forth
below with respect to the fiscal year ended February 29, 1996 are derived from
and should be read in conjunction with the Company's consolidated financial
statements and notes thereto included elsewhere herein which have been audited
by Coopers & Lybrand L.L.P., independent accountants. The selected historical
financial data with respect to Fiscal 1994 and 1995 are derived from
consolidated financial statements of the Company which are not included herein.
The Mergers have been accounted for essentially as a pooling of interests from
May 6, 1997, the date on which Old EVI and Old Telex came under common control,
and the selected historical financial data below for Fiscal 1998 accordingly
includes the results of operations of Old Telex from May 6, 1997. The results of
operations and balance sheet data of Old Telex are not reflected in the data for
periods prior to May 6, 1997.
<TABLE>
<CAPTION>
PREDECESSOR BASIS OF ACCOUNTING(a) NEW BASIS OF ACCOUNTING(j)
FISCAL YEAR ENDED THE LAST DAY OF PERIOD FROM PERIOD FROM FISCAL YEAR
FEBRUARY MARCH 1, 1996, FEBRUARY 11, ENDED
--------------------------------- THROUGH 1997, THROUGH MARCH 31,
1994 1995 1996 FEBRUARY 10, 1997 MARCH 31, 1997 1998(b)
---- ---- ---- ----------------- -------------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $173.6 $185.3 $195.5 $177.1 $28.3 $332.9
Cost of sales 106.0 115.2 123.9 112.1 18.0 205.6
------ ------ ----- ------ ----- ------
Gross profit 67.6 70.1 71.6 65.0 10.3 127.3
Engineering 5.8 6.6 8.5 8.0 1.3 17.3
Selling, general and administrative 41.3 43.0 44.4 41.6 6.4 81.7
Restructuring charges -- -- -- -- -- 6.2
Corporate charges -- -- -- -- 0.1 2.2
Special charges (c) -- -- -- -- -- 2.2
Amortization of goodwill and other
intangibles 0.9 1.0 1.0 0.9 0.2 3.2
------ ------ ----- ------ ----- ------
Operating profit 19.6 19.5 17.7 14.5 2.3 14.5
Interest expense -- -- -- -- 5.0 37.9
Recapitalization expense -- -- -- -- -- 6.7
Other expense -- -- 0.4 (d) -- 0.1 0.1
------ ------ ----- ------ ----- ------
Income (loss) before income taxes and
extraordinary item 19.6 19.5 18.1 14.5 (2.8) (30.2)
Provision (benefit) for income taxes 7.3 7.5 7.1 6.2 (1.1) 0.1
------ ------ ----- ------ ----- ------
Income (loss) before extraordinary
item 12.3 12.0 11.0 8.3 (1.7) (30.3)
Extraordinary loss from early retire-
ment of debt -- -- -- -- -- 20.6
------ ------ ----- ------ ----- ------
Net income (loss) $12.3 $12.0 $11.0 $8.3 $(1.7) $(50.9)
====== ====== ===== ====== ===== ======
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
PREDECESSOR BASIS OF ACCOUNTING(a) NEW BASIS OF ACCOUNTING(j)
----------------------------------------------------- ----------------------------
FISCAL YEAR ENDED THE LAST DAY OF PERIOD FROM PERIOD FROM FISCAL YEAR
FEBRUARY, MARCH 1, 1996, FEBRUARY 11, ENDED
--------------------------------- THROUGH 1997, THROUGH MARCH 31,
1994 1995 1996 FEBRUARY 10, 1997 MARCH 31, 1997 1998(b)
---- ---- ---- ----------------- -------------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA:
EBITDA (e) $24.0 $24.3 $22.8 $19.6 $3.1 $26.2(f)
EBITDA margin (g) 13.8% 13.1% 11.7% 11.1% 11.0% 7.9%
Capital expenditures $2.6 $4.6 $3.7 $3.3 $0.4 $8.5
Cash interest expense (h) -- -- -- -- -- 36.7
Ratio of EBITDA to cash interest
expense -- -- -- -- -- 0.7
Ratio of EBITDA minus capital
expenditures to cash interest
expense -- -- -- -- -- 0.5
Ratio of earnings to fixed charges (i) -- -- -- -- -- 0.2
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
1998
---------------
BALANCE SHEET DATA:
<S> <C>
Working capital............................................................................... $ 69.9
Total assets.................................................................................. 300.3
Total debt.................................................................................... 353.2
Shareholder's deficit......................................................................... (125.8)
</TABLE>
NOTES TO SELECTED HISTORICAL FINANCIAL DATA
(a) Certain previously reported amounts have been reclassified to conform to
Fiscal 1998 presentation. These reclassifications had no impact on the
previously reported operating profit, net income, EBITDA or shareholder's
equity. Variable selling costs, such as freight and commissions paid to
sales representatives, previously included in cost of sales, are now
included in selling, general and administrative expenses. Additionally,
depreciation expense, previously combined with and reported as a separate
line item on the Statement of Operations as "depreciation and
amortization", is now allocated to cost of sales, engineering expense, and
selling, general and administrative expense.
(b) The financial data for Fiscal 1998 consists of the full year results of
operations for Old EVI and the results of operations of Old Telex for the
period from May 6, 1997 (the date on which both entities came under common
control) through March 31, 1998.
(c) Special charges for Fiscal 1998 consist primarily of non-cash write-offs
associated with the impairment of certain intangible assets, recognized in
accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121 "Accounting for Impairment of Long-Lived Assets
and Assets to be Disposed Of." See Management's Discussion and Analysis of
Financial Condition and Results of Operations- "Fiscal 1998 Compared to
Fiscal 1997" and Notes 1 and 3 to the Consolidated Financial Statements
included elsewhere herein.
(d) Represents a one-time gain on the sale of land in Germany.
(e) EBITDA 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, 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.
(f) The Fiscal 1998 EBITDA, as presented, includes non-cash compensation
charges for stock options associated with the Recapitalization,
non-recurring charges for management cash bonus, restructuring charges and
the non-cash impairment loss described in note (c) above.
(g) Represents EBITDA as a percentage of net sales.
(h) Represents the interest expense exclusive of bank agency fees and
amortization of deferred financing costs.
(i) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes and fixed charges.
Fixed charges consist of interest expense on all indebtedness,
amortization of deferred financing costs and a portion of the rental
expense on operating leases deemed representative of the interest factor.
(j) The Statement of Operations and Financial Data for the periods after
February 10, 1997 were prepared under the new basis of accounting,
which includes adjustments giving effect to the Acquisition under the
purchase method of accounting.
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<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis may contain forward-looking
statements, including, without limitation, statements relating to the Company's
plans, strategies, objectives and expectations and are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Any such forward-looking statements involve known and unknown risks and
uncertainties and the Company's actual results may differ materially from those
forward-looking statements. The Company does not undertake to update, revise or
correct any of the forward-looking information contained in this document.
Readers are cautioned that such forward-looking statements should be read in
connection with the Company's disclosures under the heading "CAUTIONARY
STATEMENT FOR THE PURPOSES OF THE 'SAFE HARBOR' PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995".
The following discussion and analysis of the financial condition and
results of operations covers periods both before and after completion of the
Transactions (as defined herein). As a result of the Transactions, the Company
has entered into new financing arrangements and has a different capital
structure than its predecessors, Old EVI and Old Telex. The results of
operations for the periods after February 10, 1997 were prepared under the new
basis of accounting, which includes adjustments giving effect to the Acquisition
under the purchase method of accounting. Accordingly, the results of operations
for Fiscal 1998, which are affected by such changes, are not comparable to the
results of operations for prior fiscal years which do not fully reflect the
impact of the Transactions. Additionally, in Fiscal 1998 the Company changed its
fiscal year end to March 31 from the last day of February. This change in fiscal
year end, which coincides with that of the Old Telex, did not have a material
impact on the comparability of the results of operations of Fiscal 1998 with
Fiscal 1997. As presented in the Company's Form 10-K for the fiscal year ended
February 28, 1998, the results of operations for the fiscal year ended February
28, 1997 are based on Old EVI's statement of operations for the period ended
February 10, 1997, under the predecessor basis of accounting, and Old EVI's
statement of income for the eighteen-day period ended February 28, 1997, under
the new basis of accounting. The impact of the new basis of accounting in the
period ended February 28, 1997 on the results of operations for the fiscal year
ended February 28, 1997 was not significant. Pursuant to the Recapitalization of
Old Telex on May 6, 1997, the historical basis of all assets and liabilities was
retained for financial reporting purposes, and the repurchases of existing
Holdings Common Stock and issuance of new Holdings Common Stock have been
accounted for as equity transactions. The Mergers have been accounted for
essentially as a pooling of interests from May 6, 1997, the date on which Old
EVI and Old Telex came under common control, and the financial statements of the
Company for Fiscal 1998 accordingly include the results of Old Telex from May 6,
1997. The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the consolidated
financial statements and notes thereto contained elsewhere herein.
THE TRANSACTIONS
The Acquisition. On February 10, 1997 (the "Acquisition Closing Date"),
pursuant to a purchase agreement dated December 12, 1996 (,as amended, the
"Purchase Agreement") an acquisition subsidiary wholly owned by GSCP and certain
affiliated investors acquired from Mark IV and one of its subsidiaries all of
the issued and outstanding capital stock of Gulton, the former parent of Old
EVI, and each of its subsidiaries for an initial cash purchase price of $151.5
million, plus $4.9 million in estimated adjustments paid on the closing date,
which aggregate amount is subject to further post-closing adjustments as
described below. The acquisition subsidiary subsequently merged with and into
the parent of Old EVI, and the parent then merged with and into Old EVI, with
Old EVI ultimately surviving (the "Acquisition"). Prior to the Acquisition
Closing Date, (i) EVI Audio LLC, a subsidiary wholly owned by GSCP and certain
affiliated investors, purchased all the issued and outstanding shares of common
stock and Pay-in-Kind Preferred Stock of EV Holdings for an aggregate amount of
$57.6 million and (ii) EV Holdings, a
23
<PAGE> 26
Delaware corporation organized by GSCP to hold all the issued and outstanding
stock of the EVI, contributed $57.6 million to the Old EVI.
Financing for the Acquisition, and the related fees and expenses,
consisted of (i) $57.6 million of equity capital provided by GSCP and certain
affiliated investors, (ii) a $60.0 million senior credit facility (consisting of
a term loan and a revolving credit facility), and (iii) a $75.0 million senior
subordinated credit facility issued as interim financing by Chase Securities
Inc. and Smith Barney Inc., the initial purchasers of the EVI Existing Notes (as
defined herein), and certain other lenders. Of these amounts, $156.4 million was
used for the purchase price for the Acquisition and $10.4 million was used for
financing and transaction fees and expenses. Under the Purchase Agreement, the
purchase price was subject to adjustment on the basis of (i) the audited working
capital and audited cash flow of Old EVI as of and for the 10-month period ended
December 31, 1996 and (ii) the net intercompany transfers of cash between Mark
IV and its affiliates (other than Old EVI and its subsidiaries), on the one
hand, and Old EVI and its subsidiaries, on the other hand, during the period
between December 31, 1996 and the Acquisition Closing Date. Based on these
provisions Mark IV has requested a purchase price increase of $405,000, which
amount the Company is currently disputing pursuant to the applicable provisions
of the Purchase Agreement.
On March 24, 1997, Old EVI issued 11% Senior Subordinated Notes due 2007
in an aggregate principal amount of $100.0 million (the "EVI Existing Notes"),
all of which were subsequently exchanged in September, 1997 for a like principal
amount of new 11% Senior Subordinated Notes due 2007, Series A (together with
the EVI Existing Notes, the "EVI Notes"), in an offering registered under the
Securities Act of 1933, as amended (the "Securities Act"). The proceeds from the
EVI Notes were used to repay the $75.0 million of indebtedness under the interim
financing in its entirety and a portion of EVI's term loan. The foregoing
transactions, including the issuance of the EVI Notes, are referred to herein as
the "Acquisition Transactions." The Acquisition was accounted for using the
purchase method of accounting pursuant to which the purchase price was allocated
among the acquired assets and liabilities in accordance with estimates of fair
market value on February 10, 1997 (i.e., the Acquisition Closing Date).
In connection with the Acquisition, Mark IV and Old EVI entered into a
transition services agreement pursuant to which Mark IV agreed to provide
certain services, including accounting, tax planning, foreign currency hedging,
cash management and administering certain pension plan assets pending their
transfer to Old EVI, for a period not to exceed twelve months following the
Acquisition Closing Date. In Fiscal 1998, the Company paid an aggregate of
approximately $41,000 in fees for services provided pursuant to such transition
services agreement, which services terminated on January 31, 1998. In addition,
Mark IV and Old EVI entered into a sublease agreement with respect to certain
premises located in Austin, Texas and a non-exclusive, royalty-free license to
use certain names which incorporate the "Mark IV" name, including related
tooling and sales and marketing materials, and to sell products incorporating
such names for periods ranging from 18 to 36 months after the Acquisition
Closing Date.
The Recapitalization. On May 6, 1997 (the "Recapitalization Closing
Date"), Old Telex completed a recapitalization (the "Recapitalization") pursuant
to an Agreement (the "Recapitalization Agreement") among Old Telex, Greenwich
II, LLC ("G-II"), a Delaware limited liability company formed by GSCP and
certain other investors, and GST Acquisition Corp. ("GST"), a Delaware
corporation and a wholly owned subsidiary of G-II. In connection with the
Recapitalization, all of the shares of common stock of Holdings ("Holdings
Common Stock") and all options and warrants to acquire Holdings Common Stock
(other than certain shares of Holdings Common Stock and certain options to
acquire Holdings Common Stock owned by certain members of management of Old
Telex) were converted into the right to receive an aggregate amount of cash (the
"Recapitalization Consideration") equal to approximately $253.9 million. In
addition, in connection with the Recapitalization Agreement, certain shares of
Holdings Common Stock held by management of Old Telex (such shares, the
"Rollover Shares") and certain options to acquire additional shares of Holdings
Common Stock (the "Rollover Options"), with an aggregate value of approximately
$21.2 million (which represented approximately 14% of the equity of Holdings on
a non-diluted basis and approximately 20% on a fully diluted basis) were
retained by such managers. In
24
<PAGE> 27
connection with the Recapitalization, Old Telex completed (i) a tender offer
(the "Tender Offer") to repurchase all of Old Telex's then outstanding 12%
Senior Notes due 2004, in aggregate principal amount of $100.0 million, for
$118.3 million (including premium and consent fees along with accrued interest),
and (ii) a solicitation of consents with respect to certain amendments to the
indenture pursuant to which such notes were issued. The Recapitalization, the
financing thereof (including the issuance by Old Telex of 10 1/2% Senior
Subordinated Notes due 2007 (the "Existing Telex Notes") to Chase Securities,
Inc., Morgan Stanley & Co. Incorporated and Smith Barney, Inc.), the Tender
Offer and the payment of the related fees and expenses are herein referred to as
the "Recapitalization Transaction." See "The Recapitalization" and "Interests of
Certain Persons."
The Recapitalization was financed by (i) $108.4 million of new equity
provided by GSCP and certain other co-investors, (ii) the Rollover Shares and
Rollover Options valued at $21.2 million, (iii) a $140.0 million senior secured
credit facility (the "Senior Secured Credit Facility") with The Chase Manhattan
Bank, Morgan Stanley Senior Funding, Inc. and certain other lenders, consisting
of (a) a $115.0 million term loan facility (the "Term Loan Facility"), and (b) a
$25.0 million revolving credit facility (the "Revolving Credit Facility"), (iv)
$125.0 million of Existing Telex Notes and (v) $36.5 million of available cash
of Old Telex. Of the $108.4 million of new equity contributed by GSCP and
certain other co-investors, $25.2 million consisted of proceeds from the
issuance by GST (a predecessor of Holdings) of Deferred Pay Subordinated
Debentures due 2009 (the "GST Subordinated Debentures").
Pursuant to the Recapitalization of Old Telex on May 6, 1997, the
historical basis of all assets and liabilities was retained for financial
reporting purposes, and the repurchases of existing Holdings Common Stock and
issuance of new Holdings Common Stock have been accounted for as equity
transactions.
In October 1997, Old Telex completed an exchange offer of $125 million
aggregate principal amount of new 10 1/2% Senior Subordinated Notes Due 2007,
Series A (the "New Telex Notes"), which were registered under the Securities
Act, for a like principal amount of the Existing Telex Notes (together with the
New Telex Notes, the "Telex Notes"). All of the Existing Telex Notes were
tendered and accepted for exchange.
The Mergers. On February 2, 1998, Old EVI merged with Old Telex, a wholly
owned subsidiary of Holdings and an affiliate of GSCP, with Old EVI surviving.
In the Merger, Old EVI changed its corporate name to "Telex Communications,
Inc." The Merger was effected pursuant to an agreement and plan of merger, dated
January 29, 1998 under which Greenwich I LLC ("G-I"), a subsidiary wholly owned
by GSCP and certain affiliated investors, exchanged all of the issued and
outstanding common and preferred stock of EVI Holdings, the former parent of Old
EVI, for 1,397,400 shares of Holdings' Common Stock, and 13,000 shares of
Holdings' Series A Pay-in-Kind Preferred Stock, respectively, and EVI Holdings
was merged with and into Holdings, with Holdings continuing as the surviving
corporation. The Mergers have been accounted for essentially as a pooling of
interests from May 6, 1997, the date on which Old EVI and Old Telex came under
common control, and the financial statements of the Company for Fiscal 1998
accordingly include the results of Old Telex from May 6, 1997. Immediately prior
to the Mergers, approximately $12.7 million of indebtedness outstanding under
Old EVI's senior credit facility was paid in full and Old EVI's senior credit
facility was terminated. Such indebtedness, together with $0.4 million of
certain fees and expenses associated with the Mergers, was repaid by utilizing
free cash at closing from Old EVI of $3.8 million and by borrowings under Old
Telex's Revolving Credit Facility of approximately $9.3 million. Total fees and
expenses incurred as a result of the Mergers were $1.7 million, including the
$0.4 million paid at closing. The EVI Notes remain outstanding following the
Mergers.
The Acquisition Transactions, the Recapitalization Transaction, and the
Mergers are referred to herein collectively as the "Transactions."
OVERVIEW
The Company, formed as a result of the February 2, 1998 merger of Old
Telex and Old EVI (see "The Mergers"), is a leader in the design, manufacture
and marketing of sophisticated audio, wireless and
25
<PAGE> 28
multimedia communications equipment to commercial, professional and industrial
customers. The Company provides high value-added communications products
designed to meet the specific needs of customers in commercial, professional and
industrial markets, and does not participate in the competitive retail consumer
electronics market. The Company offers a comprehensive range of products
worldwide for professional audio systems as well as for multimedia and other
communications product markets, including wired and wireless microphones, wired
and wireless intercom systems, mixing consoles, signal processors, amplifiers,
loudspeaker systems, headphones and headsets, tape duplication products, talking
book players, LCD projectors, wireless LAN and PCS antennas, hearing aids and
wireless assistive listening devices.
Subsequent to the Mergers, the Company has reorganized its business into
two business segments: Professional Sound and Entertainment and
Multimedia/Communications. Prior to the Mergers, essentially all of the
Company's business consisted of Old EVI's three principal lines of business
within the overall professional audio market: Fixed Installation, Professional
Music Retail and Concert/Recording/Broadcast. These businesses now comprise a
part of the Company's Professional Sound and Entertainment business segment. In
addition, as a result of the Mergers, the Multimedia/Communications business
segment (consisting mostly of businesses of Old Telex) accounts for a greater
proportion of the Company's business.
The Mergers contributed $154.3 million to Fiscal 1998 reported sales,
approximately 28% of which is attributable to the Professional Sound and
Entertainment business segment and approximately 72% of which is attributable to
the Multimedia/Communications business segment. As a result of the Mergers, the
Professional Sound and Entertainment business segment accounted for
approximately 63% of the Company's Fiscal 1998 reported sales, down from
approximately 92% in Fiscal 1997. The corresponding proportions for
Multimedia/Communications business segment were 37% and 8%.
Over 40% of the Company's sales are made internationally, in over 80
countries. The Company conducts its foreign sales through its foreign
subsidiaries in Germany, Japan, Hong Kong, the United Kingdom, Canada,
Australia, Switzerland, Singapore and France, and exports products from its
manufacturing locations in the U.S., Germany, the United Kingdom and Mexico for
sales through its independent distributors and dealers in other countries.
Overall, the Company's business is not subject to significant seasonal
fluctuations. Management does not believe that inflation has had a material
impact on its financial position or results of operations during the periods
covered by the Consolidated Financial Statements included herein. The Company
has generally been able to effect price increases equal to, or moderately
exceeding, the inflationary increase in costs.
The Company maintains assets and/or operations in a number of foreign
jurisdictions, the most significant of which are Germany, the United Kingdom,
Japan, Singapore, and Hong Kong. In addition, the Company conducts business in
local currency in many countries, the most significant of which are Germany, the
United Kingdom, Japan, Singapore, Hong Kong, Canada, Australia, Switzerland and
France. Exposure to U.S. dollar/German mark and U.S. dollar/British pound
exchange rate volatility is mitigated to some extent by the Company's ability to
source its production needs with existing manufacturing capacity in Germany and
Great Britain, and the exposure to U.S. dollar/Japanese yen exchange rate
volatility is to some extent mitigated by sourcing products denominated in yen
from Japan or through contractual provisions in sales agreements with certain
customers. Nevertheless, the Company has a direct and continuing exposure to
both positive and negative foreign currency movements.
The Company reports the foreign exchange gains or losses on transactions
as part of other (income) expense. Gains and losses on translation of foreign
currency denominated balance sheets are classified as currency translation
adjustments and are included as part of shareholder's equity (deficit). The
Company's predecessor financial statements (i.e., Old EVI's financial
statements) excluded realized foreign currency
26
<PAGE> 29
transaction gains and losses since these were viewed as an integral part of Mark
IV's consolidated risk management.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED FEBRUARY 28, 1997
Net Sales. The Company's net sales increased $140.9 million, or 73.4%,
from $192.0 million in Fiscal 1997 to $332.9 million in Fiscal 1998. Of this
amount, Old Telex contributed $154.3 million. Excluding the impact of Old Telex,
net sales decreased $13.4 million, or 7.0%, from $192.0 million in Fiscal 1997
to $178.6 million in Fiscal 1998, primarily due to a decrease in the Company's
net sales to customers outside of the U.S. Excluding the impact of Old Telex,
net sales to customers in the U.S. remained unchanged at $79.6 million.
Excluding the impact of Old Telex, net sales to customers outside of the United
States decreased $13.4 million, or 11.9%, from $112.5 million in Fiscal 1997 to
$99.1 million in Fiscal 1998. The decrease in net sales to customers outside of
the U.S. was due in part to the stronger U.S. dollar, principally against the
German mark and Japanese yen, which reduced the foreign currency denominated
translated sales, and to the weak economies in Japan and in certain other Asian
countries. Excluding the impact of Old Telex, the stronger U.S. dollar reduced
foreign currency denominated translated sales by approximately $8.2 million in
Fiscal 1998.
Net sales in the Company's Professional Sound and Entertainment segment
increased $29.7 million, or 16.7%, from $177.9 million in Fiscal 1997 to $207.6
million in Fiscal 1998. Excluding the impact of Old Telex, this segment's net
sales decreased $12.8 million, or 7.2%, from net sales of $177.9 million in
Fiscal 1997 to $165.1 million in Fiscal 1998. This decrease is attributed
primarily to the decrease, as described above, in net sales to customers outside
of the U.S.
Net sales in the Company's Multimedia/Communications segment increased
$111.2 million, or 768.8%, from $14.1 million in Fiscal 1997 to $125.3 million
in Fiscal 1998. Excluding the impact of Old Telex, this segment's net sales
decreased $0.5 million, or 4.1%, from $14.1 million in Fiscal 1997 to $13.6
million in Fiscal 1998.
Gross Profit. The Company's gross profit increased $56.4 million, or
79.6%, from $70.9 million in Fiscal 1997 to $127.3 million in Fiscal 1998. As a
percentage of sales, the gross margin rate improved from 36.9% in Fiscal 1997 to
38.2% in Fiscal 1998. Excluding the impact of Old Telex, the Company's gross
profit decreased $8.6 million, or 12.2%, and its gross margin rate declined from
36.9% in Fiscal 1997 to 34.8% in Fiscal 1998. The decline in the gross margin
rate is attributed mainly to the unfavorable movement in exchange rates, the
Company's aggressive pricing strategy employed to maintain its foreign market
positions, and a delay in the introduction of certain new products. The
unfavorable movement in exchange rates primarily affected the gross margin rates
on sales made in Japan and Germany due to the higher costs of goods that were
produced in the U.S. and the U.K.
Engineering. The Company's engineering expenses increased $8.8 million, or
103.2%, from $8.5 million, or 4.4% of net sales in Fiscal 1997 to $17.3 million,
or 5.2% of net sales, in Fiscal 1998. Excluding the impact of Old Telex,
engineering expenses increased $0.9 million, or 10.6%, from $8.5 million in
Fiscal 1997 to $9.4 million in Fiscal 1998. The increase in expenses is
attributable primarily to the increase in outside development costs incurred to
accelerate new product development.
Selling, General and Administrative. Selling, general and administrative
expenses increased $37.2 million, or 83.6%, from $44.5 million, or 23.2% of net
sales, in Fiscal 1997 to $81.7 million, or 24.5% of net sales, in Fiscal 1998.
Included in the Fiscal 1998 selling, general and administrative expenses, as
described below, are $39.7 million of expenses attributed to Old Telex.
Excluding the impact of Old Telex, selling, general and administrative expenses
decreased $2.6 million, or 5.8%, from $44.5 million in Fiscal 1997 to $41.9
million in Fiscal 1998. The decrease was primarily due to spending restraints in
Fiscal 1998.
27
<PAGE> 30
Fiscal 1998 selling, general and administrative expenses attributed to Old
Telex were $39.7 million. Included in these expenses were $13.1 million of costs
related to the Recapitalization consisting of charges for changes in the
Rollover Options, new option grants and special management bonus compensation.
Compensation expense of $7.4 million related to the extension of terms on the
Rollover Options was recognized in Fiscal 1998. In addition, as part of the
Recapitalization Transaction, the Company granted options to purchase shares of
Holdings' Common Stock at a discount from fair value to certain management
employees. The total discount of $9.2 million will be recognized as compensation
expense over the vesting or performance period of the options, generally three
to five years. In Fiscal 1998, the Company recognized $3.2 million of
compensation expense related to these option grants.
Restructuring Charges. In the fourth quarter of Fiscal 1998 the Company
recorded a pre-tax restructuring charge of $6.2 million attributable to the
Merger-related consolidation of certain product lines, and the consolidation of
certain of its worldwide manufacturing, engineering, distribution, marketing,
service and administrative operations to reduce costs, to better utilize the
available manufacturing and operating capacity and to enhance competitiveness.
The consolidation will include the closure of some facilities and will also
include the transfer of a portion of the work from certain facilities to the
Company's remaining locations. The Company expects to complete substantially all
of the restructuring of the operations by early Fiscal 2000, and expects to
complete the sale and disposal of the owned facilities and equipment related to
those operations by late Fiscal 2000.
Included in the restructuring charges are $2.5 million associated with
severance pay for terminated employees, most of whom work in the facilities to
be closed or from which work is to be transferred to other locations, $2.8
million associated with the write-down to fair market value of certain assets
(primarily inventories related to the products to be discontinued, and land,
building and equipment to be sold, made obsolete or redundant), and $0.9 million
associated with other costs.
Corporate Charges. Corporate charges of $2.2 million in Fiscal 1998
represent fees for consulting and management services provided by GCSP under a
management and services agreement.
Special Charges. In Fiscal 1998 the Company recognized an impairment loss
of $2.2 million, charged to operating income, in accordance with the provisions
of Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for
Impairment of Long-Lived Assets and Assets to be Disposed Of." SFAS 121 requires
impairment losses to be recorded on long-lived assets used in the operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. The impairment loss is measured by comparing the fair value of the
assets, as determined by discounting the future cash flows at a market rate of
interest, to its carrying value.
Other (income) expense. The Company's foreign exchange loss was
essentially offset by license fee income. The foreign exchange loss was
primarily due to the unfavorable exchange rate movement in the German mark,
Australian dollar and Japanese yen against the U.S. dollar.
Recapitalization expense. The Company recorded a $6.7 million
recapitalization expense in Fiscal 1998, attributed to Old Telex. The charge
consists of fees for investment advisory, legal, audit and other professional
services attributed to the Recapitalization Transaction.
Interest (income) expense. Interest expense increased from $0.8 million in
Fiscal 1997 to $37.9 million in Fiscal 1998. The increase is attributed to $1.7
million of bank fees incurred in connection with a bridge loan commitment
related to the Recapitalization Transaction, $1.7 million of bank and other fees
in connection with the Mergers, and an increase in average outstanding
indebtedness resulting from the Transactions.
Income Taxes. The Company's income tax benefit, excluding the $15.7
million income tax provision related to the net deferred tax asset valuation
allowance, was 30.8% of the pretax loss and includes the extraordinary item for
Fiscal 1998. The effective tax rate for Fiscal 1997 was 42.7%. The lower
28
<PAGE> 31
effective tax benefit rate for Fiscal 1998 is principally due to the
nondeductibility of certain costs related to the Recapitalization Transaction
and goodwill amortization costs.
The Company has established a net deferred tax valuation allowance of
$15.7 million, charged to income tax provision for Fiscal 1998, due to the
uncertainty of the realization of future tax benefits. The realization of the
future tax benefits related to the deferred tax asset is dependent on many
factors, including the Company's ability to generate taxable income within the
net operating loss carryforward period. Management has considered these factors
in reaching its conclusion as to the adequacy of the valuation allowance for
financial reporting purposes.
Extraordinary Loss. In connection with the Transactions, the Company
recorded a pre-tax extraordinary loss of $20.6 million on the early retirement
of debt, consisting of bond premium, consent and tender fees, along with the
write-off of deferred financing costs associated with the repurchase and early
retirement in Old Telex's $100.0 million 12% Senior Notes due 2004 and the
termination of Old EVI's senior credit agreement.
YEAR ENDED FEBRUARY 28, 1997 COMPARED TO YEAR ENDED FEBRUARY 29, 1996
Net Sales. Net sales decreased $3.5 million, or 1.8%, from $195.5 million
in Fiscal 1996 to $192.0 million in Fiscal 1997. During the comparable periods,
net sales to customers in the United States decreased $8.6 million, or 9.8%,
from $88.2 million in Fiscal 1996 to $79.6 million in Fiscal 1997 and net sales
of $112.4 million in Fiscal 1997 to customers outside the United States
increased $5.1 million, or 4.8%, from $107.3 million in Fiscal 1996. Principal
factors accounting for the overall decrease in sales included the relative
strengthening of the U.S. dollar against certain European currencies, the
termination by the Company of several unauthorized exporters in the U.S., the
Company's decision to cease production of certain low-margin items under its
University Sound brand and the effect of business dislocations due to a fire at
the Company's Swiss facility. These factors were offset in part by increased
sales in the Pacific region, Argentina and Brazil and an out-of-cycle price
increase introduced at the end of fiscal 1996.
Gross Profit. Gross profit decreased $0.7 million, or 1.0%, from $71.6
million in Fiscal 1996 to $70.9 million in Fiscal 1997. As a percentage of net
sales, the gross margin rate increased from 36.6% in Fiscal 1996 to 36.9% in
Fiscal 1997. Principal factors for this gross margin rate improvement included
sales of high-margin loudspeaker systems and products into foreign markets, a
reduction of sales of certain low-margin University Sound products,
manufacturing cost reductions during the second and third quarters of fiscal
1997 and the continuing effects of the out-of-cycle price increase. This was
offset in part by product mix shifts and unfavorable currency exchange rates.
Engineering. Engineering expenses of $8.5 million in Fiscal 1997 were
unchanged compared to Fiscal 1996. As a percentage of net sales, engineering
expenses increased to 4.4% in Fiscal 1997 from 4.3% in Fiscal 1996. The Company
continues to emphasize the development of digital technologies, systems and
products.
Selling, General and Administrative. Selling, general and administrative
expenses of $44.5 million in Fiscal 1997 were relatively unchanged compared to
$44.4 million in Fiscal 1996. As a percentage of net sales, selling, general and
administrative expenses increased to 23.2% in Fiscal 1997 from 22.7% in Fiscal
1996. The expense rate increased because the Company has not yet realized the
full benefit of its continuing effort to lower expenses and to streamline
support functions, including the consolidation of certain selling, general and
administrative functions from Oklahoma City, Oklahoma into Buchanan, Michigan
and from Ipsach, Switzerland into Straubing, Germany.
Income Taxes. The Company's provision for income taxes as a percentage of
income before provision for taxes was 42.7% for Fiscal 1997 compared to 39.2%
for Fiscal 1996. The higher rate principally relates to the amortization of
nondeductible goodwill recorded as a result of the Acquisition and certain other
nondeductible expenses.
29
<PAGE> 32
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 the Company had cash and cash equivalents of $2.2
million compared to $10.3 million at the end of Fiscal 1997. The Company's
principal source of funds consisted of cash generated from operating activities
in Fiscal 1998. Net cash provided by operations in Fiscal 1998 was $12.8
million. Excluding the impact of Old Telex, the Company's operations provided
$0.9 million of cash in Fiscal 1998 compared with $4.9 million of cash provided
by operations in Fiscal 1997. The decrease in cash from operations, exclusive of
Old Telex, is attributable primarily to lower operating profit, an increase in
interest expense and other expenses related to the Transactions, and an increase
in inventory, partially offset by a decrease in receivables.
The Company's investing activities consist mainly of capital expenditures
to maintain facilities, to acquire machines or tooling, to update certain
manufacturing processes and to improve efficiency. Capital expenditures totaled
$8.5 million in Fiscal 1998 compared with $3.4 million in Fiscal 1997. Excluding
the impact of Old Telex, Fiscal 1998 capital expenditures were $3.4 million. The
Company estimates its annual maintenance levels of capital expenditures to be
approximately $6.3 million. The Company's ability to make capital expenditures
is subject to certain restrictions under its Senior Secured Credit Facility.
The Company's consolidated indebtedness increased $243.2 million from
$110.0 million at the end of Fiscal 1997 to $353.2 million at March 31, 1998.
The increase in indebtedness was due primarily to the indebtedness of Old Telex,
which was assumed by the Company in the Merger.
The Company's liquidity needs arise primarily from debt service on
indebtedness incurred in connection with the Transactions, working capital needs
and capital expenditure requirements. The Company incurred substantial
indebtedness in connection with the Acquisition Transactions and the
Recapitalization Transaction. As a result, debt service obligations represent
significant liquidity requirements for the Company.
The Company relies mainly on internally generated funds, and, to the
extent necessary, borrowings under the Revolving Credit Facility and foreign
working capital lines to meet its liquidity needs. Prior to the consummation of
the Acquisition Transactions, Old EVI operated as a division of Mark IV and
substantially all of its cash needs were historically funded through
interest-free cash requisitions from Mark IV.
The Company's current credit facilities include the Senior Secured Credit
Facility consisting of the Term Loan Facility of $115.0 million and the
Revolving Credit Facility, subject to certain borrowing base limitations, of
$25.0 million, and foreign working capital lines, subject to certain
limitations, of $4.7 million. In certain instances the foreign working capital
lines are secured by a lien on foreign real property, leaseholds, accounts
receivable and inventory or are guaranteed by another subsidiary.
As of March 31, 1998, $8.3 million of the Company's $113.1 million Term
Loan Facility is payable in the next 12 months. In addition, the Company had
$13.3 million outstanding under the Revolving Credit Facility, and $1.8 million
outstanding under the foreign working capital lines. Net availability at March
31, 1998 under the Revolving Credit Facility, computed by deducting
approximately $8.2 million of open letters of credit and applying applicable
borrowing base limitations, totaled $3.5 million. Net availability at March 31,
1998 under such foreign working lines totaled $2.9 million. Outstanding balances
under substantially all of these credit facilities bear interest at floating
rates based upon the interest rate option selected by the Company; therefore,
the Company's financial condition is and will continue to be affected by changes
in the prevailing interest rates. The effective interest rate under these credit
facilities in Fiscal 1998 was 8.5%.
In addition, 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 ($48.3 million outstanding at
30
<PAGE> 33
March 31, 1998), $7.8 million, $8.0 million, $8.7 million, $12.0 million and
$11.8 million of which is payable in each of Fiscal 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 ($64.9 million outstanding
at March 31, 1998), $0.5 million, $0.5 million, $0.5 million, $0.5 million, $6.6
million, $28.1 million and $28.2 million of which is payable in each of Fiscal
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.
The Company expects to generate cash flow from operations attributable to
Merger-related restructurings. In addition, in June 1998, the Company received a
$7.2 million tax refund associated with its net operating loss tax benefit and
has arranged a $4.0 million intercompany line of credit with Holdings. In
addition, the Company is actively implementing plans to reduce inventory and
improve the accounts receivable collection experience.
The Company believes that these additional sources of funds, together with
the Company's Revolving Credit Facility and cash from operations will be
adequate to meet its debt service and principal payment requirements, capital
expenditure needs, working capital requirements, and the funding needed for the
restructuring and other related expenditures attributed to the Mergers. However,
no assurance can be given in this regard, because working capital requirements
and other circumstances may change. The Company's future performance and its
ability to service its obligations will also be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond the Company's control.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MANAGEMENT OF FOREIGN CURRENCY RISK
The Company has substantial assets located outside of the United States,
and a substantial portion of the Company's sales and earnings are attributable
to operations conducted abroad and to export sales, predominantly in Western
Europe and Asia Pacific. The Company's international operations subject the
Company to certain risks, including increased exposure to currency exchange
rate fluctuations. The Company intends to hedge a portion of its foreign
currency exposure by incurring liabilities, including bank debt, denominated in
the local currencies of those countries where its subsidiaries are located, and
plans to develop systems to manage and control its currency risk exposure. The
Company's international operations also subject it to certain other risks,
including adverse political or economic developments in the foreign countries in
which it conducts business, foreign governmental regulation, dividend
restrictions, tariffs and potential adverse tax consequences, including payment
of taxes in jurisdictions that have higher tax rates than does the United
States.
From time to time, 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 maturity dates 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, 1998, the Company had no foreign currency forward exchange contracts
outstanding.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Reports of Independent Public Accountants, Report of Independent
Accountants, Consolidated Financial Statements and Supplementary Data required
by Item 8 are set forth immediately following the signature page of this report
and are hereby incorporated herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with the Company's independent
public accountants on accounting or financial disclosure.
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<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position, as of March 31,
1998, 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*............................ 57 Vice President, Chief Financial Officer, Treasurer and
Assistant Secretary
John A. Palleschi*......................... 47 Vice President, Corporate Development, General
Counsel and Secretary
Joseph P. Winebarger....................... 49 Vice President, Engineering, Customer Services and
Information Systems
Dan M. Dantzler............................ 49 Vice President and President, Professional Sound and
Entertainment Group
Glen E. Cavanaugh.......................... 54 Vice President and President, Multimedia/
Communications Group
Paul A. McGuire............................ 56 Vice President, Sales & Marketing, Professional Sound
and Entertainment Group
Roger H. Gaines............................ 56 Vice President, Manufacturing
F. Davis Merrey, Jr........................ 57 Vice President, UK operations
Jeffrey J. Rosen........................... 48 Director
Edgar S. Woolard, Jr....................... 64 Director
Evan M. Marks.............................. 40 Director
Christopher P. Forester.................... 47 Director
Alfred C. Eckert III....................... 50 Director
Keith W. Abell............................. 41 Director
Christine K. Vanden Beukel*................ 28 Director, Assistant Secretary and Assistant Treasurer
</TABLE>
- ---------------------------
* Executive holds same position with Holdings
Mr. Hale is Chairman of the Board, President and Chief Executive Officer
of the Company, having served Old Telex in such capacity since 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 worldwide
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.
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<PAGE> 35
Mr. Hislop is Vice President, Chief Financial Officer, Treasurer and
Assistant Secretary of the Company, having served Old Telex in such capacity
since May 1993. Prior to joining Old Telex, 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 is Vice President, Corporate Development, General Counsel
and Secretary of the Company, having served Old Telex in such capacity since
January 1995. Prior to January 1995, Mr. Palleschi was Vice President,
Administration, General Counsel and Secretary of Old Telex and served in such
capacity since June 1989. Prior to joining Old Telex, 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.
Mr. Winebarger has been Vice President responsible for Old Telex's
Information Systems since January 1995 and for Old Telex's Engineering Services,
Quality Assurance and Sales Administration operations since April 1993 and
continues in such capacity with Telex. Prior to April 1993, Mr. Winebarger was
Vice President, Engineering of Telex and served in such capacity with Old Telex
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 President of Telex's
Professional Sound and Entertainment Group since February 1998. From September
1997 to February 1998, Mr. Dantzler served as Acting President and Chief
Executive Officer of Old EVI and from May 1994 to September 1997 served as Vice
President and President of Old Telex's RF/Communications Group. Prior to May
1994, Mr. Dantzler was Vice President and General Manager of Old 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 Old Telex. From 1983 to 1989, Mr. Dantzler served as
General Manager of the Hy-Gain Division of Old Telex 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 Telex and
Hy-Gain.
Mr. Cavanaugh has been Vice President and President of Telex's
Multimedia/Communications Group since February 1998. Mr. Cavanaugh joined Telex
in April 1993 as Vice President and President of Old Telex's
Multimedia/Communications Group and was appointed president of the Group in May
1994. Prior to joining Old Telex, Mr. Cavanaugh was Senior Vice President, Sales
and Marketing of Applied Voice Technology, Inc., which he joined in 1990. 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. McGuire has been Vice President, Sales and Marketing of Telex's
Professional Sound and Entertainment Group since February 1998. From May 1997 to
February 1998, Mr. McGuire served as Acting Co-Chief Executive Officer of Old
EVI prior to which he was Vice President of Old EVI with responsibility for
sales and marketing. He joined Electro-Voice, Incorporated, a predecessor of
EVI, in 1972. He held positions in sales and marketing at Electro-Voice,
Incorporated and in 1990 was appointed
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<PAGE> 36
President. In 1994, he was appointed President of Mark IV Audio, Inc., with
responsibility for the Americas. In 1995, Mr. McGuire assumed the additional
responsibility for Europe.
Mr. Gaines is Vice President, Manufacturing of the Company, having served
in such capacity since 1991. From May 1997 to February 1998, Mr. Gaines also
served as Acting Co-Chief Executive Officer of EVI. He joined Electro-Voice,
Incorporated, a predecessor of EVI, in 1981. In 1991, he was appointed Vice
President of Manufacturing of Mark IV Audio, Inc.
Mr. Merrey has served as Vice President, UK Operations since August 1997.
From April 1994 to August 1997, Mr. Merrey served as Vice President of Research
and Development of Electro-Voice, Incorporated, a predecessor of EVI. He joined
Electro-Voice, Incorporated in 1976. In 1985, he was appointed President of
Altec Lansing Corporation, a subsidiary of Gulton Industries, Inc.
Mr. Rosen became a director of the Company on January 29, 1998. He also
served as Director of Old Telex from December 1993 to May 6, 1997. He is a
partner of the law firm O'Melveny & Myers. Mr. Rosen has been a partner of
O'Melveny & Myers since 1987.
Mr. Woolard became a director of the Company on January 29, 1998. Mr.
Woolard is the former Chairman of the Board of Directors of DuPont. He joined
DuPont in 1957 and held a variety of engineering, manufacturing and management
positions before being elected President and Chief Operating Officer in 1987,
and Chairman and Chief Executive Officer in 1989. He retired from the company in
1995. Mr. Woolard is also a director of Citicorp and Apple Computer.
Mr. Marks became a director on December 23, 1997. He is the managing
principal of Alben Asset Management, L.L.C., a private investment company based
in New York. Prior to forming Alben, Mr. Marks was in partnership with George
Soros from 1992 to 1998 as the president of G. Soros Realty, Inc., which
invested in real estate globally. Prior to his association with Soros, Mr. Marks
was a principal in the real estate investment group of Lazard Freres & Co.
Mr. Forester became a director on December 23, 1997. Mr. Forester has been
retired since 1995. From 1993 to 1995, Mr. Forester was Managing Director of the
technology industry group of Merrill Lynch & Co. From 1977 to 1993, Mr. Forester
worked in the Corporate Finance Department, Investment Banking Division of
Goldman, Sachs & Co. where he was a General Partner from 1988 to 1993.
Mr. 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 Day International Group, Inc., Eastgate Group Limited, IPC
Magazines, Georgia Gulf Corporation and HBO & Company.
Mr. Abell became a director of the Company on December 23, 1997. Mr. Abell
joined GSCP at its inception in 1994. From 1990 to 1994, Mr. Abell was with the
Blackstone Group, most recently as a Managing Director.
Ms. Vanden Beukel became a director of the Company on December 23, 1997.
Ms. Vanden Beukel joined GSCP at its inception in 1994. Ms. Vanden Beukel
previously worked in the investment banking division of Smith Barney Inc. Ms.
Vanden Beukel is also a director of Day International Group, Inc.
34
<PAGE> 37
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Directors who are not employees of the Company or GSCP are paid $1,500 for
each Board meeting attended. The Company paid Mr. Woolard a consulting fee of
$50,000 for services rendered prior to the time he became a director of the
Company. In addition, the Company has granted Messrs. Marks, Forester, Woolard
and Rosen warrants representing the right to purchase 5,484, 5,484, 10,783, and
5,484 shares, respectively, of Common Stock of Holdings, subject to certain
anti-dilution provisions, at an exercise price of $31.93 per share. A portion of
these warrants became exercisable on grant; the remainder will become
exercisable over time through 2001, provided in each case, that the holder of
the warrant is a director of the Company on the date of exercise. Directors who
are employees of the Company or GSCP receive no separate compensation for their
services as directors. All of the Company's directors are entitled to
reimbursement of their reasonable out-of-pocket expenses in connection with
their travel to and attendance at meetings of the Board. Currently three of the
Company's directors are employees of GSCP, to which the Company pays fees for
management and financial consulting services. See Item 13, "Certain
Relationships and Related Transactions."
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation with
respect to all compensation paid or accrued by the Company for services rendered
in all capacities for the Fiscal Years indicated below by its Chief Executive
Officer and each of the other four most highly compensated executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(a) COMPENSATION
NUMBER OF
SHARES ALL OTHER
FISCAL SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(b) ($)(c) OPTIONS(d) $(e)
--------------------------- ---- ------ ------ ---------- ------------
<S> <C> <C> <C> <C> <C>
John L. Hale............................ 1998 325,250 1,015,317 299,320
Chairman of the Board, President and 1997 312,006 212,456 -- --
Chief Executive Officer 1996 297,115 175,407 160,000 --
John T. Hislop.......................... 1998 157,738 160,776 69,340
Vice President, Chief Financial Officer, 1997 149,865 100,267 -- --
Treasurer and Assistant Secretary 1996 140,742 118,038 -- --
Dan M. Dantzler......................... 1998 129,808 120,632 24,100
Vice President and President, 1997 124,950 80,065 -- --
Professional Sound and Entertainment 1996 118,058 62,948 -- --
Joseph P. Winebarger.................... 1998 131,308 132,172 21,560 --
Vice President, Engineering, Customer 1997 126,485 64,720 -- --
Services and Information Systems 1996 118,038 69,637 -- --
John A. Palleschi....................... 1998 137,286 241,634 82,620
Vice President, Corporate 1997 129,536 87,843 -- --
Development, General Counsel and 1996 119,993 73,439 16,000 --
Secretary
</TABLE>
- ---------------------------
(a) For the fiscal year ended March 31, 1998, 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.
35
<PAGE> 38
(b) Amounts shown include cash compensation earned and received, amounts
earned but deferred, and amounts earned but deferred and paid in the
subsequent fiscal year.
(c) Amounts shown for each Fiscal Year are awards under the plan that were
earned in such Fiscal Year and paid in the subsequent fiscal year.
Effective on the Recapitalization Closing Date, bonuses will be paid
pursuant to new bonus programs. See "The Annual Bonus Programs."
Amounts shown for Fiscal Year 1998 represent the special bonuses paid
under the Annual Bonus Programs. Bonuses earned under the new bonus
plans during Fiscal 1998 will be based on the twelve month period
ending March 31, 1998 and calculated upon completion of the audit for
the fiscal year ended March 31, 1998. Such bonuses are reported by the
Company for Fiscal Year 1998 and will be paid in Fiscal 1999. Amounts
shown for Fiscal 1996 and 1997 represent bonuses under the Fiscal 1996
and 1997 management incentive plan. The plan was 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 were based upon performance measured by established Old 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 plans are made within 30
days following the completion of the audit for the fiscal year in which
such compensation is earned. The management incentive plans provide for
a bonus target of 50.0% of base salary, although maximum awards can
exceed such targets. The maximum award for Fiscal 1997 for the named
executive officers was 75.0% of base salary for Fiscal 1997.
(d) All Options for Fiscal 1998 were granted under the 1997 Stock Option Plan
on the Recapitalization Closing Date. Options granted in Fiscal 1996 are
fully vested and exercisable and are governed by the terms of the 1997
Stock Option Plan. Amounts are adjusted to reflect the 20-for-1 stock
split effected by Holdings effective as of June 25, 1997.
OPTION GRANTS DURING FISCAL 1998
The following table sets forth information on the options to acquire
Common Stock of Holdings granted to the named executive officers during Fiscal
1998 and the potential realizable value of each grant:
OPTION GRANTS DURING FISCAL 1998
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE
SHARES OPTIONS AT ASSUMED ANNUAL RATES
UNDERLYING GRANTED TO OF STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION FOR OPTION TERM(c)
NAME GRANTED(a) FISCAL 1998 PRICE(b) DATE 5% 10%
- --------------------- ------------ ------------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
John L. Hale 213,160(d) 53.5% $7.98 05/06/07 $9,385,435 $15,952,894
86,160(e) 54.3% $31.93 05/06/07 $1,730,093 $4,384,682
---------- ---------- -----------
299,320 $11,115,528 $20,337,576
John T. Hislop 48,080(d) 12.1% $7.98 05/06/07 $2,116,962 $3,598,307
21,260(e) 13.4% $31.93 05/06/07 $426,901 $1,081,921
---------- ---------- -----------
69,340 $2,543,863 $4,680,228
Dan M. Dantzler 18,840(d) 4.7% $7.98 05/06/07 $829,525 $1,409,986
5,260(e) 3.3% $31.93 05/06/07 $105,621 $267,681
---------- ---------- -----------
24,100 $935,146 $1,677,667
Joseph P. Winebarger 17,540(d) 4.4% $7.98 05/06/07 $772,286 $1,312,698
4,020(e) 2.5% $31.93 05/06/07 $80,722 $204,578
---------- ---------- -----------
21,560 $853,008 $1,517,276
John A. Palleschi 57,360(d) 14.4% $7.98 05/06/07 $2,525,561 $4,292,822
25,260(e) 15.9% $31.93 05/06/07 $507,221 $1,285,481
---------- ---------- -----------
82,620 $3,032,782 $5,578,303
</TABLE>
- -----------------
(a) All Options were granted under the Company's 1997 Stock Option Plan.
Amounts are adjusted to reflect the 20 for 1 stock split effected by
Holdings effective as of June 25, 1997.
36
<PAGE> 39
(b) The exercise price of $7.98 per share is $23.95 less than the fair market
value at the time of grant. The total discount of $9.4 million will be
recognized as compensation expense over the vesting or performance period
of the options, generally from three to five years.
(c) The 5% and 10% assumed annual compound rates of stock price appreciation
from the assumed price of $31.93 per share are mandated by the rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of future Common Stock prices.
(d) Includes Initial Option Grants, which vest over a three period beginning
on the date of grant, and Performance Option Grants, which vest over a
five year period upon achievement of certain annual performance objectives
and, notwithstanding the achievement of such performance objectives, upon
the seventh anniversary of the date of grant. On May 6, 1997 (the
Recapitalization Closing Date) Mr. Hale was granted 107,100 shares and
106,060 shares under the Initial Option Grant and the Performance Option
Grant, respectively; Mr. Hislop was granted 18,700 shares and 29,380
shares under the Initial Option Grant and the Performance Option Grant,
respectively; Mr. Dantzler was granted 12,000 shares and 6,800 shares
under the Initial Option Grant and the Performance Option Grant,
respectively; Mr. Winebarger was granted 12,270 shares and 4,820 shares
under the Initial Option Grant and the Performance Option Grant,
respectively; and Mr. Palleschi was granted 26,240 shares and 31,120
shares under the Initial Option Grant and the Performance Option Grant,
respectively.
(e) Includes Super Performance Options granted on May 6, 1997 (the
Recapitalization Closing Date), which vest on the fifth anniversary of the
date of grant or upon a Change of Control (as defined in the 1997 Stock
Option Plan) on the achievement of certain long term performance
objectives, and, notwithstanding the achievement of such performance
objectives, on the seventh anniversary of the grant date.
STOCK OPTION EXERCISES AND VALUE AT MARCH 31, 1998
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 during the period ended March 31, 1998 and
options to acquire Common Stock of Holdings held by the named executive officers
as of March 31, 1998. No stock appreciation rights have been granted under any
incentive plan.
AGGREGATED OPTION EXERCISES DURING FISCAL 1998
AND OPTION VALUES AT MARCH 31, 1998
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF VALUE UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES REALIZED OPTIONS OPTIONS
ACQUIRED ON ($)(a) EXERCISABLE/ EXERCISABLE/
NAME EXERCISE UNEXERCISABLE UNEXERCISABLE($)(b)
- ----------------------- ----------- ---------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
John L. Hale .......... 147,920 $4,723,012 118,805/266,595 3,291,274/4,321,418
John T. Hislop ........ 127,920 $4,087,422 52,680/63,640 1,728,878/1,016,272
Dan M. Dantzler ....... 25,580 $ 816,757 18,070/20,450 546,839/363,801
Joseph P. Winebarger... 17,800 $ 568,345 16,070/17,690 481,379/327,397
John A. Palleschi ..... 35,840 $1,144,353 28,175/74,605 779,220/1,181,813
</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.
OLD TELEX 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"). Options granted
prior to the Recapitalization Closing Date are also governed by the terms of the
Option Plan.
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
37
<PAGE> 40
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.
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
38
<PAGE> 41
Performance Option Grant, respectively, (iii) Mr. Dantzler was granted 12,000
shares, 6,840 shares and 5,260 shares under the Initial Option Grant, the
Performance Option Grant and the Super Performance Option Grant, respectively,
(iv) Mr. Winebarger was granted 12,270 shares, 4,820 shares and 4,020 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 $1.1 million, and $0.3
million in Fiscal 1999 and 2000, respectively.
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 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, Dantzler,
Winebarger 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, Dantzler, Winebarger 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, $0.2 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 $0.4 million. $0.2 million, $0.1
million, $0.1 million and $0.1 million, in Fiscal 1999, 2000, 2001 and 2002,
respectively.
POSSIBLE RESTRUCTURING OF OPTION PLAN
The Company and its senior management team are discussing a possible
restructuring of some aspects of the Option Plan. While the precise terms of any
such restructuring have not been established, and will, in any event, be subject
to a number of conditions, including approval by the Company's Board of
Directors, the Company currently expects that all of the previously granted
Performance Grant Options and Super Performance Grant Options would be
terminated in any such restructuring and replaced by two new series of options.
If any such restructuring is ultimately implemented, the Company will disclose
the precise terms of the Company's revised option plan (and provide any related
disclosure) when and as required by The Securities and Exchange Act of 1934, as
amended.
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 Mr. Cavanaugh if his 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.
39
<PAGE> 42
RETIREMENT BENEFITS
OLD EVI DEFINED CONTRIBUTION PLAN
The Company maintains the EV International, Inc. Savings and Retirement
Plan (the "Savings Plans"), which is a defined contribution plan with a cash or
deferred arrangement (as described under Section 401(k) of the Internal Revenue
Code of 1986, as amended). All salaried employees and certain employees covered
by the collective bargaining agreements are eligible to participate in the
Savings Plan after completion of one year of service.
Eligible employees may elect to contribute on a tax deferred basis from
1% to 15% of their compensation (as defined in the Savings Plan), subject to
statutory limitations. In addition, the Company may make matching or
discretionary contributions, which vary in amount, to the Savings Plan. The
Company has committed for the first plan year (as defined in the Savings Plan)
to make a discretionary contribution on behalf of non-collectively bargained
employees in an amount which is substantially comparable to the amount of
contribution of benefits that such participants would have received if they were
participants in the Mark IV Savings and Retirement Plan (which amount, for
fiscal year 1997, would have been an aggregate of approximately $450,000) or the
Mark IV Retirement Plan, had such plans continued in full force and effect after
the Acquisition.
Under the terms of the Savings Plan, each participant has a fully vested
(nonforfeitable) interest in all contributions made by the individual, matching
contributions and all earnings thereon. A participant will vest in any
discretionary contributions made to his or her account upon completion of five
years of service.
OLD TELEX PENSION PLAN
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.
40
<PAGE> 43
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------------------------
REMUNERATION 15 20 25 30 35
----------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 125,000 $ 26,002 $ 34,670 $ 43,337 $ 52,004 $ 60,672
150,000 31,552 42,070 52,587 63,104 73,622
175,000 33,127 44,170 55,212 66,254 77,297
200,000 34,252 45,670 57,087 68,504 79,922
225,000 35,377 47,170 58,962 70,754 82,547
250,000 35,865 47,820 59,775 71,730 83,685
300,000 35,865 47,820 59,775 71,730 83,685
400,000 35,865 47,820 59,775 71,730 83,685
500,000 35,865 47,820 59,775 71,730 83,685
</TABLE>
The full years of credited service as of March 31, 1998 for the executive
officers named in the Summary Compensation Table above are as follows: Mr. Hale,
6; Mr. Hislop, 4; Mr. Dantzler, 20; Mr. Winebarger, 23; and Mr. Palleschi, 14.
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 $160,000 (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.
EMPLOYMENT AGREEMENTS
John L. Hale, John T. Hislop and John A. Palleschi each entered into
five-year employment agreements with Holdings 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
41
<PAGE> 44
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 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.
OLD EVI MANAGEMENT CHANGES
On May 6, 1997, the employment of Messrs. Pabst, Bolstetter and Graham,
who had been, respectively, the Chief Executive Officer and President, Vice
President-Finance and Vice President-Administration, of Old EVI was terminated.
Under employment agreements with the Company, Messrs. Pabst and Bolstetter were
entitled to compensation upon their departure from the Company. Pursuant to such
employment agreements during the course of employment, Messrs. Pabst and
Bolstetter were entitled to, among other items, an annual base salary of
$230,000 and $140,000, respectively, and an annual cash bonus in an amount
determined under the Company's Annual Bonus Plan based on the achievement of
targeted performance objectives. All obligations of the Company to Messrs. Pabst
and Bolstetter ceased upon the termination of their respective employment except
that each (a) is entitled to payment of his earned salary, accrued vacation, and
vested benefits earned through the date of termination, and (b) shall receive a
pro rata annual bonus for the year of termination. Any severance payments due to
Messrs. Pabst and Bolstetter under their Employment Agreements shall be paid by
Mark IV, as provided in such Employment Agreements and the Purchase Agreement.
Mr. Graham is entitled to receive severance payments pursuant to a severance
agreement with Mark IV which are paid by Mark IV.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
OWNERSHIP OF CAPITAL STOCK
The authorized common stock of the Company as of March 31, 1998 consists
of 1,000 shares of common stock, par value $.01 per share, of which 110 shares
are issued and outstanding and all of which are owned by Holdings. The
authorized Common Stock of Holdings as of March 31, 1998 consists of 7,000,000
shares of Common Stock, par value $.0005 per share, of which 4,438,140 shares
are issued and outstanding and 200,000 shares of Series A Pay-in-Kind Preferred
Stock, par value $0.01 per share, (the "Preferred Stock") of which 13,000 shares
are issued and outstanding. Except for 433,240 Rollover Shares (as defined
herein), which are owned by current and former management and certain shares
held by a former director of Holdings and Telex, all of the issued and
outstanding Common Stock of Holdings is
42
<PAGE> 45
owned by Greenwich I, LLC and Greenwich II, LLC and all of the issued and
outstanding Preferred Stock is owned by Greenwich I, LLC.
The following table sets forth the beneficial ownership of the limited
liability company interests of each of Greenwich I, LLC and Greenwich II, LLC,
each of which is affiliated with GSCP.
<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, N.Y. 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, N.Y. 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,
Connecticut 06183-2030. The person is an indirect wholly owned
subsidiary of Travelers.
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 21, 1998 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
NAME OF BENEFICIAL OWNER(a) BENEFICIALLY OWNED BENEFICIALLY OWNED(a) PERCENT OF CLASS
--------------------------- ------------------ --------------------- ----------------
<S> <C> <C> <C>
Greenwich II, LLC(b) ......................... 2,605,060 -- 58.7%
Greenwich I, LLC(b) .......................... 1,397,400 -- 31.5%
John L. Hale ................................. 243,680 127,730 8.1%
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF SHARES UNDERLYING OPTIONS
NAME OF BENEFICIAL OWNER(a) BENEFICIALLY OWNED BENEFICIALLY OWNED(a) PERCENT OF CLASS
--------------------------- ------------------ --------------------- ----------------
<S> <C> <C> <C>
John T. Hislop .................................................. 17,480 54,240 1.6%
Dan M. Dantzler ................................................. 37,740 19,072 1.3%
Joseph P. Winebarger ............................................ 46,540 17,132 1.4%
John A. Palleschi ............................................... 48,880 30,362 1.8%
Alfred C. Eckert III(c) ......................................... -- -- 0.0%
Jeffrey J. Rosen ................................................ -- 783 0.0%
Edgar S. Woolard, Jr ............................................ -- 3,595 0.0%
Evan M. Marks ................................................... -- 1,828 0.0%
Christopher P. Forester ......................................... -- 1,828 0.0%
Keith W. Abell(c) ............................................... -- -- 0.0%
Christine K. Vanden Beukel(c) ................................... -- -- 0.0%
All directors and officers as a group (16) persons(b)(c) ....... 415,800 324,054 15.9%
</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 I, LLC and Greenwich
II, LLC.
(c) Does not include any of the 4,002,460 shares of Holdings Common Stock
beneficially owned by Greenwich I LLC and Greenwich II LLC, which Messrs.
Eckert and Abell and Ms. Vanden Beukel may be deemed to beneficially own
by virtue of their affiliation with GSCP. Mr. Eckert, Mr. Abell and Ms.
Vanden Beukel disclaim any such beneficial ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, Old Telex 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 (which represented approximately 20% of the fully diluted equity of
Holdings, giving effect to the Rollover Options) were retained by certain
members of management of the Company. In connection with the Recapitalization,
Old Telex completed (i) the Tender Offer to repurchase all of Old Telex's then
outstanding 12% Senior Notes due 2004, in aggregate principal amount of $100.0
million, and (ii) a solicitation of consents with respect to certain amendments
to the indenture pursuant to which such notes were issued.
44
<PAGE> 47
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 (which are now
obligations of Holdings) 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 effectiveness of the Mergers, 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-I and 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.
INTEREST OF CERTAIN PERSONS
GSCP is a private direct equity investment fund organized in 1994 to
provide long-term capital for and make acquisitions in companies in a variety of
industries. GSCP invests in management buyouts, leveraged acquisitions,
international investment opportunities and minority investments. The general
partner of GSCP is Greenwich Street Capital Partners, Inc., a wholly-owned
subsidiary of The Travelers Group, Inc ("Travelers"). Messr. Eckert is the
President of GSCP and a director of Holdings and the Company; Messr. Abell and
Ms. Vanden Beukel are principals of GSCP and directors of Holdings and of the
Company. See Item 10. Directors and Officers of the Registrant. GSCP and certain
co-investors affiliated with Travelers purchased $57.6 million of equity in Old
EVI in connection with the Acquisition and $108.4 of equity in Old Telex in
connection with the Recapitalization.
The Company has 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 aggregate annual fee of $1,715,000, payable quarterly in arrears,
plus Greenwich's reasonable out-of-pocket costs and
45
<PAGE> 48
expenses. This engagement will be in effect until the earlier to occur of the
fifth anniversary of the Acquisition Closing Date or the date on which GSCP no
longer owns, directly or indirectly, any shares of the capital stock of G-II,
and may be earlier terminated by Greenwich in its discretion. In connection with
the Mergers, the services agreement which previously had been entered into by
Greenwich and Old Telex and assumed by the Company in the Merger was amended to
reduce the term thereof from a maximum of ten years to a maximum of five years.
In conjunction with such amendment, the services agreement between Greenwich and
Old EVI that had been in effect prior to the Mergers was terminated.
In addition, Greenwich received $1.5 million in fees on the Acquisition
Closing Date, and $2.5 million in fees on the Recapitalization Closing Date, for
providing services relating to the structuring and management of the Acquisition
(including the management compensation package related thereto) and the
Recapitalization Transactions, respectively and is entitled to receive
reimbursement for its reasonable out-of-pocket costs and expenses relating to
its provision of such services.
In addition, Holdings has agreed to indemnify Greenwich, GSCP, and their
respective directors, officers, partners, employees, agents, representatives and
control persons against certain liabilities arising under the federal securities
laws, liabilities arising out of the performance of the consulting agreement and
certain other claims and liabilities.
GSCP and Smith Barney, Inc. are both affiliated companies of Travelers.
An affiliate of Chase Securities Inc. is a limited partner in GSCP. Chase
Securities Inc. is an affiliate of The Chase Manhattan Bank ("Chase"), which is
the administrative agent and a lender to the Company under the Senior Secured
Credit Facility. Chase Securities Inc. acted as a Dealer Manager in connection
with Old Telex's Tender Offer. Chase and Smith Barney Inc. provided interim
financing to Old EVI in connection with the Acquisition. Chase has received and
will receive customary fees in connection with the Senior Secured Credit
Facility and Chase and Smith Barney Inc. received customary fees in connection
with such interim financing, as well as their proportionate shares of repayment
by Old EVI of amounts outstanding under the interim financing and Old EVI's
senior credit facility from the proceeds of the offering of the EVI Notes. Chase
Securities Inc. and Chase or their affiliates participate from time to time in
various financing and banking transactions for GSCP and its affiliates. Princes
Gate Investors II, L.P., an investment fund affiliated with Morgan Stanley & Co.
Incorporated, together with certain affiliated investors, are the owners of the
GST Subordinated Debentures.
MANAGEMENT
In connection with the Recapitalization 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, Dantzler, Winebarger and Palleschi, respectively, were converted
into the right to receive an aggregate of $25.6 million, $5.5 million, $2.8
million, $3.3 million and $5.4 million in cash, respectively. In addition, in
connection with the Recapitalization Transactions, an aggregate of 329,760,
64,460, 52,160, 58,740 and 69,040 of the shares of Holdings Common Stock and
options to acquire shares of Holdings Common Stock held by Messrs. Hale, Hislop,
Dantzler, Winebarger and Palleschi, respectively, were retained by such
individuals.
46
<PAGE> 49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
<TABLE>
<CAPTION>
(a) The following documents are filed as a part of this report: Page
----
<S> <C>
1. Financial Statements:
CONSOLIDATED FINANCIAL STATEMENTS (NEW BASIS OF ACCOUNTING)
Report of Independent Public Accountants..............................53
Consolidated Balance Sheets as of March 31, 1998 and 1997.............54
Consolidated Statements of Operations for the year ended
March 31, 1998 and for the period from February 11, 1997
through March 31, 1997................................................55
Consolidated Statements of Shareholder's Equity (Deficit)
for the year ended March 31, 1998 and for the period from
February 11, 1997 through March 31, 1997..............................56
Consolidated Statements of Cash Flows for the year ended
March 31, 1998 and for the period from February 11, 1997
through March 31, 1997................................................57
Notes to Consolidated Financial Statements............................58
CONSOLIDATED FINANCIAL STATEMENTS
(PREDECESSOR BASIS OF ACCOUNTING)
Report of Independent Public Accountants..............................81
Report of Independent Accountants.....................................82
Consolidated Statements of Income and Retained Earnings
for the period from March 1, 1996 through February 10, 1997
and for the year ended February 29, 1996............... ..............83
Consolidated Statements of Cash Flows for the period from
March 1, 1996 through February 10, 1997 and for the year
ended February 29, 1996...............................................84
Notes to Consolidated Financial Statements............................85
</TABLE>
2. Financial Statement Schedules:
All schedules have been omitted because they are inapplicable, not
required, or the information is included elsewhere in the financial
statements or notes thereto.
3. The Exhibits are listed in the Exhibit Index required by Item 601
of the Regulation S-K at Item (c) below and included immediately
following the Consolidated Financial Statements. The Exhibit Index
is incorporated herein by reference.
(b) On January 8, 1998, Old EVI filed a Current Report on Form 8-K with
the Securities and Exchange Commission reporting that Old EVI had
announced their intent to merge with Old Telex. On April 21, 1998,
the Company filed Current Report on Form 8-K reporting the Mergers,
which Form 8-K included the following financial statements:
Unaudited Pro Forma Condensed Statement of Operations for the year
ended February 28, 1997 for Old EVI and March 31, 1997 for Old
Telex, respectively; Unaudited Pro Forma Condensed Statement of
Operations for the nine months ended November 30, 1997 for Old EVI
and December 31, 1997 for Old Telex, respectively; Unaudited Pro
Forma
47
<PAGE> 50
Condensed Balance Sheet as of November 30, 1997 and December 31,
1997 for Old Telex, respectively; and Notes to the Unaudited Pro
Forma Condensed Financial Statements.
(c) The Exhibit Index and required Exhibits are included following the
Consolidated Financial Statements. The Company will furnish to any
security holder, upon written request, any exhibit listed in the
accompanying Exhibit Index upon payment by such security holder of
the Company's reasonable expenses in furnishing any such exhibit.
(d) The Index to Consolidated Financial Statements is included
following the signature page of this report.
48
<PAGE> 51
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT:
The Company has not sent to its security holders an annual report
covering the fiscal year ended March 31, 1998 nor any proxy material relating to
any annual or other meeting of security holders. The indentures governing the
EVI Notes and the Telex Notes require the Company to provide to the holders of
such notes with such annual reports and such information, documents and other
reports as are specified in Sections 13 and 15(d) of the Securities Exchange Act
of 1934, as amended.
49
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 14th day of
July 1998.
TELEX COMMUNICATIONS, INC.
By: /s/ John L. Hale
-------------------------------
John L. Hale, President and
Chief Executive Officer
Power of Attorney
Each person whose signature appears below constitutes and appoints, JOHN
L. HALE and JOHN T. HISLOP his true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign this
Transition Report on Form 10-K and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, each acting alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Transition Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John L. Hale President, Chief Executive July 14, 1998
- --------------------------------------------- Officer and Chairman of the
John L. Hale Board of Directors (principal
executive officer)
/s/ John T. Hislop Vice President, Chief Financial July 14, 1998
- --------------------------------------------- Officer, Treasurer and Assistant
John T. Hislop Secretary (principal financial
and accounting officer)
Director July , 1998
- ---------------------------------------------
Jeffrey J. Rosen
</TABLE>
50
<PAGE> 53
<TABLE>
<S> <C> <C>
/s/ Edgar S. Woolard, Jr. Director July 14, 1998
- ---------------------------------------------
Edgar S. Woolard, Jr.
Director July , 1998
- ---------------------------------------------
Evan M. Marks
/s/ Christopher P. Forester Director July 14, 1998
- ---------------------------------------------
Christopher P. Forester
/s/ Alfred C. Eckert III Director July 14, 1998
- ---------------------------------------------
Alfred C. Eckert III
/s/ Keith W. Abell Director July 14, 1998
- ---------------------------------------------
Keith W. Abell
/s/ Christine K. Vanden Beukel Director July 14, 1998
- ---------------------------------------------
Christine K. Vanden Beukel
</TABLE>
51
<PAGE> 54
TELEX COMMUNICATIONS, INC.
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Page
Consolidated Financial Statements (New Basis of Accounting):
Report of Independent Public Accountants 53
Consolidated Balance Sheets as of March 31, 1998 and 1997 54
Consolidated Statements of Operations for the year ended March 31, 1998 and
for the period from February 11, 1997 through March 31, 1997 55
Consolidated Statements of Shareholder's Equity (Deficit) for the year ended
March 31, 1998 and for the period from February 11, 1997 through March 31, 1997 56
Consolidated Statements of Cash Flows for the year ended March 31, 1998 and
for the period from February 11, 1997 through March 31, 1997 57
Notes to Consolidated Financial Statements 58
Consolidated Financial Statements (Predecessor Basis Of Accounting):
Report of Independent Public Accountants 81
Report of Independent Accountants 82
Consolidated Statements of Income and Retained Earnings for the period
from March 1, 1996 through February 10, 1997 and for the year ended
February 29, 1996 83
Consolidated Statements of Cash Flows for the period from March 1, 1996
through February 10, 1997 and for the year ended February 29, 1996 84
Notes to Consolidated Financial Statements 85
</TABLE>
52
<PAGE> 55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Telex Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Telex
Communications, Inc. (a Delaware corporation formerly known as EV International,
Inc.) and Subsidiaries as of March 31, 1998 and 1997, and the related
consolidated statements of operations, shareholder's equity (deficit), and cash
flows for the year ended March 31, 1998 and for the period from February 11,
1997 through 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 financial statements referred to above present fairly, in
all material respects, the financial position of Telex Communications, Inc. and
Subsidiaries as of March 31, 1998 and 1997, and the results of their operations
and their cash flows for the year ended March 31, 1998 and for the period from
February 11, 1997 through March 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
July 13, 1998
53
<PAGE> 56
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets as of March 31
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997
---- ----
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 2,224 $ 10,266
Accounts receivable, net of allowance for doubtful
accounts of $3,983 and $1,849 62,085 40,913
Inventories, net 78,711 48,940
Other current assets 16,088 12,177
-------- --------
Total current assets 159,108 112,296
PROPERTY, PLANT AND EQUIPMENT, net 50,777 34,313
DEFERRED FINANCING COSTS, net 11,303 4,954
INTANGIBLE ASSETS, net 79,064 59,259
-------- --------
$300,252 $210,822
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Revolving lines of credit $ 15,119 $ 733
Current maturities of long-term debt 8,250 1,000
Accounts payable 20,165 7,724
Accrued wages and benefits 11,739 6,664
Accrued interest 8,133 211
Other accrued liabilities 20,786 12,100
Income taxes payable 5,048 -
-------- --------
Total current liabilities 89,240 28,432
LONG-TERM DEBT 329,875 117,000
OTHER LONG-TERM LIABILITIES 6,893 10,331
-------- --------
Total liabilities 426,008 155,763
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 3 and 12)
SHAREHOLDER'S EQUITY (DEFICIT):
Common stock, $.01 par value, 1,000 shares authorized; 110 shares issued and
outstanding - -
Capital in excess of par 3,156 57,600
Cumulative translation adjustment (2,297) (804)
Accumulated deficit (126,615) (1,737)
-------- --------
Total shareholder's equity (deficit) (125,756) 55,059
-------- --------
$300,252 $210,822
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
54
<PAGE> 57
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands)
<TABLE>
<CAPTION>
Year Ended Period From
March 31, February 11, 1997
1998 Through March 31, 1997
---- ----------------------
<S> <C> <C>
NET SALES $332,964 $28,314
COST OF SALES 205,624 18,055
-------- -------
Gross profit 127,340 10,259
-------- -------
OPERATING EXPENSES:
Engineering 17,278 1,320
Selling, general and administrative 81,695 6,365
Restructuring charges 6,232 -
Corporate charges 2,203 100
Special charges 2,231 -
Amortization of goodwill and other intangibles 3,207 180
-------- -------
112,846 7,965
-------- -------
OPERATING PROFIT 14,494 2,294
INTEREST EXPENSE 37,938 5,032
RECAPITALIZATION EXPENSE 6,710 -
OTHER EXPENSE 43 56
-------- -------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM (30,197) (2,794)
PROVISION (BENEFIT) FOR INCOME TAXES 103 (1,057)
-------- -------
LOSS BEFORE EXTRAORDINARY ITEM (30,300) (1,737)
EXTRAORDINARY LOSS FROM EARLY
RETIREMENT OF DEBT 20,579 -
-------- -------
Net loss $(50,879) $(1,737)
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
55
<PAGE> 58
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholder's Equity (Deficit)
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Common Stock Capital in Cumulative Shareholder's
------------------ Excess of Translation Accumulated Equity
Shares Amount Par Adjustment Deficit (Deficit)
------ ------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, February 10, 1997 - $ - $ - $ - $ - $ -
Initial capitalization 110 - 57,600 - - 57,600
Translation adjustments - - - (804) - (804)
Net loss - - - - (1,737) (1,737)
--- --- -------- ------- --------- ---------
BALANCE, March 31, 1997 110 - 57,600 (804) (1,737) 55,059
Equity from Merger (Note 2) - - 20,001 (27) (13,156) 6,818
Equity contribution - - 108,353 - - 108,353
Change in terms of Rollover Options - - 7,410 - (309) 7,101
Repurchase of common stock and outstanding
options - - (193,364) - (60,534) (253,898)
Vesting of new options - - 3,156 - - 3,156
Translation adjustments - - - (1,466) - (1,466)
Net loss - - - - (50,879) (50,879)
--- --- -------- ------- --------- ---------
BALANCE, March 31, 1998 110 $ - $ 3,156 $(2,297) $(126,615) $(125,756)
=== === ======== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
56
<PAGE> 59
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Year Ended Period From
March 31, February 11, 1997
1998 Through March 31, 1997
---- ----------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(50,879) $ (1,737)
Adjustments to reconcile net loss to cash flows from operations-
Depreciation 8,585 723
Amortization of intangibles and deferred financing costs 4,856 523
Provision for bad debts 980 50
Write-off of deferred financing costs 1,674 3,164
Recapitalization costs incurred 6,710 -
Restructuring and special charges 8,463 -
Extraordinary loss on early retirement of debt 20,579 -
Stock option compensation expense 10,566 -
Deferred income taxes 5,609 -
Change in operating assets and liabilities:
Income taxes (5,621) (762)
Accounts receivable 4,769 (2,953)
Inventories (5,832) 3,042
Other current assets 2,260 (3,499)
Accounts payable and accrued liabilities 1,572 (2,169)
Other long-term liabilities (1,502) 938
-------- --------
Net cash provided by (used in) operating activities 12,789 (2,680)
-------- --------
INVESTING ACTIVITIES:
Cash paid for acquisition, net of cash acquired -- (154,615)
Additions to property, plant and equipment (8,096) (441)
Additions to equipment leased to customers (372) -
-------- --------
Net cash used in investing activities (8,468) (155,056)
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 240,000 210,000
Borrowings under revolving line of credit, net 14,414 733
Repayment of long-term debt and payment of fees (134,968) (92,000)
Proceeds from equity contribution 108,353 57,600
Cash balance of Old Telex at date of Merger 34,753 -
Repurchase of common stock and outstanding options (253,898) -
Payments for deferred financing costs (12,312) (7,659)
Recapitalization costs incurred (6,710) -
Other (309) -
-------- --------
Net cash provided by (used in) financing activities (10,677) 168,674
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (1,686) (672)
-------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) (8,042) 10,266
Beginning of period 10,266 -
-------- --------
End of period $ 2,224 $ 10,266
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 26,167 $ 1,414
======== ========
Income taxes, net $ 866 $ -
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
57
<PAGE> 60
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Telex Communications, Inc., formerly known as EV International, Inc. ("Telex" or
the "Company"), a Delaware corporation, is a wholly owned subsidiary of Telex
Communications Group, Inc. ("Holdings"). As used in these consolidated financial
statements, unless otherwise indicated or the context otherwise requires,
references to (i) "Holdings" shall mean Telex Communications Group, Inc., a
Delaware corporation and the corporate parent of the Company; (ii) "Old Telex"
shall refer to the Delaware corporation formerly named Telex Communications,
Inc., a wholly owned subsidiary of Holdings, and its subsidiaries with respect
to periods prior to the Mergers (as defined in Note 2); (iii) the "Company"
shall mean Telex Communications, Inc., a Delaware corporation formerly named EV
International, Inc. (EVI) and successor by merger to Old Telex, and its
subsidiaries and includes, as the context may require, predecessor and successor
companies; (iv) "Old EVI" shall mean EV International, Inc. and its subsidiaries
with respect to periods prior to the Mergers and includes any predecessor
companies; and (v) "EV Holdings" shall refer to EVI Audio Holding, Inc., the
direct parent company of EVI prior to the Mergers.
The Company, formed as a result of the February 2, 1998 merger of Old Telex and
Old EVI, is a leader in the design, manufacture and marketing of sophisticated
audio, wireless and multimedia communications equipment to commercial,
professional and industrial customers. The Company provides high value-added
communications products designed to meet the specific needs of customers and
does not participate in the retail consumer electronics market. The Company
offers a comprehensive range of products worldwide for professional audio
systems as well as for multimedia and other communications product markets,
including wired and wireless microphones, wired and wireless intercom systems,
mixing consoles, signal processors, amplifiers, loudspeaker systems, headphones
and headsets, tape duplication products, talking book players, LCD projectors,
wireless LAN and PCS antennas, hearing aids and wireless assistive listening
devices. Its products are used in airports, theaters, sports arenas, concert
halls, cinemas, stadiums, convention centers, television and radio broadcast
studios, houses of worship and other venues where music or speech is amplified
or transmitted, and by professional entertainers, television and radio on-air
talent, presenters, airline pilots and the hearing impaired in order to
facilitate speech or communications.
PRINCIPLES OF CONSOLIDATION
The Company's financial statements are prepared on a consolidated basis in
accordance with generally accepted accounting principles. All significant
intercompany balances and transactions have been eliminated in the accompanying
consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported
58
<PAGE> 61
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Ultimate results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
All temporary investments with original maturities of three months or less at
the time of purchase are considered cash equivalents. These investments are
considered available for sale and are carried at cost, which approximates fair
value.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market and
include amounts for materials, labor and overhead.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost, net of accumulated
depreciation. The cost of property, plant and equipment retired or otherwise
disposed of, and the accumulated depreciation thereon, are eliminated from the
asset and related accumulated depreciation accounts, and any resulting gain or
loss is reflected in operations. Depreciation of property, plant and equipment
is computed principally by the straight-line method over the estimated useful
lives of the assets as follows:
Buildings and improvements 5 to 31 years
Machinery and equipment 1.5 to 12 years
Beginning in the fiscal year ended March 31, 1998 (Fiscal 1998), the Company
capitalized certain software implementation costs. Prior to Fiscal 1998, such
costs were not significant. Direct internal and all external implementation
costs and purchased software have been capitalized and depreciated using the
straight-line method over the estimated useful lives, ranging from two to five
years. As of March 31, 1998, software implementation costs of $6.5 million have
been capitalized and are included in equipment and construction in progress. The
Company expenses reengineering costs as incurred.
DEFERRED FINANCING COSTS
Deferred financing costs represent costs incurred by Old EVI and Old Telex to
issue the EVI Notes, the Telex Notes (together, the Senior Subordinated
Notes) and the Senior Secured Credit Facility (see Note 7) and are being
amortized over the terms of the related debt.
INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line basis over their estimated
useful lives, as follows:
Patents and engineering drawings 5 - 10 years
Dealer and distributor lists 15 years
Goodwill 40 years
Other intangibles 3 - 5 years
59
<PAGE> 62
LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and For Long-Lived Assets to Be Disposed Of," which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Impairment losses are
measured by comparing the fair value of the assets, as determined by discounting
the future cash flows at a market rate of interest, to their carrying amount.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time of shipment. Revenues
from the sale of hearing instrument extended warranty contracts are recognized
ratably over the lives of the contracts.
WARRANTY COSTS
The Company warrants certain of its products for workmanship and performance for
periods of generally up to one year. The accrual for warranty costs is based on
expected average repair costs and return rates developed by the Company using
historical data.
PRODUCT DEVELOPMENT COSTS
Engineering costs associated with the development of new products and changes to
existing products are charged to operations as incurred.
ADVERTISING COSTS
Advertising costs are expensed when incurred. Advertising costs for the year
ended March 31, 1998 and for the period from February 11, 1997 through March 31,
1997 were $8.9 million and $0.6 million, respectively.
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. The Company's tax provision is calculated on a separate company
basis, and the Company's taxable income is included in the consolidated federal
income tax return of Holdings.
FOREIGN CURRENCY
Foreign subsidiaries' operations accounts are translated at the average exchange
rates in effect during the period while assets and liabilities are translated at
the rates of exchange at the balance sheet date. The resulting balance sheet
translation adjustments are charged or credited directly to shareholder's
equity. Foreign exchange transaction gains and losses realized during the year
ended March 31, 1998 and the period from February 11, 1997 through March 31,
1997, and those attributable to exchange rate movements on intercompany
receivables and payables not deemed to be of a long-term investment nature are
recorded in other expense.
60
<PAGE> 63
CONCENTRATIONS, RISKS AND UNCERTAINTIES
The Company is highly leveraged. The Company's high degree of leverage could
have important consequences, including but not limited to the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisition, general corporate purposes or other purposes may be
impaired in the future; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness, thereby reducing the funds available to the Company for other
purposes; and (iii) the Company's flexibility to adjust to changing market
conditions and the ability to withstand competitive pressures could be limited,
and the Company may be more vulnerable to a downturn in general economic
conditions or its business, or may be unable to carry out capital spending that
is important to its growth strategy.
Technological innovation and leadership are among the important factors in
competing successfully in the professional sound and entertainment market. The
Company's future results in this segment will depend, in part, upon its ability
to make timely and cost-effective enhancements and additions to its technology
and to introduce new products that meet customer demands, including products
utilizing digital technology, which are increasingly being introduced in the
professional audio industry. The success of current and new product offerings is
dependent on several factors, including proper identification of customer needs,
technological development, cost, timely completion and introduction,
differentiation from offerings of the Company's competitors and market
acceptance. Maintaining flexibility to respond to technological and market
dynamics may require substantial expenditures. There can be no assurance that
the Company will successfully identify and develop new products in a timely
manner, that products or technologies developed by others will not render the
Company's products obsolete or noncompetitive, or that constraints in the
Company's financial resources will not adversely affect its ability to develop
and implement technological advances.
The Company has substantial assets located outside of the United States, and a
substantial portion of the Company's sales and earnings are attributable to
operations conducted abroad and to export sales, predominantly in Western Europe
and Asia Pacific. The Company's international operations subject the Company to
certain risks, including increased exposure to currency exchange rate
fluctuations. The Company intends to hedge a portion of its foreign currency
exposure by incurring liabilities, including bank debt, denominated in the local
currencies of those countries where its subsidiaries are located, and plans to
develop systems to manage and control its currency risk exposure. The Company's
international operations also subject it to certain other risks, including
adverse political or economic developments in the foreign countries in which it
conducts business, foreign governmental regulation, dividend restrictions,
tariffs and potential adverse tax consequences, including payment of taxes in
jurisdictions that have higher tax rates than does the United States.
From time to time, 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 maturity dates 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, 1998, the Company had no foreign currency forward exchange contracts
outstanding.
The Company offers a range of audio products to a diverse customer base
throughout the world. Terms typically require payment within a short period of
time; however, the Company periodically offers extended payment terms to certain
qualified customers. As of March 31, 1998, the Company believes it has no
significant customer or geographic concentration of accounts receivable that
could expose the Company to an adverse, near-term financial impact.
61
<PAGE> 64
2. TRANSACTIONS:
ACQUISITION
On February 10, 1997 (the "Acquisition Closing Date"), pursuant to a purchase
agreement dated December 12, 1996 (the "Purchase Agreement"), an acquisition
subsidiary wholly owned by Greenwich Street Capital Partners, L.P. ("GSCP") and
certain affiliated investors acquired from Mark IV Industries, Inc. ("Mark IV")
and one of its subsidiaries all of the issued and outstanding capital stock of
Gulton Industries, Inc. ("Gulton"), the former parent of Old EVI, and each of
its subsidiaries for an initial cash purchase price of $151.5 million, plus $4.9
million in estimated adjustments paid on the closing date, with this aggregate
amount was subject to further postclosing adjustments as described herein. The
acquisition subsidiary subsequently merged with and into the parent of Old EVI,
and the parent then merged with and into Old EVI, with Old EVI ultimately
surviving (the "Acquisition"). Prior to the Acquisition Closing Date, (i) EVI
Audio LLC, a subsidiary wholly owned by GSCP and certain affiliated investors,
purchased all the issued and outstanding shares of common stock and pay-in-kind
preferred stock of EV Holdings for an aggregate amount of $57.6 million and (ii)
EV Holdings, a Delaware corporation organized by GSCP to hold all the issued and
outstanding stock of the EVI, contributed $57.6 million to the Company.
Financing for the Acquisition and the related fees and expenses consisted of (i)
$57.6 million of equity capital provided by GSCP and certain affiliated
investors, (ii) a $60.0 million senior credit facility (consisting of a term
loan and a revolving credit facility), and (iii) a $75.0 million senior
subordinated credit facility issued as interim financing by Chase Securities
Inc. and Smith Barney Inc., the initial purchasers of the EVI Existing Notes (as
defined herein), and certain other lenders. Of these amounts, $156.4 million was
used for the purchase price for the Acquisition and $10.4 million was used for
financing and transaction fees and expenses. Under the Purchase Agreement, the
purchase price was subject to adjustment on the basis of (i) the audited working
capital and audited cash flow of the Company as of and for the ten-month period
ended December 31, 1996, and (ii) the net intercompany transfers of cash between
Mark IV, and its affiliates (other than the Company and its subsidiaries), on
the one hand, and the Company and its subsidiaries, on the other hand, during
the period between December 31, 1996 and the Acquisition Closing Date. Based on
these provisions, Mark IV has requested a purchase price increase of $405,000,
which the Company is currently disputing pursuant to the applicable provisions
of the Purchase Agreement.
On March 24, 1997, Old EVI issued 11% Senior Subordinated Notes due in 2007 in
an aggregate principal amount of $100 million (the "EVI Existing Notes"), all of
which were subsequently exchanged in September 1997 for a like principal amount
of new 11% Senior Subordinated Notes due 2007, Series A (together with the EVI
Existing Notes, the "EVI Notes"), in an offering registered under the Securities
Act of 1933, as amended (the "Securities Act"). The proceeds from the EVI Notes
were used to repay the $75.0 million of indebtedness under the interim financing
in its entirety and a portion of EVI's term loan. The foregoing transactions,
including the issuance of the EVI Notes, are referred to herein as the
"Acquisition Transactions." The Acquisition was accounted for using the purchase
method of accounting, which established a new basis of accounting pursuant to
which the purchase price was allocated among the acquired assets and liabilities
in accordance with estimates of fair market value on February 10, 1997.
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<PAGE> 65
In connection with the Acquisition, Mark IV and the Company entered into a
transition services agreement pursuant to which Mark IV agreed to provide
certain services, including accounting, tax planning, foreign currency hedging,
cash management and administering certain pension plan assets pending their
transfer to the Company, for a period not to exceed twelve months following the
Acquisition Closing Date. In Fiscal 1998, the Company paid an aggregate of
approximately $41,000 in fees for services provided pursuant to such transition
services agreement, which services terminated on January 31, 1998. In addition,
Mark IV and the Company entered into a sublease agreement with respect to
certain premises located in Austin, Texas, and a nonexclusive, royalty-free
license to use certain names which incorporate the "Mark IV" name, including
related tooling and sales and marketing materials, and to sell products
incorporating such names for periods ranging from 18 to 36 months after the
Acquisition Closing Date.
RECAPITALIZATION
On May 6, 1997 (the "Recapitalization Closing Date"), Old Telex completed a
recapitalization (the "Recapitalization") pursuant to an agreement (the
"Recapitalization Agreement") among Old Telex, Greenwich II, LLC ("G-II"), a
Delaware limited liability company formed by GSCP and certain other investors,
and GST Acquisition Corp. ("GST"), a Delaware corporation and a wholly owned
subsidiary of G-II. In connection with the Recapitalization, all of the shares
of common stock of Holdings ("Holdings Common Stock") and all options and
warrants to acquire Holdings Common Stock (other than certain shares of Holdings
Common Stock and certain options to acquire Holdings Common Stock owned by
certain members of management of Old Telex) were converted into the right to
receive an aggregate amount of cash (the "Recapitalization Consideration") equal
to approximately $253.9 million. In addition, in connection with the
Recapitalization Agreement, certain shares of Holdings Common Stock held by
management of Old Telex (the "Rollover Shares") and certain options to acquire
additional shares of Holdings Common Stock (the "Rollover Options"), with an
aggregate value of approximately $21.2 million (which represented approximately
14% of the equity of Holdings on a nondiluted basis and approximately 20% on a
fully diluted basis) were retained by such managers. In connection with the
Recapitalization, Old Telex completed (i) a tender offer (the "Tender Offer") to
repurchase all of Old Telex's then outstanding 12% Senior Notes due 2004, in
aggregate principal amount of $100.0 million, for $118.3 million (including
premium and consent fees along with accrued interest), and (ii) a solicitation
of consents with respect to certain amendments to the indenture pursuant to
which such notes were issued. The Recapitalization, the financing thereof
(including the issuance by Old Telex of 10-1/2% Senior Subordinated Notes due
2007 (the "Existing Telex Notes") to Chase Securities, Inc., Morgan Stanley &
Co. Incorporated and Smith Barney, Inc.), the Tender Offer and the payment of
the related fees and expenses are herein referred to as the "Recapitalization
Transaction."
Costs associated with terminating Old Telex's 12% Senior Notes, including
write-off of deferred financing costs of $2.5 million, bond premium fees of
$13.6 million, bond tender fees of $0.5 million and consent fees of $1.0
million, are included in extraordinary loss from early retirement of debt in the
statement of operations.
The Recapitalization was financed by (i) $108.4 million of new equity provided
by GSCP and certain other co-investors, (ii) the Rollover Shares and Rollover
Options valued at $21.2 million, (iii) a $140.0 million senior secured credit
facility (the "Senior Secured Credit Facility") with The Chase Manhattan Bank,
Morgan Stanley Senior Funding, Inc. and certain other lenders, consisting of (a)
a $115.0 million term loan facility (the "Term Loan Facility"), and (b) a
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<PAGE> 66
$25.0 million revolving credit facility (the "Revolving Credit Facility"), (iv)
$125.0 million of Existing Telex Notes and (v) $36.5 million of available cash
of Old Telex. Of the $108.4 million of new equity contributed by GSCP and
certain other co-investors, $25.2 million consisted of proceeds from the
issuance of Deferred Pay Subordinated Debentures due 2009 (the "GST Subordinated
Debentures") contributed by GST to Old Telex in connection with the
Recapitalization.
Pursuant to the Recapitalization, the historical basis of all assets and
liabilities was retained for financial reporting purposes, and the repurchases
of existing Holdings Common Stock and issuance of new Holdings Common Stock have
been accounted for as equity transactions.
In October 1997, Old Telex completed an exchange offer of a $125 million
aggregate principal amount of new 10-1/2% Senior Subordinated Notes due 2007,
Series A (the "New Telex Notes"), which were registered under the Securities
Act, for a like principal amount of the Existing Telex Notes (together with the
New Telex Notes, the "Telex Notes"). All of the Existing Telex Notes were
tendered and accepted for exchange.
THE MERGERS
On February 2, 1998, Old EVI merged with Old Telex, a wholly owned subsidiary of
Holdings and an affiliate of GSCP, with Old EVI surviving (the "Merger"). In the
Merger, Old EVI changed its corporate name to "Telex Communications, Inc." The
Merger was effected pursuant to an agreement and plan of merger dated January
29, 1998, under which Greenwich I LLC ("G-I"), a subsidiary wholly owned by GSCP
and certain affiliated investors, exchanged all of the issued and outstanding
common and preferred stock of EVI Holdings, the former parent of Old EVI, for
1,397,400 shares of Holdings' Common Stock, and 13,000 shares of Holdings'
Series A pay-in-kind preferred stock, respectively, and EVI Holdings was merged
with and into Holdings, with Holdings continuing as the surviving corporation.
The mergers referred to above (the "Mergers") have been accounted for
essentially as a pooling of interests from May 6, 1997, the date on which Old
EVI and Old Telex came under common control, and the consolidated financial
statements of the Company for Fiscal 1998 include the results of Old Telex from
May 6, 1997. Immediately prior to the Mergers, approximately $12.7 million of
indebtedness outstanding under Old EVI's senior credit facility was paid in full
and Old EVI's senior credit facility was terminated. Such indebtedness, together
with $0.4 million of certain fees and expenses associated with the Mergers, was
repaid by utilizing free cash at closing from Old EVI of $3.8 million and by
borrowings under the Company's Revolving Credit Facility of approximately $9.3
million. Total fees and expenses incurred as a result of the Mergers were $1.7
million, including the $0.4 million paid at closing. The EVI Notes remain
outstanding following the Mergers.
As a result of the Mergers, deferred financing costs of $2.9 million associated
with Old EVI's senior credit facility were written off and are included in
extraordinary loss from early retirement of debt in the statement of operations.
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<PAGE> 67
PRO FORMA RESULTS OF TRANSACTIONS (UNAUDITED)
Pro forma information is presented below for the years ended March 31, 1998 and
1997, as if the Acquisition of Old EVI, the offering by Old EVI of the EVI
Notes, the Recapitalization of Old Telex (including the offering by Old Telex of
the Telex Notes) and the Merger of Old Telex with and into Old EVI had occurred
at the beginning of Fiscal 1997. The pro forma results are for illustrative
purposes only and do not purport to be indicative of the actual results which
occurred, nor are they indicative of future results of operations for the years
ended March 31, as adjusted (in thousands).
<TABLE>
1998 1997
--------- ---------
<S> <C> <C>
Net sales $ 345,775 $ 362,145
Operating income(a) 24,088 43,136
Net income (loss)(a) (14,145) 3,925
</TABLE>
- ----------
(a)Included in Fiscal 1998 operating income and net income (loss), as
presented, are noncash compensation charges for stock options associated with
the Recapitalization, nonrecurring charges for management cash bonus,
restructuring charges and a noncash impairment loss described in Note 3
below.
3. RESTRUCTURING AND SPECIAL CHARGES:
RESTRUCTURING CHARGES
In the fourth quarter of Fiscal 1998, the Company recorded a restructuring
charge of $6.2 million attributable to the Merger-related consolidation of
certain product lines, and the consolidation of certain of its worldwide
manufacturing, engineering, distribution, marketing, service and administrative
operations to reduce costs, to better utilize the available manufacturing and
operating capacity and to enhance competitiveness. The consolidation will
include the closure of some facilities and will also include the transfer of a
portion of the work from certain facilities to the Company's remaining
locations. The Company expects to complete substantially all of the
restructuring of the operations by early Fiscal 2000, and expects to complete
the sale and disposal of the owned facilities and equipment related to those
operations by late Fiscal 2000.
Included in the restructuring charges are $2.5 million associated with severance
pay for terminated employees, most of whom work in the facilities to be closed,
or from work to be transferred to other locations, $2.8 million associated with
reserves established for the write-down to fair market value of certain assets
and $0.9 million associated with other costs. As of March 31, 1998, the Company
has not incurred any cash-related restructuring costs.
SPECIAL CHARGES
For the year ended March 31, 1998, the Company recognized an impairment loss of
$2.2 million against operating income for certain intangible assets, including
dealer and distributor lists, patents and engineering drawings and goodwill as a
result of changed business conditions for certain product lines within the
Company's two business segments. Considerable management judgment is necessary
to estimate 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 or other long-lived assets down further.
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<PAGE> 68
4. INVENTORIES:
Inventories consist of the following as of March 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Raw materials $35,740 $21,814
Work in progress 9,812 6,568
Finished goods 33,159 20,558
------- -------
$78,711 $48,940
======= =======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following as of March 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Land $ 3,050 $ 2,259
Buildings and improvements 23,145 15,464
Machinery and equipment 84,417 49,253
Construction in progress 4,976 1,796
--------- ---------
115,588 68,772
Less accumulated depreciation (64,811) (34,459)
--------- ---------
$ 50,777 $ 34,313
========= =========
</TABLE>
6. INTANGIBLE ASSETS:
Intangible assets consist of the following as of March 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Goodwill $ 82,938 $ 59,456
Dealer and distributor lists 5,626 --
Patents and engineering drawings 5,762 --
Other intangibles 3,496 345
-------- --------
97,822 59,801
Less accumulated amortization (18,758) (542)
-------- --------
$ 79,064 $ 59,259
======== ========
</TABLE>
7. DEBT:
REVOLVING LINES OF CREDIT
In May 1997, the Company entered into the Revolving Credit Facility (the
"Facility"), as part of the Senior Secured Credit Facility. Under the Facility,
the Company may borrow
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<PAGE> 69
up to $25.0 million, subject to a borrowing base calculation. Interest on
outstanding borrowings is calculated, at the Company's option, using the bank's
prime rate or LIBOR plus specified margins. The revolving line of credit expires
November 30, 2002. The Facility requires an annual commitment fee of 0.5% of the
unused portion of the commitment. Borrowings are secured by accounts receivable
and inventories. The Company had letters of credit outstanding in the amount of
$8.2 million as of March 31, 1998, reducing the availability under the Facility.
Certain foreign subsidiaries of the Company have entered into agreements with
banks to provide for local working capital needs. Under these agreements, the
Company may make aggregate borrowings of up to $4.7 million. The rates of
interest in effect on these facilities as of March 31, 1998, ranged from 1.9% to
9.3%, and are generally subject to change based upon prevailing local prime
rates. In certain instances, the facilities are secured by a lien on foreign
real property, leaseholds or accounts receivables and inventories, or guaranteed
by another subsidiary of the Company.
LONG-TERM DEBT
Long-term debt consists of the following as of March 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
Senior Subordinated Notes, due May 1, 2007, bearing interest of 10-1/2% payable
<S> <C> <C>
semiannually, unsecured $ 125,000 $ --
Senior Subordinated Notes, due March 15, 2007, bearing interest of 11% payable
semiannually, unsecured 100,000 100,000
Senior Secured Credit Facility (Term Loan Facility):
Term Loan A, due in quarterly installments through November 30, 2002, bearing
interest at LIBOR plus 2.5% (8.19% at March 31, 1998) payable
semiannually, secured by substantially all assets of the Company 48,250 --
Term Loan B, due in quarterly installments through November 30, 2004, bearing
interest at LIBOR plus 3.0% (8.69% at March 31, 1998) payable
semiannually, secured by substantially all assets of the Company 64,875 --
Term Loan (repaid during year) -- 18,000
--------- ---------
338,125 118,000
Less current portion (8,250) (1,000)
--------- ---------
$ 329,875 $ 117,000
========= =========
</TABLE>
The Senior Subordinated Notes and the Senior Secured Credit Facility contain
certain financial and nonfinancial restrictive covenants, including limitations
on additional indebtedness, payment of dividends, certain investments, sale of
assets, and consolidations, mergers, transfers of all or substantially all of
the Company's assets and capital expenditures, subject to certain qualifications
and exceptions. As of the issuance of this report, the Company is in compliance
with all covenants related to the Senior Subordinated Notes and Senior Secured
Credit Facility.
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Aggregate annual maturities of long-term debt are as follows for the year ended
March 31 (in thousands):
<TABLE>
<S> <C> <C>
1999 $ 8,250
2000 8,500
2001 9,250
2002 12,500
2003 18,375
Thereafter 281,250
--------
$338,125
========
</TABLE>
8. INCOME TAXES:
Significant components of the provision (benefit) for income taxes attributable
to income (loss) including the extraordinary item are as follows (in thousands):
<TABLE>
<CAPTION>
Period From
Year Ended February 11, 1997
March 31, 1998 Through March 31, 1997
-------------- ----------------------
Current:
<S> <C> <C>
Federal $(5,709) $(1,330)
State - (141)
Foreign 203 414
------- -------
(5,506) (1,057)
Deferred 5,609 -
------- -------
$ 103 $(1,057)
======= =======
</TABLE>
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<PAGE> 71
A reconciliation of the income taxes computed at the federal statutory rate to
the Company's income tax provision (benefit) including the extraordinary item is
as follows (in thousands):
<TABLE>
<CAPTION>
Period From
February 11,
Year Ended 1997 Through
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Federal benefit at statutory rate $(17,262) $(1,237)
State benefit, net of federal tax (1,668) (141)
Amortization and write-off of goodwill 1,450 61
Change in deferred tax asset valuation allowance and
other income tax accruals 15,739 -
Recapitalization costs 2,522 -
Foreign tax rate differences (741) 122
Other 63 138
-------- -------
$ 103 $(1,057)
======== =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows as of March 31
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
Deferred tax liabilities:
<S> <C> <C>
Tax over book depreciation $ 6,791 $ 6,624
-------- --------
Deferred tax assets:
Compensation accruals 3,997 --
Book over tax amortization 3,250 --
Pension accrual 1,206 446
Inventory reserves 2,496 2,154
Foreign tax credits 1,992 --
Vacation accrual 1,216 652
Warranty reserves 1,019 1,290
Restructuring reserves 2,197 --
Tax loss carryforward 3,676 --
Other 2,127 1,534
-------- --------
Total deferred tax assets 23,176 6,076
Valuation allowance (15,739) --
-------- --------
Net deferred tax assets 7,437 6,076
-------- --------
Net deferred tax assets (liabilities) $ 646 $ (548)
======== ========
</TABLE>
69
<PAGE> 72
The Company has established a net deferred tax valuation allowance of $15.7
million, charged to the income tax provision for the year ended March 31, 1998,
due to the uncertainty of the realization of future tax benefits. The
realization of the future tax benefits related to the deferred tax asset is
dependent on many factors, including the Company's ability to generate taxable
income within the net operating loss carryforward period. Management has
considered these factors in reaching its conclusion as to the adequacy of the
valuation allowance for financial reporting purposes.
In addition, the Company has not recognized any income tax benefit related to
the excess of the market price over the exercise price of the exercised stock
options of $27.6 million for financial reporting purposes. The income tax
benefit, once realized, will be credited to shareholder's equity (deficit).
Prior to the merger of Old Telex and Old EVI, Old Telex received a settlement
offer from the Internal Revenue Service (the "IRS") with respect to the
amortization of certain intangibles for the taxable years 1990, 1991 and 1992.
Old Telex reviewed the IRS settlement offer and determined not to accept it. Any
adjustment imposed by the IRS relating to this matter would not likely result in
a material adjustment to the Company's operations, because it would be recorded
principally as an adjustment to goodwill.
Accumulated and current unremitted earnings of the Company's foreign
subsidiaries are deemed to be reinvested in each country and are not expected to
be remitted.
9. RELATED-PARTY TRANSACTIONS:
Holdings' principal asset is its investment in the Company and, therefore,
Holdings is dependent on the operations of the Company for its cash flow needs.
However, there are no agreements between the Company and Holdings requiring the
transfer of funds from the Company to Holdings. The Senior Subordinated Notes
and the provisions of the indenture agreements pursuant to which the Senior
Subordinated Notes were issued restrict Telex's payment of dividends, loans or
advances to its affiliates.
The Company pays fees to Holdings' majority shareholder for management services
in the amount of $1.7 million annually. For the year ended March 31, 1998, the
Company recorded a charge to operations for corporate charges of $2.2 million
for Old Telex and Old EVI for such fees.
Income taxes payable and receivable include tax benefits related to Holdings as
the Company makes all tax payments for the consolidated group and amounts
recorded are included within other long-term liabilities on the consolidated
balance sheets.
10. RETIREMENT PLANS:
The Company has two noncontributory defined benefit pension plans covering
substantially all employees of Old Telex and certain employees of Old EVI.
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.
70
<PAGE> 73
The components of pension cost are as follows (in thousands):
<TABLE>
<CAPTION>
Period From
February 11,
Year Ended 1997 Through
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Service cost for benefits earned during the period $1,571 $46
Interest cost on projected benefit obligation 1,814 2
Actual return on plan assets (6,580) (5)
Net amortization and deferral 5,202 6
------ ---
Net pension cost $2,007 $49
====== ===
</TABLE>
The following table presents the funded status of the above plans as recognized
in the consolidated balance sheets as of March 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
Actuarial present value of benefit obligation:
<S> <C> <C>
Vested benefits $ 20,804 $ 49
Nonvested benefits 320 --
-------- --------
Accumulated benefit obligation 21,124 49
Effect of projected pay increases 6,807 --
-------- --------
Projected benefit obligation 27,931 49
Less plan assets at market value 23,155 --
-------- --------
Projected benefit obligation in excess of plan assets 4,776 49
Less unrecognized net loss 570 --
Less unrecognized net transition obligation 119 --
Less unrecognized prior service cost 8 --
Other (92) --
-------- --------
Pension liability accrued $ 4,171 $ 49
======== ========
</TABLE>
Assumptions used in the accounting for the defined benefit plans were as follows
as of March 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Weighted average discount rate 7.0% 7.5%
Rate of increase in future compensation levels 4.5 -
Expected long-term rate of return on plan assets 9.0 N/A
</TABLE>
71
<PAGE> 74
Plan assets consist primarily of equity and debt securities and cash
equivalents.
As of the Acquisition Closing Date, the Company ceased withholding 401(k)
contributions from employees' payroll until the time the Company could establish
its own defined contribution plan. Pursuant to the Purchase Agreement, the
assets of the Sellers' defined contribution plan that relate to the Company's
employees will be transferred into the Company's plan, and, at such time,
employee payroll withholding for 401(k) contributions into the Company's defined
contribution plan will resume.
The Company's Japanese subsidiary also has a retirement and termination plan
(the "Retirement Plan"), which provides benefits to employees in Japan upon
their termination of employment. The benefits are based upon a multiple of the
employee's monthly salary, with the multiple determined based upon the
employee's years of service. The multiple paid to employees who retire or are
involuntarily terminated is greater than the multiple paid to those who
voluntarily terminate their services. The Retirement Plan is unfunded, and the
accompanying consolidated balance sheet includes a liability of approximately
$917 at March 31, 1998, which represents the actuarially determined estimated
present value of the Company's liability as of this date. In developing this
estimate, the actuary used discount and compensation growth rates prevailing in
Japan of 2.4% and 1.1%, respectively. For the year ended March 31, 1998 and for
the period from February 10, 1997 through March 31, 1997, the Company charged
$0.3 million and $0.0 million, respectively, to expense for this plan.
11. POSTRETIREMENT BENEFITS:
The Company is obligated to provide health and life insurance benefits to
certain employees of its U.S. operations upon retirement. Contributions required
to be paid by the employees towards the cost of such plans are a flat dollar
amount per month in certain instances, or a range from 25% to 100% of the cost
of such plans in other instances.
72
<PAGE> 75
Net postretirement benefit expense included the following components (in
thousands):
<TABLE>
<CAPTION>
Period From
February 11,
Year Ended 1997 Through
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Service cost $ 22 $ 1
Interest cost 34 1
Actual return on plan assets - -
Net amortization and deferral 2 -
---- ----
Net periodic postretirement benefit expense $ 58 $ 2
==== ====
Accumulated postretirement benefit obligations:
Retirees $ - $ -
Fully eligible active plan participants 159 126
Other active plan participants 354 219
---- ----
513 345
Fair value of plan assets - -
---- ----
Excess of accumulated postretirement benefit obligations over plan assets
513 345
Unrecognized prior service cost - -
Unrecognized net loss 106 -
Unrecognized net transition obligation - -
---- ----
Accrued postretirement benefit cost $407 $345
==== ====
</TABLE>
The assumed health care cost trend rate used in measuring the benefit obligation
is 8% for the year ended March 31, 1998, declining at a rate of 1.5% per year to
an ultimate rate of 5.0% in 2000. The weighted average discount rate used in
determining the benefit obligation at March 31, 1998 is 7.75%.
The Company does not provide any post-employment benefits which would require
accrual under SFAS No. 112, "Employers' Accounting for Postemployement
Benefits."
12. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is a party to various legal actions in the normal course of
business. The Company believes that it is not currently party to any litigation
which, if adversely determined, would have a material adverse effect on the
consolidated financial position or results of operations of the Company.
73
<PAGE> 76
ENVIRONMENTAL MATTERS
The Company and its operations are subject to extensive and changing U.S.
federal, state and local and foreign environmental laws and regulations,
including, but not limited to, laws and regulations that impose liability on
responsible parties to remediate, or contribute to the costs of remediating,
current or formerly owned or leased sites or other sites where solid or
hazardous wastes or substances were disposed of or released into the
environment. These remediation requirements may be imposed without regard to
fault or legality at the time of the disposal or release. The Company believes
that it currently conducts its operations, and in the past has operated its
business, in substantial compliance with applicable environmental laws and
regulations. From time to time, however, operations of the Company have
resulted, and may result in the future, in noncompliance or liability with
respect to such laws and regulations.
The Company (or, for certain sites, Mark IV Industries, Inc. and Mark IV PLC
(the "Sellers"), on behalf of the Company) has undertaken or is currently
undertaking remediation of contamination at certain of its currently or formerly
owned sites (some of which are unrelated to the audio business), and the Company
has agreed that it is a de minimis responsible party at a number of other such
sites, which have been designated as Superfund sites under U.S. environmental
laws. The Company recently had Phase I Environmental Site Assessments and
Compliance Reviews conducted by a third-party environmental consultant at all of
its manufacturing sites and is aware of environmental conditions at certain of
such sites that require or may require remediation or continued monitoring. In
particular, the Company's site in Buchanan, Michigan, has been designated a
Superfund site under U.S. environmental laws. The Sellers have agreed to
indemnify the Company fully for environmental liabilities resulting from the
Buchanan, Michigan, Superfund site and certain of the other sites at which the
environmental consultant indicated monitoring or remediation was necessary.
The Company's environmentally related expenditures for the year ended March 31,
1998 and for the period from February 11, 1997, through March 31, 1997, were not
material. The Company does not believe that the costs to the Company of
environmental compliance under current laws and regulations will have a material
adverse effect on the financial position or results of operations of the
Company.
There can be no assurance that the Company's estimated environmental
expenditures, which the Company believes to be reasonable, will cover in full
the actual amounts of environmental obligations the Company does incur, that the
Sellers will pay in full the indemnified environmental liabilities when they are
incurred, that new or existing environmental laws will not affect the Company in
currently unforeseen ways, or that present or future activities undertaken by
the Company will not result in additional environmentally related expenditures.
However, the Company does not believe that the costs to the Company of the
environmental compliance under current laws and regulations will have a material
adverse effect on the financial position or results of operations of the
Company.
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.
74
<PAGE> 77
LEASE COMMITMENTS
At March 31, 1998, the Company had various noncancelable operating leases for
manufacturing, distribution and office buildings, warehouse space and equipment.
Approximate future minimum rental commitments under all noncancelable operating
leases are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31:
<S> <C> <C>
1999 $2,133
2000 1,753
2001 1,377
2002 254
2003 227
2004 and thereafter 805
------
Total minimum lease commitments $6,549
======
</TABLE>
13. SEGMENT INFORMATION:
Subsequent to the Mergers, the Company reorganized what had been classified as
Old Telex's four strategic business units and Old EVI's four principal lines of
business into the following two business segments:
PROFESSIONAL SOUND AND ENTERTAINMENT
Professional Sound and Entertainment includes Old EVI's three principal lines of
business within the overall professional audio market: (1) Fixed Installation;
(2) Professional Music Retail; and (3) Concert/Recording/Broadcast, and Old
Telex's Broadcast Communications Systems and Sound Reinforcement product groups
(these businesses were previously part of Old Telex's Professional Sound and
Entertainment Group).
MULTIMEDIA/COMMUNICATIONS
Multimedia/Communications includes all of Old Telex's Multimedia/Audio
Communications, RF/Communications, and Hearing Instruments Groups, the Tape
Duplication product group from Old Telex's Professional Sound and Entertainment
Group and Old EVI's Other Applications line of business, consisting of handheld
microphones and earphones for field and aircraft communications, both military
and civilian, equipment for high-speed duplication of audio tapes, and
components marketed to original equipment manufacturers for incorporation into
their products.
The amounts in the following tables have been presented to coincide with the new
business segment (in thousands).
75
<PAGE> 78
<TABLE>
<CAPTION>
Period From February 11, 1997 Through
Year Ended March 31, 1998 March 31, 1997
------------------------------------------- -----------------------------------------
Professional Professional
Sound and Multimedia/ Sound and Multimedia/
Entertainment Communications Corporate Entertainment Communications Corporate
------------- -------------- --------- ------------- -------------- ---------
Net sales to unaffiliated customers from:
<S> <C> <C> <C> <C> <C> <C>
North America $118,587 $125,346 $ -- $ 13,164 $ 1,727 $ --
Europe 51,954 -- -- 7,034 -- --
Asia and other foreign 37,077 -- -- 6,389 -- --
-------- -------- -------- -------- -------- --------
Total net sales to
unaffiliated customers $207,618 $125,346 $ -- $ 26,587 $ 1,727 $ --
======== ======== ======== ======== ======== ========
Operating income (loss)(a):
North America $ 11,067 $ 7,548 $ (4,978) $ 1,910 $ 118 $ (519)
Europe 851 -- -- 326 -- --
Asia and other foreign 6 -- -- 459 -- --
-------- -------- -------- -------- -------- --------
Total operating income
(loss) $ 11,924 $ 7,548 $ (4,978) $ 2,695 $ 118 $ (519)
======== ======== ======== ======== ======== ========
Depreciation and amortization:
North America $ 4,855 $ 3,508 $ 1,938 $ 545 $ 62 $ 113
Europe 861 -- -- 102 -- --
Asia and other foreign 630 -- -- 81 -- --
-------- -------- -------- -------- -------- --------
Total depreciation and
amortization $ 6,346 $ 3,508 $ 1,938 $ 728 $ 62 $ 113
======== ======== ======== ======== ======== ========
Capital expenditures:
North America $ 3,230 $ 1,720 $ 2,720 $ 310 $ 26 67
Europe 578 -- -- 26 -- --
Asia and other foreign 220 -- -- 12 -- --
-------- -------- -------- -------- -------- --------
Total capital
expenditures $ 4,028 $ 1,720 $ 2,720 $ 348 $ 26 $ 67
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 1998 As of March 31, 1997
---------------------------------------- ----------------------------------------
Professional Professional
Sound and Multimedia/ Sound and Multimedia/
Entertainment Communications Corporate Entertainment Communications Corporate
------------- -------------- --------- ------------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Identifiable assets:
North America $ 78,912 $ 47,598 $110,945 $ 44,333 $ 8,825 $ 90,090
Europe 39,027 -- -- 39,014 -- --
Asia and other foreign 23,770 -- -- 28,131 -- --
-------- -------- -------- -------- -------- --------
Total identifiable assets $141,709 $ 47,598 $110,945 $111,478 $ 8,825 $ 90,090
======== ======== ======== ======== ======== ========
</TABLE>
(a)Included in operating income (loss) for the year ended March 31, 1998 are
restructuring charges of $5.4 million, $0.7 million, and $0.1 million and
special charges of $0.3 million, $2.0 million, and $0.0 million, for
Professional Sound and Entertainment, Multimedia/Communications and
Corporate, respectively.
76
<PAGE> 79
The net sales to unaffiliated customers reflect the sales from the Company's
operating units located in each geographic area. The net sales to unaffiliated
customers into each of its principal geographic regions for the year ended
March 31, 1998 were as follows: North America - $205.3 million; Europe - $67.2
million; and Asia and other foreign - $60.5 million. Export sales from the
United States to unaffiliated customers were approximately $44.3 million and
$1.1 million for the year ended March 31, 1998 and for the period from February
11, 1997 through March 31, 1997, respectively. Sales from the Company's
subsidiaries in Canada, Singapore, United Kingdom, Hong Kong, Germany, France,
Switzerland, Japan and Australia accounted for approximately 75% and 50% of the
total international sales for the year ended March 31, 1998 and the period from
February 11, 1997 through March 31, 1997, respectively. Substantially all of
the Company's sales from these subsidiaries are transacted in the respective
subsidiaries local currency. The Company's operating profits on export sales
are comparable to those realized on domestic sales.
Corporate identifiable assets relate principally to the Company's investment in
information systems and corporate facilities, as well as cost in excess of net
assets acquired included in intangible assets and deferred financing costs.
14. EQUITY:
STOCK SPLIT
On June 25, 1997, Holdings' board of directors approved a 20-for-1 stock split
of all Holdings' outstanding Common Stock. All common stock options for the
purchase of Holdings' common stock described below have been restated for the
period presented to reflect the common stock split.
STOCK COMPENSATION PLANS
In Fiscal 1992, Holdings granted options to purchase up to 821,280 shares of
Holdings common stock at an exercise price of $0.0005 per share to the new
chairman, president and chief executive officer of the Company.
In Fiscal 1993, Holdings and Old Telex adopted a nonqualified option plan, the
1993 Stock Option Plan, which, as amended, authorized the issuance of options to
purchase shares of Holdings common stock, at exercise prices ranging from $0.075
to $2.80 per share, to key employees; as of May 6, 1997, 242,000 options were
granted and fully vested. Effective as of the Recapitalization Closing Date, all
options granted under the 1993 Stock Option Plan became subject to the terms of
the 1997 Stock Option Plan.
The 1997 Stock Option Plan authorizes the issuance of up to 769,460 shares of
Holdings Common Stock, of which 557,000 have been granted. The exercise price of
these options ranges from $7.98 to $31.93. The nonqualified options may be
granted to certain key employees, directors and independent contractors of the
Company or Holdings.
77
<PAGE> 80
A summary of the Company's stock option activity and related information for the
period from May 6, 1997 (the date on which both entities came under common
control) through March 31, 1998 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Options Price
------- --------
<S> <C> <C>
Beginning of period 242,000 $ 1.27
Granted 557,020 14.80
Exercised (873) 7.98
Canceled (17,587) 17.63
-------
End of period 780,560 10.61
=======
Exercisable at end of period 289,500 2.37
=======
Available for future grants 212,440
=======
</TABLE>
Exercise prices for options outstanding as of March 31, 1998 range from $0.075
to $31.93. The weighted average remaining contractual life of those options is
9.3 years as of March 31, 1998. Compensation expense has been recognized for
options granted below fair market value as of the date of grant over their
respective vesting periods.
In accordance with the provisions of SFAS 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. Included below are
additional disclosures pursuant to the requirements of SFAS No. 123.
The fair value of each option granted is estimated as of the date of grant using
the Black-Scholes single option-pricing model using a risk-free interest rate of
6.57% and no expected dividend yield. 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 the awards, the Company's net loss for the year
ended March 31, 1998, would have increased by $970,000. The effects of applying
the fair value method of measuring compensation expense for the periods
presented is not likely to be representative of the effects of future years in
part because the fair value method was applied only to stock options granted
after March 31, 1995.
WARRANTS
Certain directors of the Company have been granted warrants representing the
right to purchase up to 27,235 shares of Holdings Common Stock at an exercise
price of $31.93 per share. A portion of these warrants became exercisable on the
date of grant, whereas the remainder will become exercisable through 2001,
provided in each case that the holder of the warrant is a director of the
Company on the date of exercise.
78
<PAGE> 81
15. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practical to estimate fair
value.
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND REVOLVING
LINE OF CREDIT
The carrying amount approximates fair value because of the short maturity of
these instruments.
LONG-TERM DEBT
The fair value of the Company's long-term debt approximates fair value because
of the variability of the interest cost associated with these instruments. The
fair value of the Company's Senior Subordinated Notes is estimated based on
quoted market rates for the notes.
The estimated fair values of the Company's financial instruments are as follows
as of March 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- -------- --------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,215 $ 2,215 $ 10,266 $10,266
Accounts receivable 62,085 62,085 40,913 40,913
Accounts payable 20,165 20,165 14,104 14,104
Revolving line of credit 15,119 15,119 733 733
Long-term debt, excluding Senior Subordinated Notes 113,125 113,125 18,000 18,000
Senior Subordinated Notes 225,000 207,000 100,000 102,000
</TABLE>
16. SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS:
The cash paid for the acquisition of Old EVI, net of cash acquired, was
allocated as follows:
<TABLE>
<S> <C>
Working capital $ 63,878
Plant and equipment 31,649
Purchase price in excess of the net tangible assets acquired 60,588
Deferred financing costs 6,450
Other assets 1,358
Noncurrent liabilities (9,308)
--------
Net cash used for Acquisition $154,615
========
</TABLE>
79
<PAGE> 82
17. SUBSEQUENT EVENT:
SALE OF BUSINESS
In April 1998 the Company sold the assets, exclusive of the land and building,
of Gauss, its California-based high-speed, bin-loop, tape duplication business
and operations, for $0.7 million subject to certain adjustments attributed to
changes in working capital. The Company does not expect the sale to have a
material impact on its consolidated financial position and results of
operations.
80
<PAGE> 83
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EV International, Inc.:
We have audited the accompanying consolidated statements of income and retained
earnings and cash flows of EV International, Inc. (a Delaware corporation) for
the period from March 1, 1996 through February 10, 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 audit.
We conducted our audit 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 assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. An audit also includes examining on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of EV
International, Inc. for the period from March 1, 1996 through February 10, 1997,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York,
May 9, 1997
81
<PAGE> 84
REPORT OF INDEPENDENT ACCOUNTANTS
To the Management of
EV International, Inc.
We have audited the accompanying consolidated statements of income and retained
earnings, and cash flows of EV International, Inc. (the "Company") for the year
ended February 29, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audits 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of their operations and their
cash flows for the year ended February 29, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Rochester, New York
August 7, 1996
(February 10, 1997 as to effects
of the reorganization discussed
in Note 1)
82
<PAGE> 85
EV INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM MARCH 1, 1996
THROUGH FOR THE YEAR ENDED
FEBRUARY 10, 1997 FEBRUARY 29, 1996
----------------- -----------------
<S> <C> <C>
Net sales ......................................... $ 177,100 $ 195,500
Cost of sales ..................................... 112,100 123,900
--------- ---------
Gross profit ................................ 65,000 71,600
--------- ---------
Operating expenses:
Engineering ................................. 8,000 8,500
Selling, general and administrative ......... 41,600 44,400
Amortization of goodwill .................... 900 1,000
--------- ---------
50,500 53,900
--------- ---------
Operating profit .................................. 14,500 17,700
Gain on sale of assets ............................ -- 400
--------- ---------
Income before taxes ......................... 14,500 18,100
Provision for income taxes ........................ 6,200 7,100
--------- ---------
Net income .................................. 8,300 11,000
Retained earnings, at the beginning of the year ... 133,000 118,700
Cash transfers (to) from Parent, net and
adjustments resulting from the acquisition
(see Note 1) .......................... (2,000) 3,300
--------- ---------
Retained earnings, at the end of the period ....... $ 139,300 $ 133,000
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
83
<PAGE> 86
EV INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
MARCH 1, 1996
THROUGH FEBRUARY 10, FOR THE YEAR ENDED
1997 FEBRUARY 29, 1996
-------------------- ------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ..................................... $ 8,300 $ 11,000
Items not affecting cash:
Depreciation and amortization ................ 5,100 5,100
Deferred income tax (benefit) ................ 700 (300)
Changes in assets and liabilities
Accounts receivable .......................... (500) (5,100)
Inventories .................................. (2,100) (8,500)
Other assets ................................. (2,500) (100)
Accounts payable ............................. (800) 300
Other liabilities ............................ (2,900) (2,000)
-------- --------
Net cash provided by operating
activities ............................... 5,300 400
-------- --------
Cash Flows From Investing Activities to
purchase equipment ........................... (3,300) (3,700)
-------- --------
Net cash transferred from (to) Parent and
adjustments resulting from the
acquisition (see Note 1) ................... $ (2,000) $ 3,300
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
84
<PAGE> 87
EV INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
1. BACKGROUND INFORMATION AND
SIGNIFICANT ACCOUNTING POLICIES
Prior to the date of their disposition on February 10, 1997, Mark IV
Industries, Inc. ("Mark IV") was the owner of a number of operating divisions
and subsidiaries which made up its professional audio business, referred to as
the Mark IV Audio Group (the "Group"). Effective February 10, 1997, Mark IV
completed a reorganization of the Group in which certain assets and liabilities
not relating to the business of the Group were transferred out of the parent
company of the Group, Gulton Industries, Inc. ("Gulton"). On the same date, (i)
all the issued and outstanding stock of Gulton was then sold to an indirect
acquisition subsidiary of Greenwich Street Capital Partners, L.P. ("Sub"), (ii)
Sub merged with and into Gulton, with Gulton surviving, (iii) Gulton merged with
and into Electro-Voice, Incorporated ("EV"), Mark IV Audio, Inc., Mark IV Audio
Magnetic, Inc. and LFE Corporation, with EV surviving, and (iv) EV changed its
name to EV International, Inc. (the "Company"). The accompanying financial
statements have been restated to reflect the foregoing steps and include the
accounts of Gulton. All references to the Company relate to the business of the
Mark IV Audio Group, and exclude any activities which may have been a part of
the Company during the reporting periods, but which were transferred out as part
of the foregoing steps. There were no adjustments to the net assets or net
income of the Group as a result of this reorganization. The operating
subsidiaries and divisions of the Company are as follows:
Audio Consultants Co., Limited Mark IV Audio (Europe) AG
Altec Lansing International Mark IV Audio (Aust.) Pty Ltd.
Cetec International Limited Mark IV Audio Canada, Inc.
Dearden Davies Associates Limited Mark IV Audio France S.A.
Dynacord France Mark IV Audio Hong Kong Limited
Dynacord Audio GmbH Mark IV Audio Japan Ltd.
Klark-Teknik PLC Nivenfield (1992) Limited
Rebis Audio Limited
Mark IV Audio Japan had a certain minority ownership interest as of February
29, 1996. As part of the reorganization described above, the minority interest
was acquired by Mark IV, and Mark IV Audio Japan became a 100%-owned subsidiary.
The financial statements reflect all of the operations making up the Company
and no recognition has been made to reflect the minority interests that existed
as of the various financial statement dates. All significant intergroup
transactions have been eliminated. These consolidated financial statements have
been prepared in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of such financial statements,
and the reported amounts of revenues and expenses during the reporting periods.
It should be recognized that the actual results could differ from those
estimates. The Company's significant accounting policies are as follows:
Property, Plant and Equipment
The Company provides for depreciation of plant and equipment primarily on
the straight-line method to amortize the cost of such plant and equipment
over their useful lives. Depreciation expense was approximately $4,200 for
the period from March 1, 1996 through February 10, 1997 and $4,100 in fiscal
1996.
85
<PAGE> 88
Cost in Excess of Net Assets Acquired ("Goodwill")
Management continually evaluates the existence of goodwill impairment on the
basis of whether the goodwill is fully recoverable from projected,
undiscounted net cash flows of the business. Goodwill is amortized on the
straight-line method over a 40-year period. Amortization expense was
approximately $900 for the period from March 1, 1996 through February 10,
1997, and $1,000 in fiscal 1996.
Income Taxes
Mark IV adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"), in fiscal 1994. The adoption
of this standard retroactively changed Mark IV's method of accounting for
income taxes from the deferred method to the liability method. The Company's
provisions for income taxes have been calculated on the separate return
basis.
Postretirement Benefits
Mark IV adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions"
("SFAS No. 106"), effective as of February 28, 1993. SFAS No. 106 required
the estimated present value of the Company's liability for its commitments
to provide health and life insurance benefits to its retirees to be included
in the balance sheet. The related expense is required to be recognized on
the accrual method over the remaining years of the employees' active
service, up to the dates of the individual's eligibility to retire and begin
receiving the benefit.
Research and Development Costs
Research and development costs are expensed as incurred and amounted to
approximately $7,700 for the period from March 1, 1996 through February 10,
1997, and $8,200 in the fiscal year 1996.
Foreign Currency
The assets and liabilities of the Company's foreign operations are
translated at year-end exchange rates, and resulting gains and losses are
included as a part of net equity. Realized foreign currency transactions
recognized at the Company level have been eliminated from the accompanying
consolidated statements of income, since such transactions are in integral
part of Mark IV's consolidated currency exposure, including operations other
than those of the Company.
2. INCOME TAXES
Income before taxes and the related provision for income taxes for the
period from March 1, 1996 through February 10, 1997, and for fiscal 1996,
consist of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Income before taxes:
United States ................................. $ 10,700 $ 10,600
Foreign ....................................... 3,800 7,500
-------- --------
Total income before taxes ................... $ 14,500 $ 18,100
======== ========
Provision for income taxes:
Currently payable-
United States ............................... $ 4,700 $ 5,300
Foreign ....................................... 800 2,100
-------- --------
Total currently payable ..................... 5,500 7,400
-------- --------
Deferred-
United States ................................. 200 (600)
Foreign ....................................... 500 300
-------- --------
Total deferred income tax (benefit) ......... 700 (300)
-------- --------
Total provision for income taxes ............ $ 6,200 $ 7,100
======== ========
</TABLE>
86
<PAGE> 89
The provision for income taxes for the period from March 1, 1996 through
February 10, 1997 and, for fiscal year 1996, differs from the amount computed
using the U.S. statutory income tax rate as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Expected tax at U.S. statutory income tax
rate ............................................ $5,100 $6,300
Permanent differences ............................. 600 200
State and local income taxes ...................... 600 400
Foreign tax rate differences ...................... (100) 200
------ ------
Total provision for income taxes .................. $6,200 $7,100
====== ======
</TABLE>
For purposes of these financial statements, the undistributed earnings of
Gulton's foreign subsidiaries were considered to have been reinvested in each
country, and were not expected to be remitted back to Mark IV.
3. PENSION AND RETIREMENT SAVINGS PLANS
Prior to the consummation of the steps set forth in Note 1, the Company's
U.S. employees participated in one of a number of defined-benefit pension plans
which were funded and administered by Mark IV. Such plans provide retirement
benefits based upon the employees' age, earnings and years of service, or were
based upon years of service multiplied by stated monthly benefit amounts. The
Company recognized an expense for the estimated service cost of such plans of
approximately $350 for the period from March 1, 1996 through February 10, 1997,
and approximately $400 in fiscal 1996. The plans are a part of Mark IV's Master
Defined Benefit Plan, and the funded position and responsibility for benefit
payments were managed by Mark IV.
Certain of the Company's U.S. employees also participated in defined
contribution plans which were also funded and administered by Mark IV. The
Company recognized an expense of approximately $170 for the period from March 1,
1996 through February 10, 1997, and approximately $200 for these plans in fiscal
1996.
The Company's Japanese subsidiary also had a retirement and termination plan
(the "Retirement Plan") which provided benefits to employees in Japan upon their
termination of employment. The benefits were based upon a multiple of the
employee's monthly salary, with the multiple determined based upon the
employee's years of service. The multiple paid to employees who retired or are
involuntarily terminated is greater than the multiple paid to those who
voluntarily terminate their services. The Company recognized an expense of
approximately $100 for these plans for the period from March 1, 1996 through
February 10, 1997 and approximately $100 in fiscal 1996.
87
<PAGE> 90
4. POSTRETIREMENT BENEFITS
The Company provided health and life insurance benefits to a number of
existing retirees from its U.S. operations. Contributions required to be paid by
the retirees towards the cost of such plans are a flat dollar amount per month
in certain instances, or a range from 25% to 100% in other instances. The
Company also had a number of active employees who will receive such benefits
upon their retirement.
The Company's postretirement benefit expense on the accrual method for the
period from March 1 through February 10, 1997, and for fiscal 1996 includes the
following components:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Service cost-benefits earned during the period ......... $ 5 $ 10
Interest cost on the APBO .............................. 15 130
---- ----
Total expense ........................................ $ 20 $140
==== ====
</TABLE>
The postretirement liability recognized in the consolidated balance sheet as
of February 29, 1996 includes approximately $1,000 related to existing retirees,
and $200 related to active employees of the Company as of that date. Of the
total expense recognized by the Company, approximately $20 relates to the
benefits earned by the active employees in each of the fiscal years presented,
with the balance related to the existing retirees of the Company. In connection
with the disposition of the Company discussed in Note 1, Mark IV retained the
obligation for retirees and beneficiaries currently receiving benefits.
There was an increase in the unrecognized net loss during fiscal 1996 as a
result of the settlement of certain litigation actions between the Company and
certain retirees. The settlement resulted in the mutual agreement to
prospectively reduce amounts previously required to be contributed by such
retirees to the cost of their benefits. The APBO was calculated using a discount
rate of 7.50% at February 29, 1996. The rate used in the prior year was 8.75%.
The change in the discount rate did not have a significant effect on the expense
determination for fiscal 1996. The APBO determinations assume an initial health
care cost trend rate of approximately 8.0%, trending down ratably to an ultimate
rate of 4.5%. A one-percentage-point increase in such trend rate would not have
a significant effect on the Company's obligations or annual expense.
5. LEGAL AND ENVIRONMENTAL MATTERS
The Company has historically been involved in various legal and
environmental matters. In the opinion of management, the ultimate cost to
resolve these matters will not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
The Company's manufacturing facility in Michigan is adjacent to land which
has been designated as a Superfund site by the U.S. Environmental Protection
Agency ("EPA"). The Company has been identified by the EPA as the sole
Potentially Responsible Person at this site. The remediation required by the EPA
has been substantially completed as of February 29, 1996, and remains the
financial responsibility of Mark IV. Therefore, the accompanying consolidated
financial statements do not reflect any of the associated cleanup costs expended
to date, or remaining to be expended as of February 29, 1996.
6. FOREIGN OPERATIONS
The Company's foreign operations are located in Europe and the Far East.
Information concerning the Company's operations by geographic area for the
period from March 1,1996 through February 10, 1997, and for fiscal 1996 is as
follows:
88
<PAGE> 91
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net sales to customers:
United States ............................ $ 111,000 $ 125,700
Foreign .................................. 96,300 107,300
Eliminations ............................. (30,300) (37,500)
--------- ---------
Total net sales to customers ........... $ 177,100 $ 195,500
========= =========
Operating income:
United States ............................ $ 10,700 $ 12,800
Foreign .................................. 3,800 7,100
Eliminations ............................. (2,000) (2,200)
--------- ---------
Total operating income ................. $ 14,500 $ 17,700
========= =========
</TABLE>
The net sales to customers reflect the sales of the Company's operating
units in each geographic area to unaffiliated customers. Export sales from the
United States to unaffiliated customers were approximately $8,160 for the period
from March 1, 1996 through February 10, 1997, and approximately $8,100 in fiscal
1996.
7. RELATED PARTY TRANSACTIONS
Through February 10,1997, Mark IV provided and coordinated treasury, tax,
audit, legal, medical and risk insurance, and benefits administration services
to the various operating units of the Company. Insurance, legal, audit and
direct employee benefits related costs have been allocated directly to the
Company. An allocation of Mark IV's costs for tax, treasury and other
administrative work performed has not been made as Mark IV management did not
believe such costs to be significant. All intercompany accounts with Mark IV and
its affiliates other than the Company and its subsidiaries have been included as
a part of net equity.
Certain bank indebtedness existed in certain of the Company's foreign
subsidiaries. The amount of such indebtedness was controlled by Mark IV and is
based on Mark IV's financing plans on a consolidated country-by-country basis.
As a result, the accompanying consolidated financial statements exclude all such
indebtedness and related interest expense for the periods presented.
Mark IV also provided letters of credit for the Company's operating needs.
The Company had an informal lease arrangement with Mark IV for a facility
which it uses for its cabinet assembly requirements. The Company recognized an
expense for this lease of approximately $450 for the period from March 1, 1996
through February 10, 1997 and approximately $234 in Fiscal 1996.
89
<PAGE> 92
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
TELEX COMMUNICATIONS, INC.
(Commission File Number: 333-27341)
EXHIBIT INDEX
for
Form 10-K
Exhibit
Number Description of Document
- ------ -----------------------
2(a) - Exchange Agreement and Plan of Merger, dated as of January 29, 1998,
among Greenwich I LLC, Greenwich II LLC, EVI Audio Holdings, Inc.,
Telex Communications Group, Inc. ("Holdings"), Telex Communications,
Inc. ("Old Telex") and EV International, Inc. (incorporated by
reference to Exhibit 2 to Old Telex's Quarterly Report on Form 10-Q
for nine months ended December 31, 1997, filed with the Commission
on February 17, 1998, File No. 333-30679).
2(b) - Recapitalization Agreement and Plan of Merger, dated March 4, 1997,
among Greenwich II LLC ("G-II"), GST Acquisition Corp. ("GST") and
Old Telex (incorporated by reference to Exhibit 2(a) to the Old
Telex's Registration Statement on Form S-4, filed with the
Commission on September 5, 1997, Registration No. 333-30679).
2(c) - Amendment No. 1 to the Recapitalization Agreement and Plan of
Merger, dated as of April 17, 1997 (incorporated by reference to
Exhibit 2(b) to Old Telex's Registration Statement on Form S-4,
Registration No. 333-30679).
2(d) - Amendment No. 2 to the Recapitalization Agreement and Plan of
Merger, dated as of April 25, 1997 (incorporated by reference to
Exhibit 2(c) to Old Telex's Registration Statement on Form S-4,
Registration No. 333-30679).
2(e) - Purchase Agreement, dated December 12, 1996, among Gulton
Acquisition Corp., Mark IV Industries, Inc., and Mark IV PLC, and
Gulton Industries, Inc. (incorporated by reference to Exhibit 2(a)
to the Registrant's Registration statement on Form S-4, filed with
the Commission on July 30, 1997, Registration No. 333-27341).
3(a) - Amended and Restated Certificate of Incorporation of Telex
Communications, Inc., dated February 2, 1998 (incorporated by
reference to Exhibit 3(a) to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1998, filed with the
Commission on May 29, 1998, File No. 333-27341).
3(b) - By-laws of the Company, as amended (incorporated by reference to
Exhibit 3(b) to Old Telex's Registration Statement on Form S-4,
Registration No. 333-30679).
4(a) - Indenture, dated March 24, 1997, between Old EVI and The Bank of New
York, as Trustee (incorporated by reference to Exhibit 4(a) to the
Registrant's Registration statement on Form S-4, filed with the
Commission on July 30, 1997, Registration No. 333-27341).
(i)
<PAGE> 93
4(b) - Indenture (the "Telex Indenture"), dated as of May 6, 1997, among
Old Telex and Manufacturers and Traders Trust Company (incorporated
by reference to Exhibit 4(a) to Old Telex's Registration Statement
on Form S-4, Registration No. 333-30679).
4(c) - The First Supplemental Indenture, dated May 6, 1997, to the Telex
Indenture (incorporated by reference to Exhibit 4(b) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
4(d) - Second Supplemental Indenture, dated as of February 2, 1998, made by
Old EVI in favor of Manufacturers and Traders Trust Company, as
trustee (incorporated by reference to Exhibit 2 to Old Telex's
Quarterly Report on Form 10-Q for nine months ended December 31,
1997, filed with the Commission on February 17, 1998, File No.
333-30679).
4(e) - Credit Agreement (the "Credit Agreement"), dated May 6, 1997, among
Old Telex, the lenders named on the signature pages thereof (the
"Senior Lenders") and The Chase Manhattan Bank, a New York banking
corporation ("Chase"), as administrative agent for such Senior
Lenders (the "Administrative Agent") (incorporated by reference to
Exhibit 4(d) to Old Telex's Registration Statement on Form S-4,
Registration No. 333-30679).
4(f) - The Assignment and Assumption Agreement, dated May 6, 1997, made by
Old Telex, and Telex Communications Group, Inc. in favor of the
Administrative Agent for the benefit of the Senior Lenders
(incorporated by reference to Exhibit 4(e) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
4(g) - Guarantee and Collateral Agreement, dated May 6, 1997, made by Old
Telex and Telex Communications Group, Inc. in favor of the
Administrative Agent for the benefit of the Senior Lenders and
certain other secured parties (incorporated by reference to Exhibit
4(f) to Old Telex's Registration Statement on Form S-4, Registration
No. 333-30679).
4(h) - Patent and Trademark Security Agreement, dated March 6, 1997, made
by Old Telex in favor of the Administrative Agent for the benefit of
the Senior Lenders under the Credit Agreement (incorporated by
reference to Exhibit 4(g) to Old Telex's Registration Statement on
Form S-4, Registration No. 333-30679).
4(i) - Amendment No. 1 to the Telex Communications, Inc. Credit Agreement,
dated as of January 29, 1998, among Telex Communications, Inc., The
Chase Manhattan Bank, as Administrative Agent, Morgan Stanley Senior
Funding, Inc. and the several banks and other financial institutions
from time to time party thereto (incorporated by reference to
Exhibit 2 to Old Telex's Quarterly Report on Form 10-Q for nine
months ended December 31, 1997, filed with the Commission on
February 17, 1998, File No. 333-30679).
10(a) - Amended and Restated Stockholders Agreement, dated March 4, 1997,
among Old Telex, G-II and the Stockholders set forth on Schedule A
thereto (incorporated by reference to Exhibit 10(a) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
10(b) - Trademark License Agreement, dated May 25, 1989, by and between
Memorex Telex Corporation and Old Telex, relating to the "Telex"
name (incorporated by reference to Exhibit 10(b) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
10(c) - Consulting Agreement, dated February 6, 1997, among EVI Audio
Holding, Inc., the Company, and Greenwich Street Capital Partners,
Inc. (incorporated by reference to
(ii)
<PAGE> 94
Exhibit 10(a) the Registrant's Registration Statement on Form S-4,
filed with the Commission on July 30, 1997, Registration No.
333-27341).
10(d) - Consulting Agreement, dated May 6, 1997, between Greenwich Street
Capital Partners, Inc. ("GSCP Inc."), Holdings and G-II
(incorporated by reference to Exhibit 10(c) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
10(e) - Form of Amendment, dated May 1, 1998, to the Consulting Agreement,
dated May 6, 1997, between GSCP Inc., Holdings and G-II
(incorporated by reference to Exhibit 10(e) to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 1998,
filed with the Commission on May 29, 1998, File No. 333-27341).
10(f) - Indemnification Agreement, dated May 6, 1997, between GSCP Inc.,
Holdings and G-II (incorporated by reference to Exhibit 10(d) to Old
Telex's Registration Statement on Form S-4, Registration No.
333-30679).
*10(g) - Fee Agreement, dated May 6, 1997, between GSCP Inc. and Holdings
(incorporated by reference to Exhibit 10(e) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
*10(h) - Employment Agreement, dated December 11, 1996, between Gulton
Acquisition Corp. and Robert Pabst (incorporated by reference
Exhibit 10(b) to the Registrant's Registration statement on Form
S-4, filed with the Commission on July 30, 1997, Registration No.
333-27341).
*10(i) - Employment Agreement, dated December 11, 1996, between Gulton
Acquisition Corp. and Paul McGuire (incorporated by reference to
Exhibit 10(c) to the Registrant's Registration statement on Form
S-4, filed with the Commission on July 30, 1997, Registration No.
333-27341).
*10(j) - Employment Agreement, dated December 11, 1996, between Gulton
Acquisition Corp. and John Bolstetter (incorporated by reference to
Exhibit 10(d) to the Registrant's Registration statement on Form
S-4, filed with the Commission on July 30, 1997, Registration No.
333-27341).
*10(k) - Employment Agreement, dated March 4, 1997, between Holdings, Old
Telex and John L. Hale (incorporated by reference to Exhibit 10(f)
to Old Telex's Registration Statement on Form S-4, Registration No.
333-30679).
*10(l) - Employment Agreement, dated March 4, 1997, between Holdings, Old
Telex and John A. Palleschi (incorporated by reference to Exhibit
10(g) to Old Telex's Registration Statement on Form S-4,
Registration No. 333-30679).
*10(m) - Employment Agreement, dated March 4, 1997, between Holdings, Old
Telex and John T. Hislop (incorporated by reference to Exhibit 10(h)
to Old Telex's Registration Statement on Form S-4, Registration No.
333-30679).
*10(n) - 1997 Telex Communications Group, Inc. Stock Option Plan
(incorporated by reference to Exhibits 10(h), 10(i) and 10(j) to Old
Telex's Registration Statement on Form S-4, Registration No.
333-30679).
*10(o) - Telex Communications Group, Inc. Cash Bonus Plan (incorporated by
reference to Exhibits 10(h), 10(i) and 10(j) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679.
(iii)
<PAGE> 95
*10(p) - Telex Communications Group, Inc. Management Cash Compensation Plan
(incorporated by reference to Exhibits 10(f), 10(g) and 10(h) to Old
Telex's Registration Statement on Form S-4, Registration No.
333-30679.
*10(q) - Warrant, dated April 7, 1998, issued by Holdings to Jeffrey Rosen,
and form of amendment thereto (incorporated by reference to Exhibit
10(q) to the Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 1998, filed with the Commission on May 29,
1998, File No. 333-27341).
*10(r) - Warrant, dated April 7, 1998, issued by Holdings to Christopher
Forester, and form of amendment thereto (incorporated by reference
to Exhibit 10(r) to the Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 1998, filed with the Commission on
May 29, 1998, File No. 333-27341).
*10(s) - Warrant, dated April 7, 1998, issued by Holdings to Edgar S.
Woolard, Jr., and form of amendment thereto (incorporated by
reference to Exhibit 10(s) to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1998, filed with the
Commission on May 29, 1998, File No. 333-27341).
*10(t) - Warrant, dated April 7, 1998, issued by Holdings to Evan Marks, and
form of amendment thereto (incorporated by reference to Exhibit
10(t) to the Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 1998, filed with the Commission on May 29,
1998, File No. 333-27341).
10(u) - Tradename and Trademark License Agreement, dated February 10, 1997,
between Gulton Industries, Inc. and Mark IV Industries, Inc.
(incorporated by reference to Exhibit 10 (e) to the Registrant's
Registration Statement on Form S-4, filed with the Commission on
July 30, 1997, Registration No. 333-27341).
10(v) - Transition Services Agreement, dated February 10, 1997, between
Gulton Industries, Inc. and Mark IV Industries, Inc.(incorporated by
reference to Exhibit 10(f) to the Registrant's Registration
Statement on Form S-4, filed with the Commission on July 30, 1997,
Registration No. 333-27341).
10(w) - Software License Agreement, dated February 10, 1997, between Gulton
Industries, Inc. and Mark IV Industries, Inc. (incorporated by
reference to Exhibit 10(g) to the Registrant's Registration
Statement on Form S-4, filed with the Commission on July 30, 1997,
Registration No. 333-27341).
*10(x) - Collective Bargaining Agreement, dated May 15, 1995, between
Electro-Voice, Inc. and the International Union of Electronic,
Electrical, Salaried, Machine and Furniture Workers, AFL-CIO, and
its Local 662, relating to the Company's manufacturing facility in
Newport, Tennessee (incorporated by reference to Exhibit 10(h) to
the Registrant's Registration Statement on Form S-4, filed with the
Commission on July 30, 1997, Registration No. 333-27341).
*10(y) - Collective Bargaining Agreement, dated June 1, 1992, between
Electro-Voice, Inc. and the International Union of Electronic,
Electrical, Technical, Salaried and Machine and Furniture Workers,
AFL-CIO, and its Local 663, relating to the Company's manufacturing
facility in Sevierville, Tennessee (incorporated by reference to
Exhibit 10(i) to the Registrant's Registration Statement on Form
S-4, filed with the Commission on July 30, 1997, Registration No.
333-27341).
(iv)
<PAGE> 96
*10(z) - Collective Bargaining Agreement, dated March 18, 1993, between
Electro-Voice, Inc. and the International Union of Electronic,
Electrical, Technical, Salaried and Machine and Furniture Workers,
AFL-CIO, and its Local 900, relating to the Company's manufacturing
facility in Buchanan, Michigan (incorporated by reference to Exhibit
10(j) to the Registrant's Registration Statement on Form S-4, filed
with the Commission on July 30, 1997, Registration No. 333-27341).
10(aa) - Collective Bargaining Agreement, dated June 20, 1994, between Altec
Lansing Corporation and the International Association of Machinists
and Aerospace Workers, AFL-CIO, and its Local Lodge No. 850,
relating to the Company's manufacturing facility in Oklahoma City,
Oklahoma (incorporated by reference to Exhibit 10(k) to the
Registrant's Registration Statement on Form S-4, filed with the
Commission on July 30, 1997, Registration No. 333-27341).
10(bb) - Mortgage (or deed of trust), dated May 6, 1997, from Old Telex, as
Mortgagor, to the Administrative Agent, with respect to Bloomington,
Minnesota (incorporated by reference to Exhibit 10(i) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
10(cc) - Mortgage (or deed of trust), dated May 6, 1997, from Old Telex, as
Mortgagor, to the Administrative Agent, with respect to Blue Earth,
Minnesota (incorporated by reference to Exhibit 10(j) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
10(dd) - Mortgage (or deed of trust), dated May 6, 1997, from Old Telex, as
Mortgagor, to the Administrative Agent, with respect to Glen Cove,
Minnesota (incorporated by reference to Exhibit 10(k) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
10(ee) - Mortgage (or deed of trust), dated May 6, 1997, from Old Telex, as
Mortgagor, to the Administrative Agent, with respect to Rochester,
Minnesota (incorporated by reference to Exhibit 10(l) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
10(ff) - Mortgage (or deed of trust), dated May 6, 1997, from Old Telex, as
Mortgagor, to the Administrative Agent, with respect to Lincoln,
Nebraska (incorporated by reference to Exhibit 10(m) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
10(gg) - Mortgage (or deed of trust), dated February 2, 1998, from Telex
Communications, Inc., as Mortgagor, to the Administrative Agent,
with respect to Sun Valley, CA (incorporated by reference to Exhibit
10(gg) to the Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 1998, filed with the Commission on May 29,
1998, File No. 333-27341).
10(hh) - Mortgage (or deed of trust), dated February 2, 1998, from Telex
Communications, Inc., as Mortgagor, to the Administrative Agent,
with respect to Sylmar, CA (incorporated by reference to Exhibit
10(hh) to the Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 1998, filed with the Commission on May 29,
1998, File No. 333-27341).
10(ii) - Mortgage (or deed of trust), dated February 2, 1998, from Telex
Communications, Inc., as Mortgagor, to the Administrative Agent,
with respect to Buchanan, MI (Cecil Street) (incorporated by
reference to Exhibit 10(ii) to the Company's Annual Report on Form
10-K
(v)
<PAGE> 97
for the fiscal year ended February 28, 1998, filed with the
Commission on May 29, 1998, File No. 333-27341).
10(jj) - Mortgage (or deed of trust), dated February 2, 1998, from Telex
Communications, Inc., as Mortgagor, to the Administrative Agent,
with respect to Buchanan, MI (Front Street).(incorporated by
reference to Exhibit 10(jj) to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1998, filed with the
Commission on May 29, 1998, File No. 333-27341).
10(kk) - Mortgage (or deed of trust), dated February 2, 1998, from Telex
Communications, Inc., as Mortgagor, to the Administrative Agent,
with respect to Oklahoma City, OK (incorporated by reference to
Exhibit 10(kk) to the Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 1998, filed with the Commission on
May 29, 1998, File No. 333-27341).
10(ll) - Mortgage (or deed of trust), dated February 2, 1998, from Telex
Communications, Inc., as Mortgagor, to the Administrative Agent,
with respect to Newport, TN (incorporated by reference to Exhibit
10(ll) to the Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 1998, filed with the Commission on May 29,
1998, File No. 333-27341).
10(mm) - Mortgage (or deed of trust), dated February 2, 1998, from Telex
Communications, Inc., as Mortgagor, to the Administrative Agent,
with respect to Sevierville, TN (incorporated by reference to
Exhibit 10(mm) to the Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 1998, filed with the Commission on
May 29, 1998, File No. 333-27341).
12(a) - Computation of Ratio of Earnings to Fixed Charges (filed as an
exhibit hereto).
12(b) - Computation of EBITDA to Interest Expense (filed as an exhibit
hereto).
21 - List of Subsidiaries (incorporated by reference to Exhibit 21 to the
Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 1998, filed with the Commission on May 29, 1998, File
No. 333-27341).
24 - Power of Attorney (included on signature pages to this Form 10-K).
27 - Financial Data Schedule (filed as an exhibit hereto).
- ----------
* Denotes management contract, executive compensation plan, or arrangement.
(vi)
<PAGE> 1
SCHEDULE 12(A)
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS)
<TABLE>
<CAPTION>
NEW BASIS OF ACCOUNTING PREDECESSOR BASIS OF ACCOUNTING
------------------- -------------------------------------------------------
FISCAL PERIOD FROM PERIOD FROM
YEAR FEBRUARY 11, MARCH 1, 1996
ENDED THROUGH THROUGH FISCAL YEAR ENDED
MARCH 31, MARCH 31, FEBRUARY 10, THE LAST DAY OF FEBRUARY
1998 1997 1997 1996 1995 1994
--------- --------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes ..... $(30.2) $(2.8) $14.5 $17.7 $19.5 $19.6
Interest expense ...................... 37.9 5.0 -- -- -- --
Interest portion of rent expense ...... 0.9 0.3 0.6 0.6 0.5 0.5
------- ------- ------- ------- ------- -------
Adjusted income before income taxes.... $8.6 $2.5 $15.1 $18.3 $20.0 $20.1
======= ======= ======= ======= ======= =======
Fixed charges:
Interest expense ................... $37.9 $5.0 $ -- $ -- $ -- $ --
Interest portion of rent expense.... 0.9 0.3 0.6 0.6 0.5 0.5
------- ------- ------- ------- ------- -------
Total fixed charges ................... $38.8 $5.3 $0.6 $0.6 $0.5 $0.5
======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges(1).. 0.2 0.5
</TABLE>
- ----------
(1) The ratio of earnings to fixed charges is not meaningful for any periods
prior to February 11, 1997 due to the absence of interest expense in the
Company's consolidated financial statements.
<PAGE> 1
SCHEDULE 12(B)
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
COMPUTATION OF EBITDA TO INTEREST EXPENSE
(IN MILLIONS)
<TABLE>
<CAPTION>
NEW BASIS OF ACCOUNTING PREDECESSOR BASIS OF ACCOUNTING
----------------------- --------------------------------------------------------
FISCAL PERIOD FROM PERIOD FROM
YEAR FEBRUARY 11, MARCH 1, 1996
ENDED THROUGH THROUGH FISCAL YEAR ENDED
MARCH 31, MARCH 31, FEBRUARY 10, THE LAST DAY OF FEBRUARY
-----------------------------------
1998 1997 1997 1996 1995 1994
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
EBITDA .............................. $26.2 $3.1 $19.6 $22.8 $24.3 $24.0
Interest expense .................... 37.9 5.0 -- -- -- --
Ratio of EBITDA to interest expense.. 0.7 0.6 -- -- -- --
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 2,224
<SECURITIES> 0
<RECEIVABLES> 66,068
<ALLOWANCES> 3,983
<INVENTORY> 78,711
<CURRENT-ASSETS> 159,108
<PP&E> 115,588
<DEPRECIATION> 64,811
<TOTAL-ASSETS> 300,252
<CURRENT-LIABILITIES> 89,240
<BONDS> 329,875
0
0
<COMMON> 0
<OTHER-SE> (125,756)
<TOTAL-LIABILITY-AND-EQUITY> 300,252
<SALES> 332,964
<TOTAL-REVENUES> 332,964
<CGS> 205,624
<TOTAL-COSTS> 112,846
<OTHER-EXPENSES> 6,753
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,938
<INCOME-PRETAX> (30,197)
<INCOME-TAX> 103
<INCOME-CONTINUING> (30,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 20,579
<CHANGES> 0
<NET-INCOME> (50,879)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
