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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 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM APRIL 1, 1997 COMMISSION FILE NO. 333-30679
TO FEBRUARY 2, 1998
TELEX COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3521030
(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 February 2,
1998 was $0.
As of February 2, 1998 there were 500 shares of Telex Communications, Inc.
Common Stock $.01 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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Unless otherwise indicated herein or the context otherwise requires,
references to (i) "Holdings" shall mean Telex Communications Group, Inc., a
Delaware corporation and the corporate parent of the Company, and (ii) the
"Company" or "Telex" shall mean Telex Communications, Inc., a Delaware
corporation, and its subsidiaries and includes, as the context may require,
predecessor and successor companies. Unless otherwise indicated, all references
to fiscal years in this Form 10-K are to the fiscal years ending on March 31 of
each year (e.g., Fiscal 1997 refers to the fiscal year ended March 31, 1997).
PART I
ITEM 1. BUSINESS
GENERAL
Telex is a leader in the design, manufacture and marketing of
sophisticated audio, wireless and multimedia communications equipment to
commercial, professional and industrial customers. 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, a Delaware corporation, is a wholly owned subsidiary of
Telex Communications Group, Inc., a Delaware corporation ("Holdings"). Holdings
has no operations and its principal asset is its investment in the Company. The
predecessor company of the Company was founded in 1936 as a manufacturer and
distributor of hearing aid products and from 1973 to 1988, operated as a wholly
owned subsidiary of the Telex Corporation. In 1988, the Telex Corporation was
purchased by Memorex Telex N.V. ("Memorex"). In May 1989, Memorex sold the
assets that comprised the Company's business to Holdings and the Company in a
leveraged transaction. On May 6, 1997, the Company completed a recapitalization
pursuant to an agreement among the Company, Holdings, Greenwich Street Capital
Partners, L.P. ("GSCP") and certain other investors. On February 2, 1998, the
Company was merged with and into EV International, Inc. ("EVI"), a Delaware
corporation (the "Merger"), which changed its name to Telex Communications, Inc.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--The Merger." The Merger effected a change in the Company's fiscal
year from March 31 to the February 28 fiscal year historically utilized by EVI.
This transition report covers the business, operations and financial results of
the Company on a stand-alone basis for the period from April 1, 1997 through
February 2, 1998 immediately prior to the Merger, but after giving effect to
certain Merger-related transactions as described under "Management's Discussion
and Analysis of Financial Condition and Results of Operations--The Merger" and
"--Liquidity and Capital Resources." The Company will file shortly an annual
report on Form 10-K for the fiscal year ended February 28, 1998, which will
cover the business, operations and financial results of the Company after giving
effect to the Merger.
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.
STRATEGIC BUSINESS UNITS
The Company serves its customers through four strategic business units,
which are the Professional Sound and Entertainment Group, the Multimedia/Audio
Communications Group, the RF/Communications Group, and the Hearing Instruments
Group.
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PROFESSIONAL SOUND AND ENTERTAINMENT GROUP
The Professional Sound and Entertainment Group provides advanced
digital matrix intercoms used by broadcasters (including all major television
networks) to control production communications; intercoms, headsets and wireless
communications systems used by professional, college and high school football
teams and stadiums and other professional and school sports teams; wired and
wireless microphones used in the education, sports, broadcast, music and
religious markets; and high-speed tape duplicators used primarily by houses of
worship and training programs. The Professional Sound and Entertainment Group
targets three principal product groups: (i) broadcast communications systems,
(ii) sound reinforcement and (iii) tape duplication.
Broadcast Communications Systems. Telex is a leader in broadcast
communications equipment for end markets such as sports and broadcasting. The
Company produces a broad line of broadcast communications equipment. The
Company's smallest system, the Telex(R) Audiocom(R) modular intercom system, is
used by theaters, small sporting arenas, network affiliates and independent
cable channels for their communications needs. Typically, these systems are used
to link 20 to 30 people so they can communicate during an event or performance.
The Company's middle market offering, the RTS(TM) intercom system, is used by
larger broadcast network affiliates, larger sporting venues and production
studios. This system is also used in broadcast trucks as a remote, portable
studio for news gathering or sporting events, and typically provides
communications links for 50 to 60 people at a time. The Company's high-end
product, the ADAM(TM) intercom system, is used by the major networks in order to
cover large events such as the Olympics and the Superbowl. The ADAM(TM) system
allowed NBC to provide communications in any combination between 400 separate
individuals -- from person-to-person to one person to all four hundred at a
touch of a button -- for its 1996 Summer Olympics coverage. This system was also
used by networks from Australia, Finland, Canada, Japan, Korea and other
countries for their Olympics' coverage.
Telex also provides wired and wireless communication systems and
related components to the National Football League (the "NFL") as well as high
school and college teams and World, Canadian and Arena Football Leagues. 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.
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 microphone and guitar options. Telex
offers microphones (including noise canceling) with a wide variety of
directional patterns to meet the needs for general sound reinforcement as well
as the specific needs of users such as drummers, vocalists and public address
announcers. These lines incorporate Telex's Posi-Phase(TM) true diversity
antenna circuitry which produces a stronger signal for higher quality sound over
a longer distance without the signal dropouts or the switching noise common in
other systems. Some of the Company's wireless microphones also incorporate an
advanced proprietary multi-crystal tuning system that allows any specific
frequency to be used within the operating limits of the receiver. The crystal
control and associated radio frequency filtering provide superior radio
frequency performance and maximum protection from interference.
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The second product group in Sound Reinforcement is wireless assistive
listening devices, sold to arenas, theaters, churches, funeral homes, hotels and
other public facilities. The Company's principal product in this product group
is the SoundMate(R) wireless assistive listening systems. Assistive listening
devices are now mandated by the Americans with Disabilities Act, passed in 1994,
which requires that assistive listening devices be provided to all hearing
impaired individuals free of charge at facilities using public address systems.
The Company believes that continued implementation of this law and the aging of
America's population should generate continued growth in this market.
Tape Duplication. Telex's cassette duplicators and copiers are
primarily used to copy the spoken word and serve two principal markets:
religious (houses of worship, missionaries and tape ministries) and training
programs/seminars (professional seminar presenters, self-improvement programs,
teachers, legal documentation and law enforcement). The Company produces a line
of high-speed audio cassette duplicators designed for "in-cassette" copying of
standard 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. Sony is the Company's only significant competitor in this market.
MULTIMEDIA/AUDIO COMMUNICATIONS GROUP
The Multimedia/Audio Communications Group supplies computer audio
microphones, headsets and headphones used to facilitate voice communications
between computers and their users; LCD video and data projectors used to make
multimedia presentations; and aircraft intercoms, microphones and headsets
(including active noise reduction headsets) for use in high-noise environments
such as the cockpits of airplanes and helicopters. Customers for computer audio
microphones include a number of computer hardware and modem manufacturers, such
as Compaq, Hewlett-Packard, IBM and U.S. Robotics. In addition, the Company
sells its LCD projectors to corporate and educational training specialists,
while principal customers for the Company's aircraft products are the major
aircraft manufacturers and airlines, including Boeing, American Airlines and
Delta, as well as airport fixed base operators. The Multimedia/Audio
Communications Group targets three principal product markets: (i) computer
audio, (ii) multimedia presentation/training and (iii) aviation communications.
Computer Audio. The Company believes that it is the largest supplier of
microphones, headphones and headsets to the computer industry, selling a full
line of headphones, headsets and group listening centers for use in the
classroom with computers, VCRs, CD-ROMs and laserdisc players. The Company
currently sells to most of the major computer manufacturers, with whom it enjoys
close working relationships, including Compaq, Hewlett-Packard and IBM, as well
as dozens of other component and OEM manufacturers. In addition, the Company
serves the computer education market. The largest portion of the Company's
revenues are generated from the sales of computer microphones for sound and
speech recognition. Many of the Company's microphones are also sold to modem
manufacturers, such as U.S. Robotics, who then package these microphones with
their modems, to ensure compatibility of the application to the end-user.
Multimedia Presentation/Training. The Multimedia Presentation/Training
product group also manufactures and markets projection products, such as the
Firefly(TM), a lightweight portable data/video projector, and Caramate(R) slide
projector products, which are used in many types of educational, training
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institutions and presentation settings, primarily for the corporate and
educational markets. The Company's LCD projector line also includes other
lightweight and boardroom data/video projectors.
The Company believes that it has been on the technological forefront in
projector design with several patented innovations. In designing its products,
the Company has focused on the needs of its end-users. For example, in June
1996, the Company developed a revolutionary portable projector, called the
Firefly(TM) LCD Notebook Projector(TM) (patent pending). The Company believes
that the Firefly(TM) serves a significant unmet demand in the marketplace: the
increasing need for portability by the corporate user, especially from outside
salespersons, field sales offices and consultants. The Firefly(TM) , which fits
in a briefcase, is the industry's smallest projector but is equal in power to
standard-sized projectors.
The multimedia/audio communications product market is highly
competitive. Eastman Kodak is the major provider in the slide projector market
(Eastman Kodak is also the Company's largest customer of its slide projectors).
In the LCD projection market, In-Focus Systems, Sharp Electronics and Proxima
are the current market leaders.
Aviation Communications. The Company supplies a broad line of aviation
communications headsets, intercoms and microphones to major commercial and
commuter airlines and pilots as well as to airframe manufacturers. The Company's
aviation communications products are known for their design innovation,
lightweight build, technological strength and product value. The Company uses
its ANR(R) (Active Noise Reduction) patented technology in several of its
designs.
RF/COMMUNICATIONS GROUP
The RF/Communications Group offers a broad line of acoustic accessories
and antennas for various communications needs and applications. The Company
markets its products to wireless local area network providers, public safety and
law enforcement groups (police, fire departments, emergency services, CIA, FBI
and the Secret Service) amateur radio, citizens band radio, land mobile radio,
telephony and various commercial, industrial and military markets. The
RF/Communications Group also produces audio products for the Library of
Congress' talking book program. The RF/Communications Group targets three
principal product markets: (i) wireless LAN and PCS antennas, (ii) talking book
players and (iii) wireless communications. The Company has also historically
targeted the government and military antenna markets, but has recently made the
decision to exit these low margin markets and intends to focus its resources on
the high growth wireless LAN and PCS antenna markets.
Wireless LAN and PCS Antennas. At the end of 1994, Telex entered the
wireless local area networks ("LAN") and personal communication systems ("PCS")
antenna markets to capitalize on the Company's antenna design and communications
technology expertise. The Company believes that wireless LAN and PCS technology
has broad-based applications in today's business arenas. End users include
corporations, retailers, warehouses and distribution centers. The Company's
products are used by a wide variety of companies to set up more efficient and
cost-effective LAN and PCS systems through wireless connections. As an example,
Sears has installed the Company's wireless LAN antennas to remotely connect its
cash registers to the store's main computer, which allows Sears to move the cash
registers as needed to meet demand without worrying about wires.
Talking Book. The Company produces a unique cassette player that is
sold to the Library of Congress ("LOC") for use in their talking book program
for the blind and physically handicapped. Under the talking book program, the
LOC distributes books on tape to the blind and physically handicapped, free of
charge, throughout the United States. The talking book players were designed
using special features for ease of use
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and facilitate playing the books back at different speeds. A unique tape format
ensures that these tapes cannot be played on standard equipment. Telex has been
providing talking book players to the LOC since 1969. While the revenue from
this program in recent years has been relatively stable, the program supplies a
steady source of cash flow, which is expected to increase as the Company shifts
the manufacturing of certain components or subassemblies for this product to its
Mexico facility. 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 its strengths
in acoustics and antenna design capabilities developed over its 25-year history
in the military antenna business. The Company distributes its products through
over 1,100 dealers.
Government and Military Antennas. Telex has been a leader in the
government and military antenna business since the 1960's over which period the
Company has gained significant expertise in the design and manufacture of
antennas. The Company exited this business, however, in the fourth quarter of
Fiscal 1996, due to a decrease in demand from the decline in government military
spending, as well as from low realizable margins associated with the bidding
system of awarding contracts.
HEARING INSTRUMENTS GROUP
The Hearing Instruments Group markets a broad line of high value,
technologically differentiated hearing aids and other assistive listening
devices for the hearing impaired including in-the-ear, behind-the-ear and in-
the-canal hearing aids, as well as FM wireless auditory trainers and personal
assistive listening devices. The Company's patented Adaptive Compression(R)
technology offers superior signal processing service and provides the user with
superior intelligibility and understanding of speech in the presence of
background noise. The Company's hearing instruments business dates back to 1936,
making it one of the oldest hearing aid manufacturers in the United States. The
Hearing Instruments Group targets two principal product markets: (i) hearing
aids and (ii) wireless assistive listening devices.
Hearing Aids. Hearing aid devices are generally segmented by ear
positioning and sound enhancement capabilities. Ear positioning takes two forms,
either in the ear or behind the ear. Sound enhancement is based on two types of
technologies, linear amplification, which only amplifies the sound, and
compression technology, which modifies the actual sound received by the user.
In its product development, Telex has addressed the needs of the
hearing impaired marketplace and developed the technology around these needs,
focusing on providing products based on strong technological features. The
Company believes that its patented compression technology, Adaptive
Compression(R), offers superior signal processing circuitry and provides the
user with superior intelligibility and understanding of speech in the presence
of noise. In October 1996, the Company introduced Threshold Compression(TM)
(patent pending), which has unique user volume control and user selectable
frequency abilities which, for example, allow the user to increase the volume of
conversations in the presence of background noise.
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The Company has recently created one of the smallest hearing aids
available in the marketplace, marketed under the Acapella(TM) name. The device
fits completely in the canal, making it essentially undetectable. The Acapella
hearing aids offer not only improved appearance but its compression technology
and advanced design offer superior sound as well. In addition, in October 1996,
the Company introduced a significantly improved soft shell hearing aid which has
met with significant success. Sold under the SoftWear(TM) and Sound
Advantage(TM) names, these hearing aids are composed of a new material that, due
to its flexibility, is more comfortable than hard plastic based molds.
The Company distributes its hearing aids through 9,000 hearing
instrument dispensers, giving it excellent coverage throughout the United
States. The dispensers are serviced by approximately 16 regional sales managers.
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.
Telex's principal focus is on the educational market, where many schools use the
Company's products, including a number of large city (such as New York and Los
Angeles) and county school systems.
As with hearing aid products, the Company believes that it is able to
differentiate its products from its competitors' products through higher ease of
product use and technologically strong design. Its ClassMate(R) line of auditory
trainers offers state-of-the-art RF/wireless designs, compression technology and
synthesized frequency selection in a wireless FM behind-the-ear device, which is
specially designed for older students who have rejected other models based on
the appearance of body-worn auditory trainers.
INTERNATIONAL OPERATIONS
The Company currently has 195 international distributors and over 1,000
international dealers in nearly 70 countries. The Company had international
sales of $32.9 million in the ten months ended February 2, 1998, which
represented approximately 23.9% of total net sales of the Company. It is the
Company's goal to significantly increase its international sales as a percentage
of total net sales through a variety of methods, including the upgrading of the
quality of its existing distribution channels, the addition of new distributors
in Asia, Australia and Eastern Europe and the continuation of its recent
initiative to design and manufacture new products that better meet international
standards and requirements. Towards this goal, in July 1996, the Company hired a
new vice president of international operations and recently opened sales offices
(i) in Frankfurt and Paris to provide improved support of, and to upgrade the
quality of, the existing distribution channels to the Company's established
Western European markets, and (ii) in Prague to open new distribution channels
to the emerging Eastern European markets.
For the ten months ended February 2, 1998, the Company had European
sales of $13.6 million, Asia Pacific sales of $10.2 million, Canadian sales of
$5.1 million, and other foreign sales of $4.0 million. Substantially all of the
Company's international sales are transacted in United States dollars. The
Company's operating profit margin on export sales is comparable to that realized
on domestic sales.
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PRODUCT ENGINEERING
The Company has a history of technological innovation and strong
product development.
The Company believes that it is one of the most active developers of
new products in the industry. Currently, the Company has over 34 new product
introductions planned or in progress. In the future, the Company intends to both
enhance its existing products and to develop new products and expand the
Company's product offerings to new markets.
The Company has recently implemented a number of strategic initiatives
to identify new market opportunities and to reduce its product development cycle
in order to facilitate the timely introduction of new and enhanced products. The
Company maintains close relationships with its institutional customers to
develop products that meet their requirements. For example, the Company's
computer audio microphone line was developed with product specification input
from Microsoft and Compaq. In connection with these initiatives, the Company
increased its investment in engineering and technology and has implemented
programs in several core technologies in such areas as digital signal
processing, wireless communications, application specific integrated circuit
design and active noise reduction technologies. This increased investment in
engineering and technology has enabled the Company to design new products in
terms of features, quality, reliability and costs.
COMPETITION
The Company believes the principal competitive factors in each of its
four business segments are product reliability, product features, reputation,
distribution, customer service and support, ability to meet delivery schedules,
warranty terms and price. Many of the Company's current competitors are
generally smaller than the Company. The Company believes that the key factors
for the Company to maintain its position are its brand name recognition,
superior distribution network, large user base and large number of products,
together with its extensive experience in designing safe and reliable products,
dealing with regulatory agencies and servicing and repairing its products.
PATENTS, TRADEMARKS AND LICENSES
The Company owns a number of patents related to the design and
manufacture of several of its products, including headsets, headphones,
boom-mounted microphones, various transducer devices, multiple-band directional
antennas, multimedia projectors, computer audio microphones, adaptive
compression circuitry for hearing aids and certain intercom-related devices. The
Company owns several trademarks in the United States and various foreign
countries, including MagnaByte(R), Hy-Gain(R), Road King(R), Audiocom(R),
Adaptive Compression(R), ProStar(R), ClassMate(R), SoundMate(R) and Caramate(R).
Substantially all products sold by the Company are sold under the Telex(R)
trademark pursuant to a royalty-free license granted to the Company by MT.
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 $54.3 million for the ten months ended February 2, 1998 and $63.1
million in Fiscal 1997.
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The Company's five largest suppliers in the ten months ended February
2, 1998 accounted for 28.5% of the total supplies purchased by the Company. One
of the Company's largest suppliers has been a sole source supplier for parts
used in the manufacture of hearing aids for over 30 years. This supplier
provides these components to over 90.0% of all hearing aid manufacturers in the
United States. Although the Company believes that with adequate notice it can
secure, if necessary, alternate sources for these hearing aid parts, its
inability to obtain sufficient parts would have a material adverse effect on the
Company's results of operations. The Company's purchases from this supplier in
the ten months ended February 2, 1998 comprised 4.1% 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 14.2% of the
total cost of supplies purchased by the Company in the ten months ended February
2, 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 5.3% of the
total cost of supplies purchased by the Company for the ten months ended
February 2, 1998. 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 Telex's businesses, backlog is
not necessarily a meaningful indicator of the conditions of the business since
the Company typically receives and ships orders representing a major portion of
its quarterly non-contract revenues in the current quarter. As of February 2,
1998, the Company had a backlog of approximately $15.1 million compared to $31.2
million as of March 31, 1997.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state, local and foreign
environmental laws and regulations including those governing the use, discharge
and disposal of hazardous substances in the ordinary course of its manufacturing
process. Although management believes that its current manufacturing operations
comply in all material respects with applicable environmental laws and
regulations, environmental legislation has been enacted and may in the future be
enacted or interpreted to create environmental liability with respect to the
Company's facilities or operations. The Company believes that compliance with
federal, state and local environmental protection laws and provisions should
have no material adverse effect on the operating income or financial condition
of the Company.
The Company is party to a 1988 consent decree with the predecessor to
the Nebraska Department of Environmental Quality ("NDEQ") relating to the
cleanup of hazardous waste at the Company's Lincoln, Nebraska facility. In
connection with ongoing monitoring and cleanup activities at the site and on
adjacent property, the Company has received from the NDEQ three notices of
noncompliance (all of which related to the same underlying matter). The Company
is in discussions with the NDEQ regarding future actions but does not believe
that the costs related to its responsibilities at the site will result in a
material adverse effect on the Company's operating income or financial
condition. NDEQ and the U.S. Environmental Protection Agency also have requested
the Company to take action in connection with a post-closure permit and possibly
to perform additional remediation at the site. 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
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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 February 2, 1998, the Company had accrued approximately $1.6
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 13 to the Consolidated Financial Statements of the
Company included elsewhere herein.
Capital expenditures of the Company for environmental control
facilities are estimated to be approximately $15,000 per year, in addition to
those costs associated with the Lincoln, Nebraska 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 February 2, 1998, the Company employed 1,540 employees, of whom
1,303 were in manufacturing, 86 in engineering, 102 in sales and marketing and
49 in general and administration. The Company's work force is not unionized.
Management considers its employee relations to be 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>
Blue Earth, Minnesota Owned 150,000 Manufacturing
Lincoln, Nebraska Owned 120,000 Manufacturing, Product
Development and Sales Office
Glencoe, Minnesota Owned 100,000 Manufacturing
Bloomington, Minnesota Owned 50,000 Corporate Headquarters, Product
Development and Sales Office
Hermosillo, Sonora,
Mexico(a) Leased 32,500 Manufacturing
Rochester, Minnesota Owned 30,000 Manufacturing
Toronto, Canada Leased 4,000 Sales Office, Distribution
Burbank, California Leased 2,500 Sales Office
Sales Office, Distribution and
Singapore Leased 2,300 Service
London, England Leased 200 Sales Office
Burnsville, Minnesota Owned 14 acres Vacant land
</TABLE>
- ----------------------
(a) Subject to a five-year lease, scheduled to expire in 2001 if the
Company does not exercise its renewal option.
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At its Glencoe, Minnesota facility, the Company manufactures headsets,
intercoms, microphones, LCD projectors and many of the piece parts used in the
manufacture and assembly of the products produced at the Company's other
manufacturing facilities. The Blue Earth facility engages in electronic assembly
and the production of tape duplicators, intercoms, slide projectors, language
labs and tape players for the Library of Congress. Wireless microphones,
intercoms, auditory trainers and antenna products are manufactured at the
Company's facility in Lincoln, Nebraska. At its Rochester, Minnesota facility,
the Company manufactures hearing aids. The Company is currently manufacturing
microphones, cable assemblies and subassemblies at its Hermosillo, Sonora,
Mexico facility. The Company's recently opened sales offices in Frankfurt, Paris
and Prague are currently staffed by independent contractors.
Each of the Glencoe, Blue Earth and Lincoln facilities was designed to
employ approximately 500 people. Rochester can employ 250 people working one
shift and up to 500 with two or three shifts. The Company believes that
increases in manufacturing needs could be accommodated readily by the addition
of second or third shifts.
The city of Bloomington, Minnesota, has declared the Company's current
headquarters location to be an urban development zone. However, the city of
Bloomington has not notified the Company of any near-term need for the Company
to consider moving from its current site. Should the Company be required to move
in the future, the Company believes adequate rental facilities would be readily
available in the area.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a number of lawsuits that have arisen in
the ordinary course of business. The Company believes that such litigation,
considered separately or in the aggregate, will not have a material adverse
effect on the consolidated financial position or results of operations of the
Company. Management believes that the Company's products have proper agency
approvals where required.
For a discussion of certain environmental matters, see "--
Environmental Matters."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of either
the Company or Holdings during the ten months ended February 2, 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 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. Holdings does not expect to pay cash dividends in the foreseeable
future.
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<PAGE> 12
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial data of
the Company for the ten months ended February 2, 1998 and for each of
the four fiscal years ended March 31, 1994, 1995, 1996 and 1997, respectively.
The selected historical financial data set forth below with respect to the ten
months ended February 2, 1998 are derived from the consolidated financial
statements included elsewhere herein, which have been audited by Arthur
Andersen LLP, independent public accountants. The selected historical financial
data set forth below with respect to fiscal years ended March 31, 1996 and
1997, are derived from the consolidated financial statements included elsewhere
herein, which have been audited by Ernst & Young LLP, independent auditors. The
selected historical financial data with respect to the fiscal years ended March
31, 1994 and 1995 are derived from the consolidated financial statements of the
Company that are not included herein. The summary financial data below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations"and the Consolidated Financial Statements
and notes thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
TEN MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED
-------------------------------------------------------- FEBRUARY 2,
1994 1995 1996 1997 1998(H)
--------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ............................... $ 132,389 $ 141,572 $ 145,348 $ 170,881 $ 137,657
Gross profit ............................ 47,148 52,024 55,228 71,257 58,375
Engineering and development ............. 5,378 6,138 6,756 7,645 7,317
Selling, general and administrative ..... 22,557 23,410 24,188 27,545 36,065
Other operating expenses(a) ............. 4,308 6,286 3,385 1,648 2,759
Special charges(b) ...................... -- -- 13,785 -- 2,231
--------- --------- --------- --------- ---------
Operating profit ........................ 14,905 16,190 7,114 34,419 10,003
Interest expense ........................ 10,120 12,490 12,517 12,513 22,729
Extraordinary loss, net of tax (c) ...... -- (3,239) -- -- (10,976)
Net income (loss) ....................... $ 3,914 $ 68 $ (4,104) $ 14,325 $ (47,362)(i)
OTHER FINANCIAL DATA:
EBITDA(d) ............................... $ 23,035 $ 25,134 $ 16,691 $ 40,045 $ 14,914
EBITDA margin(e) ........................ 17.4% 17.8% 11.5% 23.4% 10.8%
Depreciation and amortization ........... $ 8,130 $ 8,944 $ 9,577 $ 5,626 $ 4,911
Capital expenditures .................... 4,377 3,596 3,320 8,685 4,724
Cash interest expense ................... 8,891 12,043 12,159 12,154 17,127
Cash flow provided by operations ........ 14,967 10,867 18,528 21,426 6,398
Cash flow used by investing activities .. (4,377) (3,596) (3,320) (8,685) (4,724)
Cash flow used by financing activities .. (1,750) (12,317) -- -- (37,056)
Ratio of EBITDA to cash interest expense 2.6 2.1 1.4(d) 3.3 0.9(d)
Ratio of earnings to fixed charges(f) ... 1.5x 1.3x --(g) 2.9x 0.2x(g)
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF FEBRUARY 2,
1997 1998
--------------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ............. $ 35,742 $ 275
Working capital ....................... 64,123 14,560
Total assets .......................... 140,816 122,213
Total debt ............................ 100,000 252,231
Shareholders' equity (deficit) ........ 6,256 (166,419)
</TABLE>
See Notes to Selected Historical Financial Data
11
<PAGE> 13
NOTES TO SELECTED HISTORICAL FINANCIAL DATA
(in thousands)
(a) Other operating expenses consist of corporate charges and amortization
of goodwill and other intangibles.
(b) The Company recorded special charges associated with (i) a non-cash
impairment loss of $2,231 for the ten months ended February 2, 1998 and
$13,345 for Fiscal 1996, and (ii) a loss of $440 associated with the
closing of a manufacturing facility and the accrual of severance
benefits payable to employees at such facility in Fiscal 1996.
Excluding these charges, the operating profit and net loss for the ten
months ended February 2, 1998 would have been $12,234 and $45,131,
respectively. Excluding the charges in Fiscal 1996, the operating
profit and net income would have been $20,899 and $7,329. The
recognition of the impairment losses was in accordance with the
provision of Statements of Financial Accounting Standards No. 121
"Accounting for Impairment of Long Lived Assets and Assets to be
Disposed Of."
(c) Extraordinary losses of $3,239, and $10,976, net of tax, in Fiscal 1995
and the ten months ended February 2, 1998, respectively, resulted from
the early retirement of debt.
(d) EBITDA, as presented, represents earnings before interest expense,
other income, income taxes, depreciation and amortization. EBITDA is
included because management understands that such information is
considered by certain investors to be an additional basis on which to
evaluate the Company's ability to pay interest, repay debt and make
capital expenditures. Excluded from EBITDA are interest expense, other
income, income taxes, depreciation and amortization, each of which can
significantly affect the Company's results of operations and liquidity
and should be considered in evaluating the Company's financial
performance. For the ten months ended February 2, 1998 and Fiscal 1996,
EBITDA has not been adjusted for the special, non-recurring charges of
$2,231 and $13,345, respectively, described in Note (b) above. Further,
EBITDA for the ten months ended February 2, 1998 has not been adjusted
for (i) $7,410 of compensation charges for stock options associated
with the Transactions (as defined herein), (ii) initial option grants
of $2,851 and (iii) management cash bonus plan of $1,908. Had EBITDA
been adjusted for these charges, EBITDA for the ten months ended
February 2, 1998 and Fiscal 1996 would have been $29,314 and $30,036,
respectively. In addition, had EBITDA been adjusted for these charges,
the ratio of EBITDA to cash interest expense for the ten months ended
February 2, 1998 and Fiscal 1996 would have been 1.7 and 2.5,
respectively. EBITDA is not intended to represent and should not be
considered more meaningful than, or an alternative to, measures of
operating performance as determined in accordance with generally
accepted accounting principles. A substantial portion of the Company's
EBITDA will be required to service the Company's payment obligations
under the Senior Secured Credit Facility and the Notes. In addition,
the Company's use of all remaining EBITDA (after making such required
debt service payments) will be limited by the applicable restrictive
covenants in the Senior Secured Credit Facility and the Indenture.
(e) EBITDA margin represents EBITDA as percentages of net sales.
(f) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges (excluding capitalized
interest) by fixed charges. Fixed charges for this purpose include
interest expense, capitalized interest, amortization of deferred
financing costs and one third of operating lease payments which are
deemed to be representative of the interest factor for lease rentals.
(g) Earnings for Fiscal 1996 were inadequate to cover fixed charges by
$4,284. Excluding the $13,785 special charges set forth in Note (b)
above, the ratio of earnings to fixed charges for Fiscal 1996 would
12
<PAGE> 14
have been 1.75. Excluding the charges and expenses set forth in Note
(i) below, the ratio of earnings to fixed charges for the ten months
ended February 2, 1998 would have been .78.
(h) The following table sets forth selected financial data for the ten
months ended February 2, 1998 and 1997.
<TABLE>
<CAPTION>
TEN MONTHS ENDED FEBRUARY 2,
----------------------------
1998 1997
(UNAUDITED)
--------- -----------
<S> <C> <C>
Net sales ................................. $ 137,657 $ 140,347
Gross profit .............................. 58,375 58,803
Income tax provision ...................... 17,248 7,570
Income (loss) before extraordinary item ... (36,386) 11,797
Net income (loss) ......................... (47,362) 11,797
</TABLE>
(i) Net loss for the ten months ended February 2, 1998 includes $21,173 of
deferred tax asset valuation allowance (see Note 10 to Consolidated
Financial Statements of the Company included elsewhere herein), and
pre-tax charges and expenses totaling $40,657 relating to (1) an
extraordinary loss of $17,588 ($10,976, net of tax) associated with the
early retirement of debt; (2) write-off of $1,674 of debt financing
fees for the bridge loan commitment (recorded as interest expense); (3)
$7,410 of compensation charges for stock options associated with the
Transactions; (4) special management bonus of $285; (5) initial option
grants of $2,851; (6) management cash bonus plan of $1,908; (7) $2,231
of special non-recurring charges (see above); and (8) $6,710 of
expenses associated with the Transactions. Excluding these charges,
operating profit and net income for the ten months ended February 2,
1998 would have been $24,688 and $2,689, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This transition report covers the ten months from April 1, 1997, the
close of the fiscal year covered by the Company's last annual report, and
February 2, 1998, the date of the Merger. Financial information for the ten
months ended February 2, 1997 has been included for comparative purposes and is
unaudited.
The following discussion and analysis of the financial condition and
results of operations includes periods before 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. Accordingly,
the results of operations for the ten months ended February 2, 1998, which are
affected by such changes, are not comparable to the results of operations for
the ten months ended February 2, 1997, which do not reflect the impact of the
Transactions. See "The Transactions" and the Consolidated Financial Statements
and notes thereto included elsewhere herein. In addition, the following
discussion and analysis of the financial condition and results of operations
covers the business, operations and financial results of the Company on a
stand-alone basis immediately prior to the Merger, but after giving effect to
certain Merger-related transactions described herein.
FORWARD-LOOKING STATEMENTS
The statements in Part I of this Form 10-K that are forward looking are
based on current expectations, and actual results may differ materially.
Forward-looking statements involve numerous risks and uncertainties that could
cause actual results to differ materially, including, but not limited to: the
timely development and market acceptance of new products; the impact of
competitive products and pricing; the effect of changing
13
<PAGE> 15
general and industry specific economic conditions; the Company's ability to
access external sources of capital; and such risks and uncertainties detailed
from time to time in the Company's Securities and Exchange Commission reports
and filings.
THE TRANSACTIONS
On May 6, 1997 (the "Recapitalization Closing Date"), the Company
completed a recapitalization (the "Recapitalization") pursuant to an Agreement
(the "Recapitalization Agreement") among the Company, Greenwich II, LLC
("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 the Company) were converted into the right
to receive an aggregate amount of cash (the "Recapitalization Consideration")
equal to approximately $253.9 million. In addition, in connection with the
Recapitalization Agreement, certain shares of Holdings Common Stock held by
management of the Company (such shares, the "Rollover Shares") and certain
options to acquire additional shares of Holdings Common Stock (the "Rollover
Options"), with an aggregate value of approximately $21.2 million (which
represents 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 connection with the Recapitalization, the Company completed (i) a tender
offer (the "Tender Offer") to repurchase all of the $100.0 million aggregate
outstanding principal amount of the 12% Senior Notes due 2004 of the Company
(the "Telex Notes"), including premium and consent fees along with accrued
interest, for $118.3 million and (ii) a solicitation of consents with respect to
certain amendments to the indenture pursuant to which the Telex Notes were
issued. The Recapitalization, the financing thereof (including the issuance by
the Company of 10 1/2% Senior Subordinated Notes due 2007 (the "Existing Notes")
in a transaction that was exempt from registration under the Securities Act),
the Tender Offer and the payment of the related fees and expenses are herein
referred to as the "Transactions." See "The Recapitalization" and "Interests of
Certain Persons."
The Transactions were financed by (i) $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 credit
facility (the "Senior Credit Facility"), consisting of (a) a $115.0 million term
loan facility (the "Term Loan Facility"), and (b) a $25.0 million revolving
credit facility (the "Revolving Credit Facility"), (iv) $125.0 million of
Existing Notes and (v) $36.5 million of available cash of the Company.
Pursuant to the Transactions, 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, the Company completed an exchange offer (the "Exchange
Offer") of $125 million aggregate principal amount of new 10 1/2% Senior
Subordinated Notes Due 2007, Series A (the "New Notes"), which were registered
under the Securities Act of 1933 (the "Securities Act"), for a like principal
amount of the Existing Notes (together with the New Notes, the "Notes"). Except
for the absence of transfer restrictions under federal securities law, the terms
of the New Notes are identical to the terms of the Existing Notes in all
material respects. All of the Existing Notes were tendered and accepted for
exchange.
14
<PAGE> 16
THE MERGER
On February 2, 1998, Telex was merged with and into EVI, with EVI as
the surviving corporation and EVI changed its name to "Telex Communications,
Inc." EVI manufactures and markets a range of products for professional audio
systems, including microphones, mixing consoles, signal processors, amplifiers
and loud speakers. Prior to the Merger, EVI Audio Holdings, Inc. ("EVI
Holdings"), the parent corporation of EVI, was merged with and into Holdings
(the "Prior Merger"), with Holdings as the surviving corporation. The Merger
and Prior Merger were effected pursuant to an exchange agreement among
Holdings, the Company, EVI, EVI Holdings, Greenwich I LLC (G-I) and Greenwich
II LLC (G-II), all of which entities are affiliates of Greenwich Street
Capital Partners, Inc., a Delaware corporation and the manager of GSCP.
Immediately prior to the Merger, approximately $12.7 million outstanding under
EVI's senior secured credit agreement was paid in full and EVI's senior credit
agreement was terminated. Such indebtedness, together with $0.4 million of
certain fees and expenses associated with the Merger was repaid by utilizing
free cash at closing from EVI of $3.8 million and by borrowings under the
Company's Revolving Credit Facility of approximately $9.3 million. The
financial statements as of and for the ten months ended February 2, 1998
included herein reflect such borrowings. EVI's 11% Senior Subordinated Notes
Due 2007 (the "EVI Notes"), issued in September 1997 for an aggregate principal
amount of $100.0 million, remain outstanding following the Merger.
FINANCIAL ACCOUNTING MATTERS
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121 "Accounting for Impairment of Long-Lived Assets and
Assets to be Disposed Of," which 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 amount.
During Fiscal 1996, several business conditions changed for the
Company, including the discontinuance of a number of product lines and the
closing of one of the Company's manufacturing facilities. These changing
business conditions had a potential impact on the realizability of virtually all
of the Company's long-lived assets, including property, plant, equipment,
identifiable assets, and the goodwill that was allocated to those assets. Based
on the cash flows identifiable with the affected assets, the Company determined
that certain assets were impaired and recognized an impairment loss, charged
against operating income, of $13.3 million. This reduction in the carrying
amount of the assets reduced the depreciation and amortization expense by
approximately $2.8 million in Fiscal 1997.
For the ten months ended February 2, 1998, the Company determined that
as a result of further changed business conditions for certain product lines the
Company recognized an additional impairment loss of $2.2 million against
operating income. This reduction in carrying amount of certain assets will
reduce the amortization expense by approximately $0.1 million in Fiscal 1999.
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 long-lived assets down further.
15
<PAGE> 17
RESULTS OF OPERATIONS
TEN MONTHS ENDED FEBRUARY 2, 1998 COMPARED TO TEN MONTHS ENDED FEBRUARY 2, 1997
Net sales decreased $2.7 million (1.9%) for the ten months ended
February 2, 1998, due to decreased shipments of the Multimedia/Audio
Communications products partially offset by increased shipments in the other
three business segments' products.
Net sales of Professional Sound and Entertainment products increased
$2.5 million (5.1%) for the ten months ended February 2, 1998, primarily due to
increased shipments of wireless intercom and microphone products. The increase
in wireless intercom and microphone shipments was primarily the result of new
products introduced in the fourth quarter of Fiscal 1997.
Net sales of Multimedia/Audio Communications products decreased $8.0
million (15.5%) for the ten months ended February 2, 1998, primarily due to
decreased shipments of computer audio and LCD projection products, partially
offset by increased shipments of aircraft communications products. The decreased
shipments of computer audio products was a result of a significant drop in sales
to one key customer. The decreased shipments of the LCD projection products was
primarily the result of increased competition and the delay in the availability
of certain new products. Although certain new products are currently available
for delivery to customers, the Company expects that future shipments of LCD
projection products will continue to be impacted by significantly increased
competition.
Net sales of the RF/Communications products increased $0.4 million
(1.8%) for the ten months ended February 2, 1998, primarily due to increased
shipments of CB microphones, commercial antenna systems and talking book players
to the Library of Congress.
Net sales of the Hearing Instruments products increased $2.4 million
(11.8%) for the ten months ended February 2, 1998. The improvement is due to
increased shipments of the Company's hearing aid and auditory trainer products.
Gross profit decreased by $0.4 million (0.7%) for the ten months ended
February 2, 1998. Gross margin increased 0.5 percentage points from 41.9% to
42.4%. The increase was the result of higher gross margins in Professional Sound
and Entertainment and RF/Communications products, partially offset by slight
declines in gross margins for the Multimedia/Audio Communications and Hearing
Instruments products.
Operating Expenses for the ten months ended February 2, 1998 increased
$18.0 million (59.1%) primarily as a result of $12.5 million of costs related to
the Transactions (described below), $2.2 million of special charges attributable
to the write-off of impaired long-lived assets, and $1.3 million of corporate
charges (described below). Excluding such charges, operating expenses for the
ten months ended February 2, 1998 increased by $2.0 million. Total operating
expenses represented 35.1% of sales for the ten months ended February 2, 1998,
compared with 21.7% for the ten months ended February 2, 1997.
Engineering expenses increased by $1.2 million (18.1%) due to increased
outside development costs incurred to accelerate new product development.
Marketing expenses increased $1.5 million (9.5%) due to increases in advertising
and marketing costs associated with new products. General and Administrative
expenses, excluding costs related to the Transactions, decreased $0.7 million
(9.7%).
16
<PAGE> 18
The $12.5 million of costs related to the Transactions consist of
charges for changes in the Rollover Options, new options grants and special
management bonus compensation. Compensation expense of $7.4 million related to
the extension of terms on the Rollover Options was recognized during the ten
months ended February 2, 1998. In addition, as part of the Transactions, the
Company granted options to purchase shares of Holdings' Common Stock at a
discount from fair value to certain management employees. 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. During the ten
months ended February 2, 1998, the Company recognized $2.9 million of
compensation expense related to these option grants.
Corporate charges of $1.3 million for the ten months ended February 2,
1998 represent fees for consulting and management services provided to GSCP
under a management and services agreement.
Interest expense increased $12.3 million (117.7%) for the ten months
ended February 2, 1998. The increase was due to $1.7 million of bank fees paid
in connection with a bridge loan commitment related to the Transactions, $1.3
million of bank and other fees in connection with the Merger and an increase in
average outstanding indebtedness resulting from the Transactions.
The Company's income tax benefit, excluding the $21.2 million income
tax provision related to the net deferred tax asset valuation allowance, was
20.4% of the pre tax loss before extraordinary items for the ten months ended
February 2, 1998. The tax rate for the ten months ended February 2, 1997 was
39.2%. The lower effective tax rate for the ten months ended February 2, 1998 is
principally due to the nondeductibility of certain costs related to the
Transaction and goodwill amortization costs.
The Company has established a net deferred tax valuation allowance of
$21.2 million, charged to income tax provision for the ten months ended February
2, 1998, due to the uncertainty of the realization of future tax benefits. The
valuation allowance includes $6.8 million related to the net deferred tax asset
balance from Fiscal 1997. 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 valuation allowance for financial reporting purposes.
In connection with the Transactions, the Company recorded an
extraordinary loss of $17.6 million ($11.0 million net of income taxes) 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 of the Company's $100.0 million Senior Notes.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased $25.5 million (17.6%), due to increased shipments
in each of the four business segments.
Net sales of Professional Sound and Entertainment products increased
$6.2 million (11.8%), primarily due to increased shipments of intercom systems,
partially offset by decreased unit sales of microphone products. The increased
sales of intercom systems were in part due to continued growth in sales of new
products introduced in Fiscal 1996 and an increase in broadcast equipment
demand.
Net sales of Multimedia/Audio Communications products increased $16.9
million (37.5%), primarily as a result of increased shipments of computer audio,
LCD projection and aircraft communications products, partially offset by
decreased unit sales of slide projectors. The increase in sales volume of
computer audio
17
<PAGE> 19
and LCD projection products resulted from the continued growth of computer audio
and multimedia applications use. The aircraft communications increase was
favorably impacted by a stronger market in the aviation industry and a change in
the sales distribution channel compared to the same period in Fiscal 1996.
Net sales of RF/Communications products increased $0.3 million (1.3%),
primarily due to increased shipments of talking book players to the Library of
Congress and wireless LAN antenna products, partially offset by reduced
shipments of military vehicular antennas. The increase in sales of talking book
players is the result of a higher unit volume and the selling price associated
with the current contract compared to the previous contract in Fiscal 1996.
Shipments of military vehicular antennas ended as the last shipments under the
remaining contract with the United States Department of Defense were made in the
fourth quarter of Fiscal 1996. The Company does not expect to ship these
products again in the foreseeable future.
Net sales of Hearing Instrument products increased $2.1 million (9.3%)
primarily due to increased shipments of hearing aid and auditory trainer
products.
Gross profit increased $16.0 million (29.0%) during Fiscal 1997. The
impact from the Company's adoption of and accounting for impairment of
long-lived assets in the fourth quarter of Fiscal 1996 increased gross profit in
Fiscal 1997 by approximately $1.2 million due to lower levels of depreciation
expense. Gross margin increased 3.7 percentage points to 41.7%, compared to
38.0% in Fiscal 1996. The gross margin increase was the result of higher margins
in each of the four business segments. The gross margin in the Professional
Sound and Entertainment segment increased slightly, primarily due to a favorable
product mix of higher margin intercom systems. The gross margin in the
Multimedia/Audio Communications segment improved, primarily due to higher
margins in computer audio, LCD projection and aircraft communications products.
This increase continued to be favorably impacted by lower production costs and
productivity improvements realized in the manufacturing process. The gross
margin in the RF/Communications segment increased, primarily as a result of
shipments under the new talking book contract at higher prices. In addition,
increased shipments of higher margin commercial products and the absence of
lower margin military vehicular antenna shipments (as noted above) also
contributed to the improved gross margin for the RF/Communications business
segment. The gross margin in the Hearing Instruments segment increased,
primarily as a result of higher selling prices and decreased production costs of
hearing aids.
During the first quarter of Fiscal 1997, the Company began initial
production at its manufacturing plant in Hermosillo, Sonora, Mexico and will be
seeking to improve its gross margins over the next several years by increasing
the levels of production at such plant.
Operating expenses increased $2.5 million (7.3%). Total operating
expenses represented 21.6% of sales for Fiscal 1997, compared with 23.6% of
sales for Fiscal 1996. The impact from the Company's adoption of and accounting
for impairment of long-lived assets in the fourth quarter of Fiscal 1996
resulted in decreased amortization expense for Fiscal 1997 of approximately $1.6
million. Engineering expenses increase $0.9 million (13.2%), primarily due to
increased levels of outside services and project supplies incurred in order to
accelerate new product development. Marketing expenses increased by $2.0 million
(11.7%), due to increased commissions, warranty and sales support costs related
to the increased sales volume. However, marketing expenses represented 10.9% of
sales for Fiscal 1997, compared with 11.5% of sales for Fiscal 1996. General and
administrative expenses increased $1.4 million (18.7%), primarily as a result of
increase compensation expense and costs associated with the Company's new
computer information systems project.
Other income increased $0.6 million (49.3%), primarily as a result of
increases in interest income on higher average cash balances compared to the
same period in Fiscal 1996.
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<PAGE> 20
The Company's effective tax rate for Fiscal 1997 was 39.2%. The Fiscal
1996 effective tax rate was not meaningful, as the Company recorded a tax
benefit of only $0.2 million despite a net loss of $4.3 million due primarily to
the nondeductible nature of amortization and impairment write-offs of goodwill.
SEASONALITY OF BUSINESS
The Company's business is not considered seasonal. Revenues between
quarters of the fiscal year are relatively stable.
LIQUIDITY AND CAPITAL RESOURCES
At February 2, 1998, the Company had cash and cash equivalents of $0.3
million compared to $35.7 million at March 31, 1997. The ratio of current assets
to current liabilities decreased to 1.5 at February 2, 1998 from 3.2 at March
31, 1997. The decrease in the current assets to the current liabilities ratio is
due primarily to the increase in current debt and the decrease in cash, both
changes attributed primarily to the Transactions.
The Company's principal source of funds has consisted of cash generated
from operating activities. Historically, the Company's principal non-operating
uses of cash have been for interest expense, repayments of debt, capital
expenditures, and certain repurchases of Holdings securities. Net cash provided
by operations for the ten months ended February 2, 1998 was $6.4 million versus
$8.6 million for the ten months ended February 2, 1997. The decrease in cash
provided by operations was primarily due to lower operating profits and higher
interest expense. Net cash used in financing activities for the ten months ended
February 2, 1998 was $37.1 million. There were no cash flows from financing
activities for the comparable period in Fiscal 1997. The net cash used in
financing activities was primarily for Transactions-related fees and expenses of
$6.7 million charged to non-operating expenses, deferred financing fees of $12.3
million, bond premium, consent and tender fees of $15.1 million paid on early
retirement of debt, and $9.3 million advanced to EVI, primarily for retirement
of EVI's senior credit agreement on February 2, 1998 in conjunction with the
Merger.
Inventory increased $6.4 million (27.0%) at February 2, 1998 from March
31, 1997. The increase is attributed primarily to the new products launched in
the second half of Fiscal 1998. As the Company introduces new products and
phases out old products, the potential impact on inventory obsolescence is
addressed by implementing an orderly phase out plan of products nearing the end
of their product life cycle, including conducting reviews for obsolescence and
related liquidation measures, and by providing provisions to ensure that an
adequate reserve is maintained.
The Company's expenditures for property, plant and equipment were $4.4
million for the ten months ended February 2, 1998, compared to $7.3 million for
the ten months ended February 2, 1997. In addition the Company has capitalized
$0.4 million of inventory leased to customers. The decrease in expenditures for
the ten months ended February 2, 1998 was anticipated, as the Company is nearing
completion of the replacement and upgrade of its computer information systems.
The Company estimates its annual maintenance levels of capital expenditures to
be approximately $3.0 million.
The Company has a Senior Credit Facility consisting of a Term Loan
Facility of $115.0 million, and a $25.0 million commitment under a Revolving
Credit Facility, subject to borrowing base limitations. As of February 2, 1998
(and before giving effect to the Merger), there was $115.0 million outstanding
on the Term Loan Facility, of which $8.0 million matures in the next 12 months,
and $2.9 million outstanding under the Revolving Credit Facility. Net
availability on the Revolving Credit Facility, computed by deducting
approximately $7.3 million of open letters
19
<PAGE> 21
of credit, totaled $14.8 million at February 2, 1998, subject to borrowing base
limitations, of which (as further described below) $9.3 million was
subsequently drawn down to pay off a portion of EVI's senior credit agreement
and certain fees and expenses in connection with the Merger. The effective
interest rate under the Company's Senior Credit Facility for the ten months
ended February 2, 1998 was 8.6%.
The Company's consolidated indebtedness at February 2, 1998
(immediately prior to the Merger, but including approximately $9.3 million of
borrowings under the Company's Revolving Credit Facility utilized, in part, to
retire EVI's senior credit agreement and to pay certain fees and expenses
associated with the Merger) increased to $252.2 million, compared to $100.0
million at March 31, 1997, and, for the respective periods, cash decreased to
$0.3 million from $35.7 million, primarily due to the Transactions.
Immediately prior to the Merger, approximately $12.7 million of
indebtednesss outstanding under EVI's senior credit agreement was paid in full
and EVI's senior credit agreement was terminated. Such indebtedness, together
with $0.4 million for certain fees and expenses associated with the Merger,
were repaid by utilizing free cash at closing from EVI of $3.8 million and by
borrowings under the Company's Revolving Credit Facility of approximately $9.3
million.
As a result of the termination of EVI's senior credit agreement,
approximately $12.7 million in term loans previously outstanding thereunder was
repaid and EVI's revolving credit facility of $25 million (of which
approximately $14.6 million was then available for borrowing) was terminated.
Immediately after the Merger, the Company had borrowings of $12.2 million
outstanding under the Revolving Credit Facility, with net availability
thereunder of $5.1 million, computed by deducting approximately $7.7 million of
open letters of credit and applying applicable borrowing base limitations.
In addition, under the indentures governing Company's Notes and the
EVI Notes and the Company's Senior Credit Facility, the Company's foreign
subsidiaries are permitted to obtain working capital lines, subject to certain
restrictions. As of February 2, 1998, the Company had the ability to borrow
approximately $19.3 million in foreign working capital under these provisions.
As of February 2, 1998 certain foreign subsidiaries of the Company (formerly
EVI's foreign subsidiaries) have entered into agreements with banks to provide
up to $4.5 million for local working capital needs including letter of credit
issuances. In certain instances, the facilities are secured by a lien on
foreign real property, leaseholds or accounts receivable and inventory or
guaranteed by another subsidiary of the Company.
The Company expects to generate cash flow from expected cost-savings
attributable to Merger-related expected restructuring activities and from the
receipt of $7.2 million net operating loss tax benefit for which tax returns
were filed in late April 1998. In addition, the Company has arranged a $4
million intercompany line of credit with Holdings, and is seeking to replace the
working capital lines of EVI's former subsidiaries with a foreign working
capital facility to be secured by the merged companies' foreign assets.
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 Merger. However,
no assurance can be given in this regard among other reasons, because the
foreign working capital facility may not be obtained, and 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.
20
<PAGE> 22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MANAGEMENT OF FOREIGN CURRENCY RISK
The Company enters into forward exchange contracts to hedge inventory
purchases denominated in Japanese yen on a continuing basis for periods
consistent with its inventory purchase commitments. It does not engage in
currency speculation. The Company's foreign exchange contracts do not subject
the Company to risk due to exchange rate movements because gains and losses on
these contracts offset losses and gains on the inventory purchase commitments.
These foreign exchange contracts typically have 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
February 2, 1998, the Company had no foreign currency forward exchange contracts
outstanding.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Public Accountants, Report of Independent
Auditors, 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
As a result of the Merger, the Company changed its independent public
accountants from Ernst & Young LLP, who audited the Company's financial
statements as of March 31, 1996 and 1997, to Arthur Andersen LLP, the
independent public accountants of EV International, Inc. In connection with the
audits of the Company's financial statements for the years ended March 31, 1996
and 1997, there have been no disagreements with Ernst & Young LLP on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.
No event of the type described in Item 304(a)(1)(v) of Regulation S-K
occurred during the period described above.
Prior to the Board of Director's determination to engage Arthur
Andersen LLP as its independent public accountant for the ten-month period
ending February 2, 1998, Arthur Andersen LLP performed certain due diligence
procedures for the new majority shareholders and was consulted on the accounting
treatment and disclosure requirements of certain acquisition related
transactions.
The Company has requested Ernst & Young LLP to furnish it a letter
addressed to the Securities and Exchange Commission stating whether it agrees
with the above statements. A copy of that letter dated May 4, 1998 is filed as
Exhibit 16 hereto.
21
<PAGE> 23
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth, as of February 2, 1998, the name, age
and position of each of the executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- -----------------------------------------------------
<S> <C> <C>
John L. Hale*.................. 57 Chairman of the Board of Directors (the "Board"),
President and Chief Executive Officer
John T. Hislop*................ 57 Vice President, Chief Financial Officer and Treasurer
John A. Palleschi*............. 46 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, RF/Communications
Group
Glen E. Cavanaugh.............. 53 Vice President and President, Multimedia/Audio
Communications Group
Neil A. Levy................... 50 Vice President and President, Hearing Instruments
Group
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................. 40 Director
Christine K. Vanden Beukel*.... 27 Director, Assistant Secretary and Assistant Treasurer
</TABLE>
- ------------------
* Executive holds same position with Holdings
Mr. Hale joined the Company as Chairman of the Board, President and
Chief Executive Officer in October 1991. Prior to October 1991, he served as
President, Chief Executive Officer and a director of Fibronics International
Inc., a provider of fiber optic and other communication products and services.
From June 1985 to November 1986, Mr. Hale was President and Chief Executive
Officer of Intelogic Trace, Inc., a computer and communications service company.
From September 1980 to March 1985, Mr. Hale served as President and Chief
Executive Officer of Inforex, Inc., a worldwide supplier of computer systems and
local area networks. From February 1978 to September 1980, and from September
1982 to June 1985, Mr. Hale
22
<PAGE> 24
was, respectively, a Vice President and Executive Vice President at Datapoint
Corporation, the parent of Inforex, Inc., a manufacturer of computers and
telecommunications equipment.
Mr. Hislop joined the Company in May 1993 as Vice President, Chief
Financial Officer, Treasurer and Assistant Secretary. Prior to joining the
Company, Mr. Hislop was with Fibronics International Inc., where he served as
Joint Chief Executive Officer from 1992 to 1993 and as Corporate Vice President
and Chief Financial Officer from 1989 through 1991. From 1987 to 1989, Mr.
Hislop served as a partner of Management Resources Inc., a management consulting
group. From 1985 to 1987, Mr. Hislop was Vice President, Chief Financial Officer
and Treasurer of Intelogic Trace, Inc. From 1973 to 1985, he served as a Vice
President and Controller of Datapoint Corporation.
Mr. Palleschi has been Vice President, Corporate Development, General
Counsel and Secretary of the Company since January 1995. Prior to January 1995,
Mr. Palleschi was Vice President, Administration, General Counsel and Secretary
of the Company and served in such capacity since June 1989. Prior to joining the
Company, Mr. Palleschi was Director of Corporate Development for Memorex from
March 1988 to June 1989. From June 1984 to March 1988, Mr. Palleschi was
International Counsel, Telex Computer Products, Inc., a subsidiary of Telex
Corp. From 1981 to 1984, Mr. Palleschi also served as an attorney with Digital
Equipment Corporation and Raytheon Corporation.
Mr. Winebarger has been Vice President responsible for Telex's
Information Systems since January 1995 and for Telex's Engineering Services, Le
Sueur manufacturing facility, Quality Assurance and Sales Administration
operations since April 1993. Prior to April 1993, Mr. Winebarger was Vice
President, Engineering of Telex and served in such capacity with Telex and Old
TCI since September 1987. From January to September 1987, he was corporate
Director of Advanced Development, Telex Computer Products, Inc. Prior to 1987,
Mr. Winebarger was Acting Vice President, Engineering, then Vice President,
Engineering for Telex Data Systems, a division of Telex Computer Products, Inc.
Mr. Dantzler has served as Vice President and General Manager of
Telex's RF/Communications Group since May 1994. Prior to May 1994, Mr. Dantzler
was Vice President and General Manager of Telex's Professional Sound and
Entertainment Group. From February 1992 to April 1993, he served as Staff Vice
President. Prior to February 1992, Mr. Dantzler was Vice President, Sales for
Telex. From 1983 to 1989, Mr. Dantzler served as General Manager of the Hy-Gain
Division of Old TCI where he was responsible for the design and production of
antennas and wireless microphones. From 1967 to 1982, Mr. Dantzler held various
engineering positions with Old TCI and Hy-Gain.
Mr. Cavanaugh joined Telex in April 1993 as Vice President and
President of Telex's Multimedia/Audio Communications Group and was appointed
president of the Group in May 1994. Prior to joining Telex, Mr. Cavanaugh was
Senior Vice President, Sales and Marketing of Applied Voice Technology, Inc.,
which he joined in 1990. From 1988 to 1990, he was a principal at Columbia
Management Consulting. Mr. Cavanaugh also served as Senior Vice President,
Marketing for Applied Communications, Inc. from 1987 to 1988, and, from 1983 to
1987, as Vice President, Marketing at ISC Systems Corporation. From 1981 to
1983, he served as Vice President and General Manager of Evans and Sutherland
Computer Corporation. From 1976 to 1981, Mr. Cavanaugh was Vice President,
Marketing for Datapoint Corporation.
Mr. Levy has served as Vice President and President of the Hearing
Instruments Group since October 1992. Prior to joining Telex, Mr. Levy served as
Vice President and General Manager for Doubleday Book Shops from 1990 to 1991.
From 1987 to 1990 he was Executive Vice President for Eye Care Centers of
America, Inc. Prior to 1987, Mr. Levy held several executive positions with
Touche Ross and Company, Genesco, Inc. and Walden Books.
23
<PAGE> 25
Mr. Rosen became a director of the Company on January 29, 1998. He also
served as Director of the Company 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.
DIRECTOR COMPENSATION
Directors who are not employees of the Company or GSCP are paid $1,500
for each Board meeting attended. 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
$31.93 per share. A portion of these warrants became exercisable on grant; the
remainder will become exercisable over time through 2001, provided in each case
that the holder of the warrant is a director of the Company on the date of
exercise. Such warrants will be filed as exhibits to the Company's annual report
on Form 10-K for the fiscal year ended February 28, 1998, which will cover the
business, operations and financial results of the Company after giving effect to
the Merger. Directors who are employees of the Company or GSCP receive no
separate compensation for their services as directors. All of the directors are
entitled to reimbursement of their reasonable out-of-pocket expenses in
connection with their travel to and attendance at meetings of the Board.
24
<PAGE> 26
Currently three of the Company's directors are employees of GSCP, to which the
Company pays fees for management and financial consulting services. See Item 13,
"Certain Relationships and Related Transactions."
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation with
respect to all compensation paid or accrued by the Company for services rendered
in all capacities for the period beginning April 1, 1997 and ended February 2,
1998 by its Chief Executive Officer and each of the other four most highly
compensated executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(a) COMPENSATION
-------------------------------- ------------
NUMBER OF SHARES ALL OTHER
FISCAL SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(b) ($)(c) OPTIONS(d) $(e)
- ---------------------------------- ------ -------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C>
John L. Hale ................. 1998 273,850 160,405 299,320
Chairman of the Board, President 1997 312,006 212,456 -- --
and Chief Executive Officer 1996 297,115 175,407 160,000 --
John T. Hislop ............... 1998 133,584 11,506 69,340
Vice President and Chief Financial 1997 149,865 100,267 -- --
Officer 1996 140,742 83,637 -- --
Glen E. Cavanaugh ............ 1998 127,524 14,139 22,120
Vice President and President, 1997 142,846 86,478 -- --
Multimedia/Audio Communications 1996 133,237 72,385 -- --
Group
Joseph P. Winebarger ......... 1998 111,154 30,636 21,560
Vice President, Engineering, 1997 126,485 64,720 --
Customer Services and Information 1996 118,038 69,637 -- --
Systems
John A. Palleschi ............ 1998 116,517 32,176 82,620
Vice President, Corporate 1997 129,536 87,843 -- --
Development, General Counsel and 1996 119,993 73,439 16,000 --
Secretary
</TABLE>
- ----------------------
(a) Fiscal Year 1998 refers to the period beginning April 1, 1997 and ended
February 2, 1998. For the period beginning April 1, 1997 and ended
February 2, 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.
25
<PAGE> 27
(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 the
ten months ended February 2, 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 will be reported by the
Company in the period ended March 31, 1998 and, if earned, 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 Telex and individual objectives and on a discretionary
evaluation by the President and Chief Executive Officer for awards other
than the objectives and on a discretionary evaluation by the President and
Chief Executive Officer for awards other than the President and Chief
Executive Officer's. Distributions under the plan are made within 30 days
following the completion of the audit for the fiscal year in which such
compensation is earned. The plan provides for a bonus target of 50.0% of
base salary, although maximum awards can exceed such targets. The maximum
award for Fiscal 1997 for the named executive officers was 75.0% of base
salary for Fiscal 1997.
(d) All Options were granted under the 1997 Stock Option Plan on the
Recapitalization Closing Date. Amounts are adjusted to reflect the
20-for-1 stock split effected by the Company effective as of June 25,
1997.
OPTION GRANTS DURING THE TEN MONTHS ENDED FEBRUARY 2, 1998
The following table sets forth information on the options to acquire
Common Stock of Holdings granted to the named executive officers during the ten
months ended February 2, 1998 and the potential realizable value of each grant:
26
<PAGE> 28
OPTION GRANTS DURING THE TEN MONTHS
ENDED FEBRUARY 2, 1998
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS POTENTIAL REALIZABLE VALUE
NUMBER OF GRANTED TO AT ASSUMED ANNUAL RATES
SHARES EMPLOYEES IN OF STOCK PRICE APPRECIATION
UNDERLYING PERIOD ENDED FOR OPTION TERM(3)
OPTIONS FEBRUARY 2, EXERCISE EXPIRATION ---------------------------------
NAME GRANTED(1) 1998 PRICE(2) DATE 5% 10%
- ------------------------ --------- --------- -------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
John L. Hale 213,160 53.5% $ 7.98 05/06/07 $ 9,385,435 $ 15,952,894
86,160 54.3% $ 31.93 05/06/07 $ 1,730,093 $ 4,384,682
------ ------------ --------------
299,320 $ 11,115,528 20,337,577
John T. Hislop 48,080 12.1% $ 7.98 05/06/07 $ 2,116,962 $ 3,598,307
21,260 13.4% $ 31.93 05/06/07 $ 426,901 $ 1,081,921
------ ------------ --------------
69,340 $ 2,543,863 4,680,229
Glen E. Cavanaugh 16,580 4.2% $ 7.98 05/06/07 $ 730,017 $ 1,240,847
5,540 3.5% $ 31.93 05/06/07 $ 111,243 $ 281,931
----- ------------ --------------
22,120 $ 841,261 1,522,778
Joseph P. Winebarger 17,540 4.4% $ 7.98 05/06/07 $ 772,286 $ 1,312,694
4,020 2.5% $ 31.93 05/06/07 $ 80,722 $ 204,578
----- ------------ --------------
21,560 $ 853,008 1,517,271
John A. Palleschi 57,360 14.4% $ 7.98 05/06/07 $ 2,525,561 $ 4,292,822
25,260 15.9% $ 31.93 05/06/07 $ 507,221 $ 1,285,481
------ ------------ --------------
82,620 $ 3,032,782 5,578,304
</TABLE>
- ---------------------------
(1) 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 the
Company effective as of June 25, 1997.
(2) 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.
(3) The 5% and 10% assumed annual compound rates of stock price appreciation
from the assumed price of $31.93 per share are mandated by the rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of future Common Share prices.
STOCK OPTION EXERCISES AND VALUE AT FEBRUARY 2, 1998
The following table provides information with respect to the executive
officers of the Company listed in the Summary Compensation Table above
concerning stock options exercised during the period ended February 2, 1998 and
options to acquire Common Stock of Holdings held by the named executive officers
as of February 2, 1998. No stock appreciation rights have been granted under any
incentive plan.
27
<PAGE> 29
AGGREGATED OPTION EXERCISES DURING THE TEN MONTHS
ENDED FEBRUARY 2, 1998 AND OPTION VALUES AT FEBRUARY 2, 1998
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS AT OPTIONS AT
SHARES VALUE FEBRUARY 2, 1998 FEBRUARY 2, 1998
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE ($)(a) UNEXERCISABLE(b) 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
Glen E. Cavanaugh ..... 55,260 $ 1,764,424 27,255/19,605 848,451/336,857
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.
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").
General Terms. Under the Option Plan, key employees (other than the Chief
Executive Officer) selected by the Chief Executive Officer and approved by the
Board of Directors of Holdings (the "Holdings Board") will receive non-qualified
options to purchase shares of Holdings Common Stock. The Chief Executive
Officer's participation will be determined by Holdings Board. Holdings Board
will be responsible for administering the Plan. The maximum number of shares of
Holdings Common Stock that may be issued under the Option Plan is 19% of the
outstanding common stock of Holdings on the Recapitalization Closing Date, on a
fully diluted basis and taking into account the issuance of all shares of common
stock issuable under the Option Plan, but excluding certain shares that may be
granted upon exercise of certain warrants. Upon the occurrence of certain
events, such as a stock dividend or a stock split, appropriate adjustments will
be made in the number of shares that may be issued under the Option Plan in the
future and in the number of shares and price per share under all outstanding
grants made before the event. If any grant is for any reason canceled,
terminated or otherwise settled without the issuance of some or all of the
shares of common stock subject to the grant, such shares will be available for
future grants.
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
28
<PAGE> 30
Recapitalization Consideration (the "Initial Option Grants"), performance-based
options that vest over a five-year period on the achievement of certain annual
performance objectives at an exercise price equal to 25% of the Recapitalization
Consideration (the "Performance Option Grants"), or performance-based options
that vest on the fifth anniversary of the grant date or upon a Change in Control
(as defined in the Option Plan) on the achievement of certain long-term
performance objectives, at an exercise price equal to the Recapitalization
Consideration (the "Super Performance Grants"). Notwithstanding the satisfaction
of any performance goals, all performance options will vest on the seventh
anniversary of their grant date.
To exercise an option, the grantee may pay the exercise price in cash or,
if permitted by Holdings Board, by delivering on the date of exercise other
shares of common stock of Holdings having an aggregate fair market value equal
to the exercise price of the option. The term of each option will be fixed by
Holdings Board but may not be more than ten years from its date of grant.
Termination of Employment. In the event of termination of employment of a
grantee by reason of disability, death, retirement at or after age 65 or
termination for good reason (as defined in the Stockholders Agreement), any
options exercisable at the date of such termination will remain exercisable
until the tenth anniversary of the grant date. Any options not then exercisable
will be forfeited. In the event of a termination of employment of a grantee for
cause, any outstanding options, whether exercisable or unexercisable, will be
forfeited. In the event of a termination of employment of a grantee for any
reason other than death, disability, retirement for good reason or cause, any
options exercisable at the date of such termination will remain exercisable for
a period of 90 days (or if earlier the expiration of the options).
Change in Control. Upon a Change in Control (as defined in the Option
Plan), each outstanding option will be cancelled for a cash payment equal to the
excess, if any, of the Change in Control Price (as defined in the Option Plan)
over the exercise price for the option unless the Holdings Board determines in
good faith that alternative options having substantially equivalent or better
rights, terms, conditions and economic value will be awarded to grantees, and
such alternative options provide that if the grantee is involuntarily terminated
within two years following a Change in Control, all restrictions on the
alternative options will lapse.
Grants to Executives. On the Recapitalization Closing Date, (i) Mr. Hale
was granted 107,100 shares, 106,060 shares and 86,160 shares under the Initial
Option Grant, the Performance Option Grant and the Super Performance Option
Grant, respectively, (ii) Mr. Hislop was granted 18,700 shares, 29,380 shares
and 21,260 shares under the Initial Option Grant, the Performance Option Grant
and the Super Performance Option Grant, respectively, (iii) Mr. Cavanaugh was
granted 8,240 shares, 8,340 shares and 5,540 shares under the Initial Option
Grant, the Performance Option Grant and the Super Performance Option Grant,
respectively and (iv) 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.
29
<PAGE> 31
The Company has also adopted an additional annual cash bonus plan whereby
Messrs. Hale, Hislop, Cavanaugh, 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, Cavanaugh,
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, $0.1 million
and $0.5 million, respectively. In total, the Company may incur estimated total
cash compensation charges in connection with this additional cash bonus plan for
the executive officers named above as well as all other covered executives and
employees of $0.4 million. $0.2 million, $0.1 million, $0.1 million and $0.1
million, in Fiscal 1999, 2000, 2001 and 2002, respectively.
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.
RETIREMENT BENEFITS
The Company maintains a defined benefit pension plan (the "Pension Plan")
qualified under the Code that provides a defined benefit upon retirement to the
Company's eligible employees. Under the terms of the Pension Plan, benefits are
determined by the average earnings during the highest five consecutive years of
the final ten consecutive years of service with the total remuneration covered
by the plan consisting of base salary, commission, overtime and bonuses paid to
each participant. The formula provides benefits in the form of a straight-life
annuity equal to a percentage of such average annual earnings times years of
benefit service plus a percentage of the excess of the average annual earnings
over the social security wage base (as determined at age 65) times years of
benefit service.
The following table lists annual benefits under the Pension Plan for the
average annual earnings and years of credited service shown for a participant
retiring at the normal retirement age of 65. A participant does not accrue
additional benefits under the Pension Plan after 35 years of credited service.
30
<PAGE> 32
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 February 2, 1998 for the
executive officers named in the Summary Compensation Table above are as follows:
Mr. Hale, 6; Mr. Hislop, 4; Mr. Cavanaugh, 4; 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 have each entered into
five-year employment agreements with GST effective at the Recapitalization
Closing Date (each an "Employment Agreement" and collectively, the "Employment
Agreements"), which automatically extend for successive annual periods. Pursuant
to such Employment Agreements, each officer will receive (i) a base annual
salary of $312,000, $150,000 and $129,000, respectively, and (ii) a special
bonus of $160,405, $11,506 and $32,176, respectively, thirty days after the
Recapitalization Closing Date and on each of the next four anniversaries of the
date of the initial payment, provided that on the date such special bonus is due
GSCP or its affiliates control 50% or more of the voting power of the Company's
outstanding voting securities and there has not occurred an initial public
offering of Holdings Common Stock. In addition, each officer will be entitled to
receive certain perquisites and to participate in (a) a management incentive
compensation plan, pursuant to which each executive may be awarded up to 100% of
his base annual salary, if certain performance objectives are achieved and (b) a
cash bonus plan, as described above under "-- The Annual Bonus Program,"
pursuant to which Mr. Hale, Mr. Hislop and Mr. Palleschi may receive an
aggregate incentive award of up to approximately $2.1 million, $0.5 million and
$0.6 million, respectively, during the first five years following the
Recapitalization Closing Date, in each case if certain performance objectives
are achieved. Mr. Hale's Employment Agreement is terminable by the Company on 30
days' written notice (or immediately for cause) and on 60 days' written notice
by Mr. Hale, whereupon the Company shall pay to Mr. Hale (1) all compensation,
benefits and perquisites accrued under his Employment Agreement through the
effective date of his termination of employment, (2) the remaining installments
of the special bonus provided for in clause (ii) above, payable only to the
extent and at such times as Mr. Hale would otherwise be entitled to such special
bonus in accordance with the terms of such clause and (3) three times the base
salary provided for in clause (i) above, at the rate being paid at the date of
termination, plus three times the most recent fiscal year's incentive bonus
31
<PAGE> 33
compensation provided for in clause (a) above, plus a pro rata portion of the
highest incentive bonus payable under clause (a) above in the three most recent
fiscal years. Each of Mr. Hislop's and Mr. Palleschi's Employment Agreements are
terminable by the Company on 30 days' written notice (or immediately for cause).
If Mr. Hislop's or Mr. Palleschi's employment is terminated by the Company for
any reason other than for cause or the death or disability of the executive or
if the executive's employment is terminated by him for Good Reason (as defined
in the Employment Agreements) during the period of employment but prior to a
Change in Control (as defined in the Employment Agreements), the Company shall
pay the executive (x) all compensation, benefits and perquisites accrued under
the applicable Employment Agreement through the effective date of his
termination of employment, (y) a severance allowance equal to the sum of (1) two
times the base salary provided for in clause (i) above, at the rate being paid
at the date of termination if the termination occurs prior to the second
anniversary of the Recapitalization Closing Date and one year's base salary at
the rate being paid at the time of the termination of the executive's employment
if the termination occurs after the second anniversary of the Recapitalization
Closing Date, (2) two times the most recent fiscal year's incentive bonus
compensation provided for in clause (a) above and (3) a pro rata portion of the
highest incentive bonus payable under clause (a) above in the three most recent
fiscal years and (z) the remaining installments of the special bonus provided
for in clause (ii) above payable only to the extent and at such times 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF CAPITAL STOCK
The authorized common stock of the Company consists of 1,000 shares of
common stock, par value $.01 per share, of which 500 shares are issued and
outstanding on a fully diluted basis and all of which are owned by Holdings. The
authorized common stock of Holdings consists of 5,000,000 shares of common
stock, par value $.0005 per share, of which 3,038,300 shares are issued and
outstanding after giving effect to the 20-for-1 stock split effected by the
Company effective as of June 25, 1997. All of the issued and outstanding common
stock of Holdings is owned by G-II, except for the Rollover Shares, which are
owned by management.
The following table sets forth the beneficial ownership of the limited
liability company interests of G-II.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME AND ADDRESS INTERESTS CLASS
- ---------------- --------- --------
<S> <C> <C>
GSCP(a)(b) ....................................... 72.42 72.42%
TRV Employees Fund, L.P.(c)(b) ................... 17.69 17.69%
Greenwich Street Capital Offshore Fund, Ltd.(d)(b) 4.41 4.41%
The Travelers Insurance Company(e)(b) ............ 3.67 3.67%
The Travelers Life and Annuity Company(e)(b) ..... 1.81 1.81%
----- -----
100.00 100.00%
====== ======
</TABLE>
32
<PAGE> 34
- -------------------
(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 February 2, 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.
33
<PAGE> 35
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF SHARES UNDERLYING OPTIONS PERCENT OF CLASS
NAME OF BENEFICIAL OWNER(a) BENEFICIALLY OWNED BENEFICIALLY OWNED(a) (FULLY DILUTED)
- ---------------------------------------------------------- ------------------- --------------------- ---------------
<S> <C> <C> <C>
Greenwich II, LLC(b) ..................................... 2,605,060 -- 78.2%
John L. Hale ............................................. 243,680 118,805 11.5%
John T. Hislop ........................................... 17,480 52,680 2.3%
Glen E. Cavanaugh ........................................ 21,480 27,255 1.6%
Joseph P. Winebarger ..................................... 46,540 16,070 2.0%
John A. Palleschi ........................................ 48,880 28,175 2.5%
Alfred C. Eckert III(c) .................................. -- -- 0.0%
Jeffrey J. Rosen ......................................... -- 783 0.0%
Edgar S. Woolard, Jr. .................................... -- 3,595 0.1%
Evan M. Marks ............................................ -- 1,828 0.1%
Christopher P. Forester .................................. -- 1,828 0.1%
Keith W. Abell(c) ........................................ -- -- 0.0%
Christine K. Vanden Beukel(c) ............................ -- -- 0.0%
All directors and officers as a group (13) persons(b)(c) . 415,800 308,142 21.6%
</TABLE>
- -------------------------
(a) The shares listed include shares of Holdings Common Stock that may be
acquired upon exercise of presently exercisable options to acquire
Holdings Common Stock, and all such options that will become exercisable
within 60 days from the date on which such information is given.
(b) See "Ownership of Capital Stock" for information concerning the ownership
of limited liability company interests of Greenwich II, LLC.
(c) Does not include any of the 2,605,060 shares of Holdings Common Stock
beneficially owned by Greenwich II LLC, which 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, the Company completed the
Recapitalization pursuant to the Recapitalization Agreement. In connection with
the Recapitalization, all of the shares of Holdings Common Stock and all options
and warrants to acquire Holdings Common Stock (other than certain shares of
Holdings Common Stock and certain options to acquire Holdings Common Stock owned
by certain members of management of the Company) were converted into the right
to receive Recapitalization Consideration equal to approximately $253.9 million.
In addition, in connection with the Recapitalization Agreement, the Rollover
Shares and the Rollover Options, with an aggregate value of approximately $21.2
million (approximately 20% of the fully diluted equity of Holdings, give effect
to the Rollover Options) were retained by certain members of management of the
Company. In connection with the Recapitalization, the Company completed (i) the
34
<PAGE> 36
Tender Offer to repurchase all of the $100.0 million aggregate outstanding
principal amount of the Telex Notes and (ii) a solicitation of consents with
respect to certain amendments to the Indenture pursuant to which the Telex Notes
were issued.
CAPITALIZATION OF GST
GST was capitalized by $83.2 million of equity provided by GSCP and
certain co-investors and $25.2 million of proceeds provided by the issuance of
the GST Subordinated Debentures. The GST Subordinated Debentures will mature in
2009, bear non-cash interest at a rate of 15% compounded quarterly, and are
redeemable at the option of Holdings (as the successor to GST in the Merger)
with various premiums up to maturity. If the GST Subordinated Debentures are
redeemed or repaid following the fifth anniversary of their issuance, a portion
of the redemption/repayment amount will be payable in warrants to purchase
Holdings Common Stock. The terms pursuant to which the GST Subordinated
Debentures were issued contain a number of negative covenants that, among other
things, restrict the ability of the Company to dispose of assets; incur
additional indebtedness (including preferred stock); guarantee obligations;
create liens; merge, consolidate, liquidate or dissolve; lease property; pay
dividends or make distributions in respect of capital stock; create liens on
assets; enter into sale and leaseback transactions; conduct transactions with
affiliates; and make investments, loans or advances.
STOCKHOLDERS AND REGISTRATION RIGHTS AGREEMENT
In connection with the Recapitalization, all members of the Company's
senior management who own any Rollover Shares or Rollover Options (the
"Management Stockholders") entered into a Stockholders and Registration Rights
Agreement (the "Stockholders Agreement"), under which such Management
Stockholder agreed that he or she shall not, without the prior written consent
of Holdings, directly or indirectly, sell, pledge, mortgage, hypothecate, give,
transfer, create a security interest in or lien on, place in trust (voting or
otherwise), assign or in any other way encumber or dispose of any shares of
Holdings Common Stock now or hereafter beneficially owned by such Management
Stockholder. In addition, under the Stockholders Agreement, if a Management
Stockholder's employment is terminated, such Management Stockholder shall have
the right to sell, and Holdings shall also have the right to purchase all of the
shares of Holdings Common Stock owned by such Management Stockholder, and all of
the options to acquire Holding Common Stock owned by such Management
Stockholder, at prices calculated in accordance with, and subject to certain
other terms and conditions set forth in, the terms of the Stockholders
Agreement. The Stockholders Agreement also creates certain conventional "drag"
and "tag" rights with respect to the shares of Holdings Common Stock owned by
the Management Stockholders. The Stockholders Agreement also provides that at
any time after the Effective Time, G-II shall have the right to make up to four
requests that Holdings effect a public offering under the Securities Act
pursuant to a Stockholder Registration Statement of any of the shares of
Holdings Common Stock owned by G-II with certain limitations and that Holdings
shall pay all registration expenses in connection with each registration of
shares of Holdings Common Stock pursuant to the Stockholders Agreement.
INTEREST OF CERTAIN PERSONS
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 annual fee of $1.7 million, payable quarterly in arrears, plus
Greenwich's reasonable out-of-pocket costs and expenses. This engagement will be
in effect until the earlier to occur of the tenth anniversary of the
Recapitalization Closing Date or the date on
35
<PAGE> 37
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 addition, on the Recapitalization Closing Date, Greenwich received $2.5
million in fees for providing services relating to the structuring and
management of the Recapitalization and reimbursement for its reasonable
out-of-pocket costs and expenses relating to its provision of such services.
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.
MANAGEMENT
In connection with the Transactions, an aggregate of 811,520, 175,540,
113,780, 106,680 and 168,960 of the shares of Holdings Common Stock and options
to acquire shares of Holdings Common Stock held by Messrs. Hale, Hislop,
Cavanaugh, Winebarger and Palleschi, respectively, were converted into the right
to receive an aggregate of $25.6 million, $5.5 million, $3.6 million, $3.3
million and $5.4 million in cash, respectively. In addition, in connection with
the Transactions, an aggregate of 329,760, 64,460, 46,220, 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, Cavanaugh, Winebarger and Palleschi,
respectively, were retained by such individuals.
36
<PAGE> 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
<TABLE>
<CAPTION>
(a) The following documents are filed as a part of this report: Page
<S> <C>
1. Financial Statements
Report of Independent Public Accountants F-1
Report of Independent Auditors F-2
Consolidated Balance Sheets as of February 2, 1998 and March 31, 1997 F-3
Consolidated Statements of Operations for the ten months ended
February 2, 1998, and the years ended March 31, 1997 and 1996 F-4
Consolidated Statements of Shareholder's Equity (Deficit) for the ten
months ended February 2, 1998, and the years ended March 31, 1997 and
1996 F-5
Consolidated Statements of Cash Flows for the ten months ended
February 2, 1998, and the years ended March 31, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
2. Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts F-23
</TABLE>
All other 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 Financial Statement Schedule. The Exhibit Index is
incorporated herein by reference.
(b) On January 8, 1998, the Company filed a Form 8-K with the Securities and
Exchange Commission reporting that the Company had announced their intent
to merge with EV International, Inc.
(c) The Exhibit Index and required Exhibits are included following the
Financial Statement Schedule. 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 and Financial Statement
Schedule is included following the signature page of this report.
37
<PAGE> 39
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 period ended February 2, 1998 nor any proxy material relating to any annual
or other meeting of security holders. Section 4.02 of the Senior Notes Indenture
requires the Company to provide to the holders of the Notes with such annual
reports and such information, documents and other reports which are specified in
Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended.
38
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Telex Communications, Inc. (formerly known as EV
International, Inc.), successor-by-merger to the Registrant, has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized, as of the 4th day of May 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 Officer May 4, 1998
- --------------------------- and Chairman of the Board of
John L. Hale Directors (principal executive
officer)
/s/ John T. Hislop Vice President, Chief Financial May 4, 1998
- --------------------------- Officer and Treasurer (principal
John T. Hislop financial and accounting officer)
/s/ Jeffrey J. Rosen Director May 4, 1998
- ---------------------------
Jeffrey J. Rosen
</TABLE>
39
<PAGE> 41
/s/ Edgar S. Woolard, Jr. Director May 4, 1998
- ---------------------------
Edgar S. Woolard, Jr.
/s/ Director May 4, 1998
- ---------------------------
Evan M. Marks
/s/ Christopher P. Forester Director May 4, 1998
- ----------------------------
Christopher P. Forester
/s/ Alfred C. Eckert III Director May 4, 1998
- ----------------------------
Alfred C. Eckert III
/s/ Keith W. Abell Director May 4, 1998
- ----------------------------
Keith W. Abell
/s/ Christine K. Vanden Beukel Director May 4, 1998
- ----------------------------
Christine K. Vanden Beukel
*By: ______________________
Attorney-in-Fact
40
<PAGE> 42
TELEX COMMUNICATIONS, INC.
INDEX OF FINANCIAL
STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants .......................................... F-1
Report of Independent Auditors .................................................... F-2
Consolidated Balance Sheets as of February 2, 1998 and March 31, 1997 ............. F-3
Consolidated Statements of Operations for the ten months ended February 2, 1998,
and the years ended March 31, 1997 and 1996 ................................. F-4
Consolidated Statements of Shareholder's Equity (Deficit) for the ten months
ended February 2, 1998, and the years ended March 31, 1997 and 1996 ......... F-5
Consolidated Statements of Cash Flows for the ten months ended February 2, 1998,
and the years ended March 31, 1997 and 1996 ................................. F-6
Notes to Consolidated Financial Statements ........................................ F-7
Schedule II -- Valuation and Qualifying Accounts .................................. F-23
</TABLE>
<PAGE> 43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
TELEX COMMUNICATIONS, INC.:
We have audited the accompanying consolidated balance sheet of Telex
Communications, Inc. (a Delaware corporation) and subsidiaries as of February 2,
1998, and the related consolidated statements of operations, shareholder's
equity (deficit), and cash flows for the ten months ended February 2, 1998.
These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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 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 financial position of Telex Communications, Inc.
and subsidiaries as of February 2, 1998 and the results of their operations and
their cash flows for the ten months ended February 2, 1998, in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule II, Valuation and Qualifying
Accounts, is presented for purposes of additional analysis and is not a required
part of the basic financial statements. This information has been subjected to
the auditing procedures applied in our audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
April 24, 1998
F-1
<PAGE> 44
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder
Telex Communications, Inc.
We have audited the accompanying consolidated balance sheet of Telex
Communications, Inc. and subsidiaries and the related consolidated statements
of operations, shareholder's equity (deficit), and cash flows for each of the
two years in the period ended March 31, 1997. Our audits also include the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Telex Communications, Inc. and subsidiaries at March 31, 1997, and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statement taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Minneapolis, Minnesota
June 2, 1997
F-2
<PAGE> 45
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 2, MARCH 31,
1998 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ 275 $ 35,742
Accounts receivable, net of allowance for doubtful
accounts (1998--$657;1997--$641) ..................... 25,512 29,459
Inventories ............................................. 29,846 23,495
Income taxes receivable ................................. 7,209 --
Deferred income taxes ................................... -- 2,813
Other ................................................... 2,395 1,525
--------- ---------
Total current assets ........................... 65,237 93,034
Property, plant and equipment, net ............................... 21,349 20,867
Deferred financing costs, net .................................... 9,634 2,525
Deferred income taxes ............................................ -- 3,990
Due from related party ........................................... 9,318 --
Intangible assets, net ........................................... 16,675 20,400
--------- ---------
$ 122,213 $ 140,816
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Revolving line of credit ................................ $ 12,231 $ --
Current maturities of long-term debt .................... 8,000 --
Accounts payable ........................................ 10,756 12,224
Accrued wages and benefits .............................. 4,535 3,813
Accrued interest ........................................ 3,915 2,504
Other accrued liabilities ............................... 6,935 7,379
Income taxes ............................................ 4,305 2,991
--------- ---------
Total current liabilities ...................... 50,677 28,911
Long-term debt ................................................... 232,000 100,000
Due to parent .................................................... 3,784 3,502
Other long-term liabilities ...................................... 2,171 2,147
--------- ---------
Total liabilities ....................................... 288,632 134,560
--------- ---------
Commitments and contingencies (Note 13)
Shareholder's equity (deficit):
Common stock, $.01 par value, 1,000 shares authorized,
500 shares issued and outstanding .................... -- --
Capital in excess of par ................................ -- 20,001
Cumulative translation adjustment ....................... (65) 20
Accumulated deficit ..................................... (166,354) (13,765)
--------- ---------
Total shareholder's equity (deficit) ........... (166,419) 6,256
--------- ---------
$ 122,213 $ 140,816
========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 46
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS ENDED YEAR ENDED
FEBRUARY 2, MARCH 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales ................................................ $ 137,657 $ 170,881 $ 145,348
Cost of sales ............................................ 79,282 99,624 90,120
--------- --------- ---------
Gross profit ................................... 58,375 71,257 55,228
--------- --------- ---------
Operating expenses:
Engineering and development ..................... 7,317 7,645 6,756
Selling, general and administrative ............. 36,065 27,545 24,188
Amortization of goodwill and other intangibles .. 1,494 1,648 3,385
Corporate charges ............................... 1,265 -- --
Special charges ................................. 2,231 -- 13,785
--------- --------- ---------
48,372 36,838 48,114
--------- --------- ---------
Operating profit ......................................... 10,003 34,419 7,114
Interest expense ......................................... (22,729) (12,513) (12,517)
Recapitalization expense ................................. (6,710) -- --
Other income ............................................. 298 1,671 1,119
--------- --------- --------
Income (loss) before income taxes ........................ (19,138) 23,577 (4,284)
Provision (benefit) for income taxes ..................... 17,248 9,252 (180)
--------- --------- --------
Income (loss) before extraordinary item .................. (36,386) 14,325 (4,104)
Extraordinary loss from early retirement of debt, net
of income taxes ................................. (10,976) -- --
--------- --------- ---------
Net income (loss) ........................................ $ (47,362) $ 14,325 $ (4,104)
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 47
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- RETAINED
NUMBER CUMULATIVE EARNINGS SHAREHOLDER'S
OF CAPITAL IN TRANSLATION (ACCUMULATED EQUITY
SHARES AMOUNT EXCESS OF PAR ADJUSTMENT DEFICIT) (DEFICIT)
-------- -------- ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995................ 500 $ -- $ 20,001 $ 20 $ (23,986) $ (3,965)
Net loss ....................... -- -- -- -- (4,104) (4,104)
---- ---- --------- --------- --------- ---------
Balance at March 31, 1996 ............... 500 -- 20,001 20 (28,090) (8,069)
Net income ..................... -- -- -- -- 14,325 14,325
---- ---- --------- --------- --------- ---------
Balance at March 31, 1997 ............... 500 -- 20,001 20 (13,765) 6,256
Equity contribution ............ -- -- 108,353 -- -- 108,353
Change in terms of rollover
options ............... -- -- 7,410 -- (309) 7,101
Repurchase of common stock
and outstanding options -- -- (135,764) -- (118,134) (253,898)
Income tax effect of exercised
options ............... -- -- -- -- 10,365 10,365
Vesting of new options ......... -- -- -- -- 2,851 2,851
Cumulative translation
adjustment ............ -- -- -- (85) -- (85)
Net loss ....................... -- -- -- (47,362) (47,362)
---- ---- --------- --------- --------- ---------
Balance at February 2, 1998 ............. 500 $ -- $ -- $ (65) $(166,354) $(166,419)
========= ==== ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 48
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED
FEBRUARY 2, MARCH 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .................................................. $ (47,362) $ 14,325 $ (4,104)
Adjustments to reconcile net income (loss) to cash flows from
operations:
Depreciation .............................................. 3,418 3,978 6,192
Amortization of intangibles and deferred financing costs .. 2,526 2,007 3,755
Provision for bad debts ................................... 168 300 98
Write-off of deferred financing costs ..................... 4,171 -- --
Recapitalization costs incurred ........................... 6,710 -- --
Special charge ............................................ 2,231 -- 13,345
Extraordinary loss on early retirement of debt ............ 15,093 -- --
Stock option compensation expense ......................... 10,261 -- --
Deferred income taxes ..................................... 6,803 259 (3,359)
Change in operating assets and liabilities:
Income taxes ..................................... 4,470 (445) 2,067
Accounts receivable .............................. 3,779 (4,321) (4,472)
Inventories ...................................... (6,351) (1,784) 3,035
Other current assets ............................. (46) (468) 228
Accounts payable and other current liabilities ... 221 5,442 2,361
Other liabilities ................................ 306 2,133 (618)
--------- --------- ---------
Net cash provided by operating activities ................. 6,398 21,426 18,528
--------- --------- ---------
INVESTING ACTIVITIES:
Additions to property, plant and equipment ......................... (4,352) (8,685) (3,320)
Additions to equipment leased to customers ......................... (372) -- --
--------- --------- ---------
Net cash used in investing activities ..................... (4,724) (8,685) (3,320)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ........................... 240,000 -- --
Borrowings under revolving line of credit, net ..................... 12,231 -- --
Payments to related party .......................................... (9,318) -- --
Repurchase of long-term debt and payment of fees ................... (115,093) -- --
Proceeds from equity contribution .................................. 108,353 -- --
Repurchase of common stock and outstanding options ................. (253,898) -- --
Payments for deferred financing costs .............................. (12,312) -- --
Recapitalization costs incurred .................................... (6,710) -- --
Other .............................................................. (309) -- --
--------- --------- ---------
Net cash used in financing activities ..................... (37,056) -- --
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ................ (85) -- --
--------- --------- ---------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) ............................................ (35,467) 12,741 15,208
Beginning of period ................................................ 35,742 23,001 7,793
--------- --------- ---------
End of period ...................................................... $ 275 $ 35,742 $ 23,001
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during the period for:
Interest .................................................. $ 17,127 $ 12,154 $ 12,159
========= ========= =========
Income taxes, net ......................................... $ (654) $ 7,975 $ 2,062
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 49
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Telex Communications, Inc. ("Telex" or the "Company"), a Delaware
corporation, is a wholly owned subsidiary of Telex Communications Group, Inc.
("Holdings"). The assets of Holdings consist primarily of its investment in
Telex. The Company designs, manufactures and markets sophisticated audio, visual
and multimedia communications equipment for commercial, professional and
industrial customers. The Company offers a broad product line that includes
advanced intercom systems, wired and wireless microphones, headsets, multimedia
presentation products, audio cassette duplicators and hearing aids. The Company
focuses on commercial, professional and industrial markets. The Company sells
primarily to customers in North America, Europe and Asia Pacific.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Telex and
its wholly owned subsidiaries. All material intercompany activity and balances
have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of 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 a maturity 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. Depreciation of
property, plant and equipment is computed principally by the straight-line
method over the estimated useful lives of the assets as follows:
Building 20 to 31 years
Equipment 1.5 to 12 years
F-7
<PAGE> 50
The carrying value of property, plant and equipment is assessed when
factors indicating impairment are present. If impairment indicators are present
and the estimated future undiscounted cash flows are less than the carrying
value of the assets and any related goodwill, the carrying value is reduced to
estimated fair value.
Beginning in 1997, the Company capitalized certain software implementation
costs. Prior to 1997, 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 February 2, 1998, software implementation
costs of $6.4 million have been capitalized and are included in equipment and
construction in progress. The Company expenses reengineering costs as incurred.
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
The carrying value of identifiable intangible assets is assessed when
factors indicating impairment are present. If impairment indicators are present
and the estimated future undiscounted cash flows are less than the carrying
value of the assets and any related goodwill, the carrying value is reduced to
the estimated fair value as measured by the discounted cash flows. Goodwill that
is not associated with specific assets that are impaired is assessed for
impairment when impairment indicators are present and reduced to its fair value.
DEFERRED FINANCING COSTS
Deferred financing costs represent costs incurred by the Company to issue
the senior subordinated notes and to secure the senior credit facility and are
being amortized over the terms of the related borrowings.
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.
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 life of the contracts.
INCOME TAXES
The Company accounts for income taxes utilizing the liability method.
Deferred income taxes are primarily recorded to reflect the tax consequences of
differences between the tax and the financial reporting bases of assets and
liabilities. Telex's tax provision is calculated on a separate company basis,
and Telex's taxable income is included in the consolidated federal income tax
return of Holdings.
F-8
<PAGE> 51
PRODUCT DEVELOPMENT COSTS
Costs associated with the development of new products and changes to
existing products are charged to operations as incurred ($5.6 million, $5.7
million and $4.9 million, for the ten months ended February 2, 1998 and years
ended March 31, 1997 and 1996, respectively).
FORWARD EXCHANGE CONTRACT GAINS AND LOSSES
Gains and losses due to changes in market value on foreign currency
contracts used to hedge firm inventory purchase commitments are deferred and
recognized in earnings when the contracts are closed or the related inventory is
purchased.
ADVERTISING EXPENSES
Advertising costs are expensed when incurred. Advertising costs for the
ten months ended February 2, 1998 and the years ended March 31, 1997 and 1996
were $3.3 million, $3.3 million and $3.1 million, respectively.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to the ten
months ended February 2, 1998 presentation. These reclassifications had no
impact on net income (loss) or shareholder's equity (deficit) as previously
reported.
2. THE MERGER
On February 2, 1998, Telex was merged with and into EVI, with EVI as the
surviving corporation, a wholly owned subsidiary of Holdings, and EVI changed
its name to "Telex Communications, Inc." EVI manufactures and markets a range
of products for professional audio systems, including microphones, mixing
consoles, signal processors, amplifiers and loud speakers. Prior to the Merger,
EVI Audio Holdings, Inc. ("EVI Holdings"), the parent corporation of EVI, was
merged with and into Holdings (the "Prior Merger"), with Holdings as the
surviving corporation. The Merger and Prior Merger were effected pursuant to
an exchange agreement among Holdings, the Company, EVI, EVI Holdings,
Greenwich I LLC (G-I) and Greenwich II LLC (G-II), all of which entities are
affiliates of Greenwich Street Capital Partners, Inc., a Delaware corporation
and the manager of GSCP. Immediately prior to the Merger, approximately $12.7
million outstanding under EVI's senior secured credit agreement was paid in
full and EVI's senior credit agreement was terminated. Such indebtedness,
together with $0.4 million of certain fees and expenses associated with the
Merger, and other amounts outstanding were repaid by utilizing free cash at
closing from EVI of $3.8 million and by borrowings under the Company's
Revolving Credit Facility of approximately $9.3 million. The financial
statements as of and for the ten months ended February 2, 1998 included herein
reflect such borrowings. EVI's 11% Senior Subordinated Notes Due 2007 (the
"EVI Notes"), issued in September 1997 for an aggregate principal amount of
$100.0 million, remain outstanding following the Merger.
3. RECAPITALIZATION TRANSACTIONS
On May 6, 1997, Holdings completed a recapitalization among Holdings,
Greenwich Street Capital Partners, L.P. ("GSCP") and certain other co-investors.
Under the recapitalization agreement, all of the
F-9
<PAGE> 52
outstanding shares of common stock of Holdings and options and warrants to
acquire Holdings' common stock (other than certain shares of Holdings' common
stock and certain options to acquire Holdings' common stock owned by certain
members of management of the Company), were converted into the right to receive
an aggregate amount of cash equal to $253.9 million. Under the recapitalization
agreement, certain members of management retained certain shares of Holdings and
certain options to acquire additional shares of Holdings' common stock, with an
aggregate value of $21.2 million, representing approximately 14.3% equity
interest on a non-diluted basis and 20.6% on a fully diluted basis.
In connection with the recapitalization, Holdings completed the tender
offer to repurchase all the Company's $100.0 million aggregate outstanding
principal amount of the 12% Senior Notes due 2004 including redemption and
consent fees along with accrued interest for $118.3 million.
These transactions were financed by (i) $108.4 million of new equity
provided by GSCP and certain other co-investors, (ii) the rollover of certain
shares and options owned by existing management with a transaction value of
$21.2 million, (iii) the issuance of $140.0 million senior credit facility due
November 6, 2002 consisting of (a) a $115.0 million term loan facility, all of
which was drawn at closing and (b) a $25.0 million revolving credit facility, of
which $5.0 million was drawn at closing, (iv) $125.0 million of senior
subordinated notes (due 2007, bearing interest at 10.5%), and (v) $36.5 million
of available cash of the Company.
4. SPECIAL CHARGES
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for Impairment of Long-Lived Assets and
Assets to be Disposed Of," which 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 amount.
During Fiscal 1996, several business conditions changed for the Company,
including the discontinuance of a number of product lines and the closing of one
of the Company's manufacturing facilities. These changing business conditions
had a potential impact on the realizability of virtually all of the Company's
long-lived assets, including property, plant, equipment, identifiable assets,
and the goodwill that was allocated to those assets. Based on the cash flows
identifiable with the affected assets, the Company determined that certain
assets were impaired and recognized an impairment loss, charged against
operating income, of $13.3 million. This reduction in the carrying amount of the
assets reduced the depreciation and amortization expense by approximately $2.8
million in Fiscal 1997.
For the ten months ended February 2, 1998, the Company determined that as
a result of further changed business conditions for certain product lines the
Company recognized an additional impairment loss of $2.2 million against
operating income. This reduction in carrying amount of certain assets will
reduce the amortization expense by approximately $0.1 million in Fiscal 1999.
Considerable management judgement 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 long-lived assets down further.
F-10
<PAGE> 53
The carrying value prior to the writedown and associated writedown of
the specific assets is as follows (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS YEAR ENDED
ENDED FEBRUARY 2, 1998 MARCH 31, 1996
--------------------------------------------------
CARRYING CARRYING
VALUE WRITE-DOWN VALUE WRITE-DOWN
--------------------------------------------------
<S> <C> <C> <C> <C>
Property, plant and equipment ........... $ -- $ -- $ 2,300 $ 2,022
Intangible assets:
Dealer and distributor lists ... 2,631 431 1,822 1,096
Patents and engineering drawings 102 102 3,653 2,587
Goodwill ....................... 16,090 1,698 10,644 7,640
------- ------- ------- -------
$18,823 $ 2,231 $18,419 $13,345
======= ======= ======= =======
</TABLE>
5. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 2, MARCH 31,
1998 1997
-----------------------
<S> <C> <C>
Raw materials .. $19,159 $15,380
Work in progress 3,408 2,954
Finished goods . 7,279 5,161
------- -------
$29,846 $23,495
======= =======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 2, MARCH 31,
1998 1997
----------------------
<S> <C> <C>
Land ........................ $ 767 $ 1,591
Building .................... 9,882 9,858
Equipment ................... 34,568 29,580
Construction in progress .... 1,713 2,102
------- -------
46,930 43,131
Less accumulated depreciation 25,581 22,264
------- -------
$21,349 $20,867
======= =======
</TABLE>
F-11
<PAGE> 54
7. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 2, MARCH 31,
1998 1997
------------------------
<S> <C> <C>
Dealer and distributor lists ... $ 5,697 $ 7,894
Patents and engineering drawings 5,763 5,999
Goodwill ....................... 18,609 21,253
Other intangibles .............. 2,804 2,804
------- -------
32,873 37,950
Less accumulated amortization .. 16,198 17,550
------- -------
$16,675 $20,400
======= =======
</TABLE>
8. REVOLVING LINE OF CREDIT
In May 1997, the Company entered into a revolving line of credit, as part
of the senior credit facility. The commitment under the facility is $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
inventory. The Company had letters of credit outstanding in the amount of $7.3
million and $2.9 million at February 2, 1998 and March 31, 1997, respectively,
reducing the availability under the facility. There was $12.2 million
outstanding under the revolving line of credit at February 2, 1998. There were
no borrowings outstanding under the former revolving line of credit at March 31,
1997. The Company was in compliance with all covenants (consistent with
covenants listed in Note 9 below - Senior Credit Facility related to the senior
credit facility as of February 2, 1998.
9. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 2, 1998 MARCH 31, 1997
----------------- ----------------
<S> <C> <C>
Senior Subordinated Notes, due May 1, 2007, bearing
interest of 10 1/2% payable semiannually, unsecured, contains
certain financial and non-financial restrictive covenants, including limitations
on: additional indebtedness, payment of dividends, certain investments, sale of
assets and consolidations, mergers and transfers of all or substantially all of
the Company's assets, subject to certain qualifications and exceptions ............. $ 125,000 $ -
</TABLE>
F-12
<PAGE> 55
<TABLE>
<CAPTION>
FEBRUARY 2, 1998 MARCH 31, 1997
----------------- ----------------
<S> <C> <C>
Senior Credit Facility
- - Term Loan A, due in quarterly installments through November 30, 2002,
bearing interest at LIBOR plus 2.5% (8.19% at February 2, 1998) payable
semiannually, secured by substantially all assets of the Company, contains
certain financial and non-financial covenants, including maintaining certain
financial ratios and minimum levels of EBITDA and limitations on: additional
indebtedness, investments, sale of assets and consolidations, mergers and
transfers of all or substantially all of the Company's assets, and capital
expenditures .................................................................. 50,000 -
- - Term Loan B, due in quarterly installments through November 30, 2004,
bearing interest at LIBOR plus 3.0% (8.69% at February 2, 1998) payable
semiannually, secured by substantially all assets of the Company, contains
certain financial and non-financial covenants, consistent with Term Loan A .... 65,000 -
Senior Notes, repaid ............................................ - 100,000
-------- --------
240,000 100,000
Less current portion ................................... 8,000 -
-------- --------
$232,000 $100,000
======== ========
</TABLE>
The Company was in compliance with all covenants related to the Senior
Subordinated Notes and Senior Credit Facility as of February 2, 1998.
Aggregate annual maturities of long-term debt are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 2,
<S> <C>
1999 ..................................... $ 8,000
2000 ..................................... 8,500
2001 ..................................... 9,000
2002 ..................................... 11,500
2003 ..................................... 15,500
Thereafter ............................... 187,500
----------
$ 240,000
==========
</TABLE>
F-13
<PAGE> 56
10. INCOME TAXES
Significant components of the provision (benefit) for income taxes
attributable to income (loss) before extraordinary item are as follows (in
thousands):
<TABLE>
<CAPTION>
TEN MONTHS ENDED YEAR ENDED MARCH 31,
FEBRUARY 2, 1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Current:
Federal ..................................... $ 9,213 $ 7,852 $ 3,030
State ...................................... 1,048 1,118 149
Foreign ..................................... 184 23 --
-------- -------- --------
10,445 8,993 3,179
Deferred ............................................ 6,803 259 (3,359)
-------- -------- --------
$ 17,248 $ 9,252 $ (180)
======== ======== ========
</TABLE>
A tax benefit in the amount of $6.6 million has been recorded due to the
extraordinary loss from early retirement of debt for the ten months ended
February 2, 1998.
A reconciliation of the income taxes computed at the federal statutory
rate to the Company's income tax provision (benefit) before extraordinary loss
is as follows (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS ENDED YEAR ENDED MARCH 31,
FEBRUARY 2, 1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Federal provision (benefit) at statutory rate ...... $ (6,560) $ 8,252 $ (1,457)
State provision (benefit), net of federal tax effect (715) 740 106
Amortization and write-off of goodwill ............. 852 188 2,760
FSC benefits ....................................... -- (387) (256)
Change in deferred tax asset valuation allowance
and other income tax accruals ............. 21,173 340 (1,438)
Recapitalization costs ............................. 2,522 -- --
Other .............................................. (24) 119 105
-------- -------- --------
$ 17,248 $ 9,252 $ (180)
======== ======== ========
</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 (in thousands):
F-14
<PAGE> 57
<TABLE>
<CAPTION>
FEBRUARY 2, MARCH 31,
1998 1997
------- -------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation ......................... $ 1,855 $ 1,718
------- -------
Deferred tax assets:
Compensation related ............................... 3,858 --
Book over tax amortization ......................... 3,749 3,754
Pension ............................................ 934 944
Inventory reserves ................................. 1,453 1,097
Accounts receivable allowance ...................... 239 245
Deferred revenue ................................... 200 264
Vacation accrual ................................... 577 432
Warranty reserves .................................. 412 414
Accrued plant closing costs and impairment writedown 760 837
Tax loss carryforward .............................. 10,632 --
Other .............................................. 214 534
------- -------
Total deferred tax assets ................. 23,028 8,521
Valuation allowance for deferred tax assets ........ 21,173 --
------- -------
Net deferred tax assets ................... 1,855 8,521
------- -------
Net deferred tax assets ............................ $ -- $ 6,803
======= =======
</TABLE>
The Company has established a net deferred tax valuation allowance of
$21.2 million, charged to income tax provision for the ten months ended February
2, 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 valuation
allowance for financial reporting purposes.
The Company recognized an income tax benefit, attributable to the excess
of the market price over the exercise price of the exercised options, of $10.4
million which is recorded as an increase to shareholder's equity. The Company
has recorded an income tax receivable of $7.2 million that the Company expects
to realize upon the carryback of the Company's current year tax loss.
The Company has received a settlement offer from the IRS with respect to
the amortization of its intangibles for the taxable years 1990, 1991 and 1992.
The Company has reviewed the IRS settlement offer and has determined not to
accept it. The accounting under Statement of Financial Accounting Standards No.
109 resulting from any adjustment imposed by the IRS relating to the intangible
assets would not likely result in a material adjustment to operations, because
it would be recorded principally as an adjustment to goodwill.
11. RELATED PARTY TRANSACTIONS
Holdings' principal asset is its investment in Telex and, therefore,
Holdings is dependent on the operations of Telex for its cash flow needs.
However, there are no agreements between Telex and Holdings requiring the
transfer of funds from Telex to Holdings. The senior subordinated notes and the
provisions of the
F-15
<PAGE> 58
indenture agreements pursuant to which the senior subordinated notes were issued
restrict Telex's payment of dividends, loans or advances to its affiliates.
On February 2, 1998, the Company incurred borrowings under its revolving
line of credit of $9.3 million and subsequently advanced to EVI in order for
EVI to retire its senior credit agreement and $0.4 million for certain fees and
expenses associated with the Merger. This balance due from EVI is recorded on
the Company's February 2, 1998 balance sheet as "Due from related party."
The Company pays fees to Holdings' majority shareholder for management
services in the amount of $1.7 million annually. For the ten months ended
February 2, 1998, the Company had recorded $1.3 million 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. The
amount recorded as "Due to parent' represents the tax benefit recorded related
to Holdings' activities.
12. RETIREMENT PLAN
The Company has a noncontributory defined benefit pension plan.
Eligibility, vesting and benefit formula provisions of the plan are based on
years of service and average final compensation. Pension costs are funded
annually subject to limitations.
The components of pension cost are as follows (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS
ENDED
FEBRUARY 2, YEAR ENDED MARCH 31,
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Service cost for benefits earned during the period $ 964 $ 1,047 $ 981
Interest cost on projected benefit obligation .... 1,476 1,663 1,638
Actual return on plan assets ..................... (4,746) (1,486) (3,069)
Net amortization and deferral .................... 3,608 298 1,937
------- ------- -------
Net pension cost ................................. $ 1,302 $ 1,522 $ 1,487
======= ======= =======
</TABLE>
F-16
<PAGE> 59
The following table presents the funded status of the above plan as
recognized in the consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 2, MARCH 31,
1998 1997
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits ................................ $(19,986) $(17,759)
Nonvested benefits ............................. (315) (509)
-------- --------
Accumulated benefit obligation ...................... (20,301) (18,268)
Effect of projected pay increases ................... (6,706) (4,428)
-------- --------
Projected benefit obligation ........................ (27,007) (22,696)
Plan assets at market value ......................... 21,580 16,990
-------- --------
Projected benefit obligation in excess of plan assets (5,427) (5,706)
Unrecognized net loss ............................... 1,770 2,159
Unrecognized net transition obligation .............. 126 158
Unrecognized prior service cost ..................... 8 10
-------- --------
Pension liability accrued ........................... $ (3,523) $ (3,379)
======== ========
</TABLE>
Assumptions used in the accounting for the defined benefit plan were as
follows:
<TABLE>
<CAPTION>
FEBRUARY 2, MARCH 31,
1998 1997 1996
----------- -------------------
<S> <C> <C> <C>
Weighted average discount rate ................... 7.00% 7.75% 7.75%
Rate of increase in future compensation levels.... 4.50% 4.50% 4.50%
Expected long-term rate of return on plan assets.. 9.00% 9.00% 9.00%
</TABLE>
Plan assets consist primarily of equity and debt securities and cash
equivalents.
13. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a defendant in a number of lawsuits that have arisen in the
ordinary course of business. The Company believes such litigation, considered
separately or in the aggregate, will not have a material adverse effect on the
consolidated financial position or results of operations of the Company.
ENVIRONMENTAL MATTERS
In connection with the consent decree with the Nebraska Department of
Environmental Control relating to the cleanup of the improper disposal of
hazardous waste, the Company has outstanding, as of February 2, 1998 and March
31 1997, a letter of credit for $0.2 million pending future post-closing
monitoring of the disposal site.
The Company has a reserve of $0.3 million as of February 2, 1998, for the
probable exposure with respect to costs incurred in cleaning up the hazardous
waste. The Company does not expect to incur further costs that are materially
higher than those accrued for at February 2, 1998 based upon the information
currently available. The assessment of materiality of such environmental matters
and claims is based on a gross determination of such charges that could occur.
F-17
<PAGE> 60
EMPLOYMENT CONTRACTS
The Company has employment contracts with certain key executives that
require the Company to pay severance or salary continuance pay equal to amounts
ranging from nine to twelve months' salary in the event such executives are
terminated without cause.
LETTERS OF CREDIT
The Company had outstanding letters of credit securing various vendor
supply and other arrangements of approximately $7.3 million and $2.9 million at
February 2, 1998 and March 31, 1997, respectively.
14. SEGMENT INFORMATION
Summarized financial information by business segment is as follows
(in thousands):
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED MARCH 31,
FEBRUARY 2, --------------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Net sales:
Professional Sound and Entertainment $ 50,581 $ 58,870 $ 52,637
Multimedia/Audio Communications .... 43,533 61,897 45,031
RF/Communications .................. 20,766 25,320 25,000
Hearing Instruments ................ 22,777 24,794 22,680
--------- --------- ---------
$ 137,657 $ 170,881 $ 145,348
========= ========= =========
Operating earnings:
Professional Sound and Entertainment $ 7,761 $ 12,260 $ 832
Multimedia/Audio Communications .... 2,027 14,321 5,701
RF/Communications .................. 3,433 7,157 1,278
Hearing Instruments ................ (3,499) 1,560 (314)
Corporate .......................... 281 (879) (383)
--------- --------- ---------
$ 10,003 $ 34,419 $ 7,114
========= ========= =========
Depreciation and amortization:
Professional Sound and Entertainment $ 1,116 $ 1,338 $ 3,209
Multimedia/Audio Communications .... 1,355 2,022 2,672
RF/Communications .................. 892 944 1,590
Hearing Instruments ................ 416 485 1,025
Corporate .......................... 1,132 837 1,081
--------- --------- ---------
$ 4,911 $ 5,626 $ 9,577
========= ========= =========
Capital expenditures:
Professional Sound and Entertainment $ 672 $ 1,083 $ 1,362
Multimedia/Audio Communications .... 811 1,072 881
RF/Communications .................. 472 412 549
Hearing Instruments ................ 82 330 353
Corporate .......................... 2,687 5,788 175
--------- --------- ---------
$ 4,724 $ 8,685 $ 3,320
========= ========= =========
</TABLE>
F-18
<PAGE> 61
<TABLE>
<CAPTION>
AS OF AS OF MARCH 31,
FEBRUARY 2, -----------------------
1998 1997 1996
----------- -----------------------
<S> <C> <C> <C>
Assets:
Professional Sound and Entertainment $ 34,377 $ 41,781 $ 40,507
Multimedia/Audio Communications .... 25,108 43,475 33,707
RF/Communications .................. 9,981 17,241 20,075
Hearing Instruments ................ 7,584 12,082 12,937
Corporate .......................... 45,163 26,237 13,591
-------- -------- --------
$122,213 $140,816 $120,817
======== ======== ========
</TABLE>
Corporate assets and expenditures relate principally to the Company's
investment in information systems and corporate facilities, as well as deferred
income taxes and deferred financing costs.
The write-down of impaired long-lived assets is summarized by business
segment as follows (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED
FEBRUARY 2, MARCH 31,
1998 1996
----------- -----------
<S> <C> <C>
Professional Sound and Entertainment $ 280 $ 8,318
Multimedia/Audio Communications 1,721 2,722
RF/Communications 230 1,410
Hearing Instruments -- 895
------- -------
$ 2,231 $13,345
======= =======
</TABLE>
Export sales accounted for approximately 78.3%, 79.7% and 76.5% of the total
international sales for the ten months ended February 2, 1998 and the years
ending March 31, 1997, and 1996, respectively. Sales from the Company's Canada
and Singapore subsidiaries accounted for approximately 21.7%, 20.3% and 23.5% of
the total international sales for the ten months ended February 2, 1998 and the
years ended March 31, 1997 and 1996, respectively. Substantially all of the
Company's international sales are transacted in United States dollars. The
Company's operating profits on export sales are comparable to those realized on
domestic sales. A summary of these sales by geographic area is as follows (in
thousands):
<TABLE>
<CAPTION>
TEN MONTHS ENDED YEAR ENDED MARCH 31,
FEBRUARY 2, ---------------------
1998 1997 1996
--------------- ---------------------
<S> <C> <C> <C>
European Sales .......... $13,600 $17,700 $ 9,800
Asia Pacific Sales ...... 10,200 12,000 11,700
Canadian Sales .......... 5,100 5,200 3,700
Latin America Sales ..... 2,500 3,800 3,100
Other Foreign Sales ..... 1,500 1,700 1,500
------- ------- -------
$32,900 $40,400 $29,800
======= ======= =======
</TABLE>
F-19
<PAGE> 62
15. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Accounts receivable are generally unsecured; however, concentrations of credit
risk with respect to these accounts receivable are limited due to the large
number of customers and their dispersion across many different geographic areas.
As of February 2, 1998, the Company had no significant concentrations of credit
risk.
16. STOCK OPTION PLANS
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 have
been restated for all periods presented to reflect the common stock split.
STOCK COMPENSATION PLANS
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. These options will expire
on October 25, 1998 and contain certain call and put provisions. Options
exercised during the ten months ended February 2, 1998, Fiscal 1997 and 1996
were 14,000, 140,000 and 30,000, respectively. As of February 2, 1998, all
options have been exercised.
Holdings and the Company have two non-qualified stock option plans, the
Rollover Shares Plan and the 1997 Stock Option Plan. The Rollover Shares Plan
authorizes the issuance of up to 242,000 shares of Holdings common stock, of
which all shares have been granted to key employees and were fully vested as of
May 6, 1997. The exercise price of these options ranges from $0.075 to $2.80.
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 non-qualified options may be
granted to certain key employees, directors and independent contractors of the
Company or Holdings.
F-20
<PAGE> 63
A summary of the Company's stock option activity, and related information
for the periods ended is as follows:
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED MARCH 31,
FEBRUARY 2, ------------------------------------------------------------
1998 1997 1996
------------------- ------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning of period ........ 1,105,900 $ 0.68 1,130,900 $ 0.67 1,195,000 $ 0.26
Granted .................... 557,020 14.80 -- -- 196,000 2.80
Exercised .................. (864,773) 0.64 (15,000) 0.08 (240,100) 0.17
Canceled ................... (17,587) 17.63 (10,000) 0.08 (20,000) 2.80
-------- --------- ---------
End of period .............. 780,560 10.61 1,105,900 0.68 1,130,900 0.67
======== ========= =========
Exercisable at end of period 289,500 2.37 758,900 0.38 414,900 0.22
======== ========= =========
Available for future grants 212,440 320,000 320,000
======== ========= =========
</TABLE>
Exercise prices for options outstanding as of February 2, 1998 range from
$0.075 to $31.93. The weighted average remaining contractual life of those
options is 9.3 years as of February 2, 1998.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," the Company has
chosen to continue to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock option plans, and, accordingly, recognizes compensation
expense to the extent that the market price of the common stock exceeds the
option price on the date of grant.
The fair value of each option granted is estimated as of the date of grant
using the Black-Scholes single option-pricing model for the ten months ended
February 2, 1998 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 ten months ended February
2, 1998, would have increased by $970,000 and for Fiscal 1997 and 1996 the
Company's net income or loss would have changed by less than 1%. 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 common stock of Holdings, 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.
F-21
<PAGE> 64
17. USE OF FOREIGN CURRENCY FORWARD CONTRACTS
The Company enters into foreign currency forward exchange contracts to
hedge certain firm purchase commitments denominated in yen. The purpose of the
Company's foreign currency hedging activities is to protect the Company from the
risk that the eventual dollar cash flows resulting from the purchase of
inventory from international vendors will be adversely affected by changes in
exchange rates. At February 2, 1998 and March 31, 1997, the Company had no
foreign currency forward exchange contracts to exchange yen for U.S. dollars
outstanding.
18. 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
that 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 debt is
estimated based on quoted market rates for the notes.
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 2, 1998 MARCH 31, 1997
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 275 $ 275 $ 35,742 $ 35,742
Accounts receivable ..... 25,512 25,512 29,459 29,459
Accounts payable ........ 10,756 10,756 12,224 12,224
Revolving line of credit 12,231 12,231 -- --
Long-term debt .......... 115,000 115,000 -- --
Senior subordinated debt 125,000 112,500 100,000 113,600
</TABLE>
F-22
<PAGE> 65
TELEX COMMUNICATIONS, INC. Schedule II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIODS ENDED FEBRUARY 2, 1998 AND MARCH 31,
1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE AT
APRIL 1, TO FEBRUARY 2,
1997 EXPENSE DEDUCTIONS 1998
----------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts .. $ 641 $ 168 $ 152(1) $ 657
Reserve for inventory obsolescence 2,831 677 -(2) 3,508
Warranty reserve ................. 1,083 2,132 2,118(3) 1,097
Medical claims accrual ........... 693 2,484 2,757(4) 420
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE AT
APRIL 1, TO MARCH 31,
1996 EXPENSE DEDUCTIONS 1997
----------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts .. $ 533 $ 300 $ 192(1) $ 641
Reserve for inventory obsolescence 2,217 804 190(2) 2,831
Warranty reserve ................. 906 3,539 3,362(3) 1,083
Medical claims accrual ........... 700 2,916 2,923(4) 693
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE AT
APRIL 1, TO MARCH 31,
1995 EXPENSE DEDUCTIONS 1996
----------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts .. $ 631 $ 98 $ 196(1) $ 533
Reserve for inventory obsolescence 1,878 757 418(2) 2,217
Warranty reserve ................. 886 3,195 3,175(3) 906
Medical claims accrual ........... 911 3,188 3,399(4) 700
</TABLE>
- -----------------------
(1) Represents amounts charged off, net of bad debt recoveries.
(2) Represents inventory that was scrapped.
(3) Represents warranty repair work incurred during the period.
(4) Represents payments made against the accrual.
F-23
<PAGE> 66
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
TELEX COMMUNICATIONS, INC.
(Commission File Number: 333-30679)
EXHIBIT INDEX
for
Form 10-K for Ten Months Ended February 2, 1998
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., Telex Communications, Inc.
and EV International, Inc. (incorporated by reference to Exhibit 2 to
the Registrant's Quarterly Report on Form 10-Q for nine months ended
December 31, 1997, filed with the Commission on February 17, 1998,
Registration 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
the Registrant (incorporated by reference to Exhibit 2(a) to the
Registrant's Registration Statement on Form S-4, 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 the Registrant'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 the Registrant's Registration Statement on Form S-4,
Registration No. 333-30679).
3(a) - Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3(a) to the Registrant's
Registration Statement on Form S-4, Registration No. 333-30679).
3(b) - By-laws of the Registrant, as amended (incorporated by reference to
Exhibit 3(b) to the Registrant's Registration Statement on Form S-4,
Registration No. 333-30679).
4(a) - Indenture (the "Indenture"), dated as of May 6, 1997, among the
Registrant and Manufacturers and Traders Trust Company, governing the
rights of the securities being registered (incorporated by reference
to Exhibit 4(a) to the Registrant's Registration Statement on Form
S-4, Registration No. 333-30679).
4(b) - The First Supplemental Indenture, dated May 6, 1997, to the
Indenture (incorporated by reference to Exhibit 4(b) to the
Registrant's Registration Statement on Form S-4, Registration No.
333-30679).
(i)
<PAGE> 67
4(c) - Purchase Agreement, dated April 29, 1997, among GST, the
Registrant, Chase Securities Inc., Morgan Stanley & Co. Incorporated
and Smith Barney (collectively, the "Initial Purchasers")
(incorporated by reference to Exhibit 4(c) to the Registrant's
Registration Statement on Form S-4, Registration No. 333-30679).
4(d) - Credit Agreement (the "Credit Agreement"), dated May 6, 1997, among
the Registrant, 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 the Registrant's Registration Statement on Form S-4,
Registration No. 333-30679).
4(e) - The Assignment and Assumption Agreement, dated May 6, 1997, made by
the Registrant, 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 the Registrant's
Registration Statement on Form S-4, Registration No. 333-30679).
4(f) - Guarantee and Collateral Agreement, dated May 6, 1997, made by the
Registrant 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 the Registrant's Registration Statement on Form S-4,
Registration No. 333-30679).
4(g) - Patent and Trademark Security Agreement, dated March 6, 1997, made
by the Registrant 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 the Registrant's
Registration Statement on Form S-4, Registration No. 333-30679).
4(h) - Second Supplemental Indenture, dated as of February 2, 1998, made
by EV International, Inc. in favor of Manufacturers and Traders Trust
Company, as trustee (incorporated by reference to Exhibit 2 to the
Registrant's Quarterly Report on Form 10-Q for nine months ended
December 31, 1997, filed with the Commission on February 17, 1998,
Registration No. 333-30679)
10(a) - Amended and Restated Stockholders Agreement, dated March 4, 1997,
among Telex Communications Group, Inc., G-II and the Stockholders set
forth on Schedule A thereto (incorporated by reference to Exhibit
10(a) to the Registrant's Registration Statement on Form S-4,
Registration No. 333-30679).
10(b) - Trademark License Agreement, dated May 25, 1989, by and between MT
Corp. and the Registrant, relating to the "Telex" name (incorporated
by reference to Exhibit 10(b) to the Registrant's Registration
Statement on Form S-4, Registration No. 333-30679).
10(c) - Consulting Agreement, dated May 6, 1997, between Greenwich Street
Capital Partners, Inc. ("GSCP Inc."), Group and G-II (incorporated by
reference to Exhibit 10(c) to the Registrant's Registration Statement
on Form S-4, Registration No. 333-30679).
10(d) - Indemnification Agreement, dated May 6, 1997, between GSCP Inc.,
Group and G-II (incorporated by reference to Exhibit 10(d) to the
Registrant's Registration Statement on Form S-4, Registration No.
333-30679).
(ii)
<PAGE> 68
*10(e) - Fee Agreement, dated May 6, 1997, between GSCP Inc. and Group
(incorporated by reference to Exhibit 10(e) to the Registrant's
Registration Statement on Form S-4, Registration No. 333-30679).
*10(f) - Employment Agreement, dated March 4, 1997, between Group, the
Registrant and John L. Hale (incorporated by reference to Exhibit
10(f) to the Registrant's Registration Statement on Form S-4,
Registration No. 333-30679).
*10(g) - Employment Agreement, dated March 4, 1997, between Group, the
Registrant and John A. Palleschi (incorporated by reference to
Exhibit 10(g) to the Registrant's Registration Statement on Form S-4,
Registration No. 333-30679).
*10(h) - Employment Agreement, dated March 4, 1997, between Group, the
Registrant and John T. Hislop (incorporated by reference to Exhibit
10(h) to the Registrant's Registration Statement on Form S-4,
Registration No. 333-30679).
10(i) - Mortgage (or deed of trust), dated May 6, 1997, from the
Registrant, as Mortgagor, to the Administrative Agent, with respect
to Bloomington, Minnesota (incorporated by reference to Exhibit 10(i)
to the Registrant's Registration Statement on Form S-4, Registration
No. 333-30679).
10(j) - Mortgage (or deed of trust), dated May 6, 1997, from the
Registrant, as Mortgagor, to the Administrative Agent, with respect
to Blue Earth, Minnesota (incorporated by reference to Exhibit 10(j)
to the Registrant's Registration Statement on Form S-4, Registration
No. 333-30679).
10(k) - Mortgage (or deed of trust), dated May 6, 1997, from the Registrant,
as Mortgagor, to the Administrative Agent, with respect to Glen Cove,
Minnesota (incorporated by reference to Exhibit 10(k) to the
Registrant's Registration Statement on Form S-4, Registration No.
333-30679).
10(l) - Mortgage (or deed of trust), dated May 6, 1997, from the Registrant,
as Mortgagor, to the Administrative Agent, with respect to Rochester,
Minnesota (incorporated by reference to Exhibit 10(l) to the
Registrant's Registration Statement on Form S-4, Registration No.
333-30679).
10(m) - Mortgage (or deed of trust), dated May 6, 1997, from the Registrant,
as Mortgagor, to the Administrative Agent, with respect to Lincoln,
Nebraska (incorporated by reference to Exhibit 10(m) to the
Registrant'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 the Registrant'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 the Registrant's
Registration Statement on Form S-4, Registration No. 333-30679.
*10(p) - Telex Communications Group, Inc. Management Cash Compensation Plan
(incorporated by reference to Exhibits 10(h), 10(i) and 10(j) to the
Registrant's Registration Statement on Form S-4, Registration No.
333-30679.
10(q) - Amendment No. 1 to the Telex Communications, Inc. Credit Agreement,
dated as of January 29, 1998, among Telex Communications, Inc., Chase
Manhattan Bank, Morgan Stanley Senior Funding,
(iii)
<PAGE> 69
Inc. and the several banks and other financial institutions from time
to time parties thereto (incorporated by reference to Exhibit 2 to
the Registrant's Quarterly Report on Form 10-Q for nine months ended
December 31, 1997, filed with the Commission on February 17, 1998,
Registration No. 333-30679)
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)
16 - Letter from Ernst & Young LLP to the Securities and Exchange
Commission, dated May 4, 1998, regarding its agreement with the
statements made in this annual report on Form 10-K (filed as an
exhibit hereto).
21 - List of Subsidiaries (incorporated by reference to Exhibit 21 to the
Registrant's Registration Statement on Form S-4, Registration No.
333-30679).
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.
(iv)
<PAGE> 70
TABLE OF CONTENTS TO FORM 10-K
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I ........................................................................................................... 1
ITEM 1. BUSINESS ......................................................................... 1
ITEM 2. PRODUCTION AND FACILITIES ........................................................ 9
ITEM 3. LEGAL PROCEEDINGS ................................................................ 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............................. 10
PART II .......................................................................................................... 10
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS ............ 10
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA ............................................... 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ....................................................................... 13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ........................ 21
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...................................... 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE ....................................................................... 21
PART III ......................................................................................................... 22
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS ................................................. 22
ITEM 11. EXECUTIVE COMPENSATION ........................................................... 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ................... 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................................... 34
PART IV .......................................................................................................... 37
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K ................ 37
</TABLE>
i
<PAGE> 1
EXHIBIT 12(A)
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
TEN
MONTHS
ENDED YEAR ENDED MARCH 31,
FEBRUARY 2, ------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes ....... $(19,138) $ 23,577 $ (4,284) $ 4,133 $ 5,217
Interest expense ........................ 22,729 12,513 12,517 12,490 10,120
Interest portion of rent expense ........ 66 121 88 85 85
-------- -------- -------- -------- --------
Adjusted income before income
taxes .......................... $ 3,657 $ 36,211 $ 8,321 $ 16,708 $ 15,422
======== ======== ======== ======== ========
Fixed charges:
Interest expense ............... $ 22,729 $ 12,513 $ 12,517 $ 12,490 $ 10,120
Interest portion of rent expense 66 121 88 85 85
-------- -------- -------- -------- --------
Total fixed charges ..................... $ 22,795 $ 12,634 $ 12,605 $ 12,575 $ 10,205
======== ======== ======== ======== ========
Ratio of earnings to fixed charges ...... .16 2.87 --(1) 1.33 1.51
======== ======== ======== ======== ========
</TABLE>
(1) Earnings for Fiscal 1996 were inadequate to cover fixed charges by $4,284.
However, excluding the $13,785 special charges set forth in footnote 4 to
the Consolidated Financial Statements, the ratio of earnings to fixed
charges for Fiscal 1996 would have been 1.75.
<PAGE> 1
EXHIBIT 12(b)
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
COMPUTATION OF EBITDA TO INTEREST EXPENSE
(IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED MARCH 31,
FEBRUARY 2, --------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EBITDA(1)................................... $ 17,145 $ 40,045 $ 30,036 $ 25,134 $ 23,035
Interest expense............................ $ 22,729 $ 12,513 $ 12,517 $ 12,490 $ 10,120
Ratio of EBITDA to interest expense......... .75 3.20 2.40 2.01 2.28
</TABLE>
(1) Depreciation and amortization includes $2,231 and $13,345 of impairment
write-off of property, plant and equipment and intangible assets for the ten
months ended February 2, 1998 and the year ended March 31, 1996, respectively.
<PAGE> 1
EXHIBIT 16
May 4, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Gentlemen:
We have read Item 9 of Form 10-K dated May 4, 1998, of Telex Communications,
Inc. and are in agreement with the statements contained in the first, second
and fourth paragraphs therein. We have no basis to agree or disagree with other
statements of the registrant contained therein.
ERNST & YOUNG LLP
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000857668
<NAME> TELEX COMMUNICATIONS, INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-02-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> FEB-02-1998
<CASH> 275
<SECURITIES> 0
<RECEIVABLES> 25,512
<ALLOWANCES> 0
<INVENTORY> 29,846
<CURRENT-ASSETS> 65,237
<PP&E> 21,349
<DEPRECIATION> 0
<TOTAL-ASSETS> 122,213
<CURRENT-LIABILITIES> 50,677
<BONDS> 232,000
0
0
<COMMON> 0
<OTHER-SE> (166,419)
<TOTAL-LIABILITY-AND-EQUITY> 122,213
<SALES> 137,657
<TOTAL-REVENUES> 137,657
<CGS> 79,282
<TOTAL-COSTS> 48,372
<OTHER-EXPENSES> (6,412)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,729
<INCOME-PRETAX> (19,138)
<INCOME-TAX> 17,248
<INCOME-CONTINUING> (36,386)
<DISCONTINUED> 0
<EXTRAORDINARY> (10,976)
<CHANGES> 0
<NET-INCOME> (47,362)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
