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Conformed Copy
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998 COMMISSION FILE NO. 333-27341
TELEX COMMUNICATIONS, INC.
(FORMERLY KNOWN AS EV INTERNATIONAL, INC.)
(Exact name of registrant as specified in its charter)
DELAWARE 38-1853300
(State or other jurisdiction of (I.R.S. Employer
incorporation or Identification No.)
organization)
9600 ALDRICH AVENUE SOUTH, BLOOMINGTON, MINNESOTA 55420
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 884-4051
Securities registered pursuant to Section 12(b) of the Act
NONE
Securities registered pursuant to Section 12(g) of the Act
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of Common Stock held by non-affiliates on March 31,
1998 was $0.
As of March 31, 1998 there were 110 shares of Telex Communications, Inc. Common
Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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As used in this Form 10-K/A, unless otherwise indicated or the context
otherwise requires, references to (i) "Holdings" shall mean Telex Communications
Group, Inc., a Delaware corporation and the corporate parent of the Company;
(ii) "Old Telex" refers to the Delaware corporation formerly named Telex
Communications, Inc., a wholly-owned subsidiary of Holdings, and its
subsidiaries in respect of periods prior to the Mergers (as defined in Item 1.
Business); (iii) the "Company" shall mean Telex Communications, Inc., a Delaware
corporation formerly named EV International, Inc. ("EVI") and successor by
merger to Old Telex, and its subsidiaries and includes, as the context may
require, predecessor and successor companies; (iv) "Old EVI" shall mean EV
International, Inc. and its subsidiaries in respect of periods prior to the
Mergers and includes any predecessor companies; and (v) "EV Holdings" refers to
EVI Audio Holding, Inc., the direct parent company of EVI prior to the Mergers.
Unless otherwise indicated, all references to fiscal years in this Form 10-K are
to the fiscal years ending on last day of February of each year (e.g., Fiscal
1998 refers to the fiscal year ended February 28, 1998). Unless otherwise
indicated, all references to amounts reported for Fiscal 1994 through Fiscal
1996 are based on reclassified predecessor basis of accounting, all references
to amounts reported for Fiscal 1997 include the reclassified predecessor basis
of accounting for the period March 1, 1996 through February 10, 1997 and the
reclassified new basis of accounting for the period February 11, 1997 through
February 28, 1997. Such reclassified amounts conform to the Fiscal 1998
presentation. These reclassifications had no impact on the previously reported
operating profit, net income, EBITDA or shareholder's equity (See Note (a) to
Selected Historical Financial Data).
1. Amendments. The Registrant hereby amends its Report on Form 10-K for
the fiscal year ended February 28, 1998 (the "Report on Form 10-K"), which was
filed on May 29, 1998, as follows.
2. ITEM 7. Item 7 of the Report on Form 10-K is hereby amended and
restated to read in its entirety as follows (the Registrant notes for the
convenience of the reader that the only changes it is making to Item 7 of the
Report on Form 10-K pertain to the seventh paragraph of the Report on Form 10-K
appearing under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources"):
"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis may contain forward-looking
statements, including, without limitation, statements relating to the Company's
plans, strategies, objectives and expectations and are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Any such forward-looking statements involve known and unknown risks and
uncertainties and the Company's actual results may differ materially from those
forward-looking statements. The Company does not undertake to update, revise or
correct any of the forward-looking information contained in this document.
Readers are cautioned that such forward-looking statements should be read in
connection with the Company's disclosures under the heading "CAUTIONARY
STATEMENT FOR THE PURPOSES OF THE 'SAFE HARBOR' PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995" on page 2 of this Report on Form 10-K.
The following discussion and analysis of the financial condition and
results of operations covers periods both before and after completion of the
Transactions (as defined herein). As a result of the Transactions, the Company
has entered into new financing arrangements and has a different capital
structure than its predecessors, Old EVI and Old Telex. The results of
operations for the periods after February 10, 1997 were prepared under the new
basis of accounting, which includes adjustments giving effect to the Acquisition
under the purchase method of accounting. Accordingly, the results of operations
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for Fiscal 1998, which are affected by such changes, are not comparable to the
results of operations for prior fiscal years which do not fully reflect the
impact of the Transactions. The results of operations for the fiscal year ended
February 28, 1997 are based on Old EVI's statement of income for the period
ended February 10, 1997, under the predecessor basis of accounting, and Old
EVI's statement of income for the eighteen-day period ended February 28, 1997,
under the new basis of accounting. The impact of the new basis of accounting in
the period ended February 28, 1997 on the results of operations for the fiscal
year ended February 28, 1997 was not significant. Pursuant to the
Recapitalization of Old Telex on May 6, 1997, the historical basis of all assets
and liabilities was retained for financial reporting purposes, and the
repurchases of existing Holdings Common Stock and issuance of new Holdings
Common Stock have been accounted for as equity transactions. The Mergers have
been accounted for essentially as a pooling of interests from May 6, 1997, the
date on which Old EVI and Old Telex came under common control, and the financial
statements of the Company for Fiscal 1998 accordingly include the results of Old
Telex from May 6, 1997. The following discussion and analysis of the Company's
financial condition and results of operations should be read in conjunction with
the consolidated financial statements and notes thereto contained elsewhere
herein.
THE TRANSACTIONS
The Acquisition. On February 10, 1997 (the "Acquisition Closing Date"),
pursuant to a purchase agreement dated December 12, 1996 (,as amended, the
"Purchase Agreement") an acquisition subsidiary wholly owned by GSCP and certain
affiliated investors acquired from Mark IV and one of its subsidiaries all of
the issued and outstanding capital stock of Gulton, the former parent of Old
EVI, and each of its subsidiaries for an initial cash purchase price of $151.5
million, plus $4.9 million in estimated adjustments paid on the closing date,
which aggregate amount is subject to further post-closing adjustments as
described below. The acquisition subsidiary subsequently merged with and into
the parent of Old EVI, and the parent then merged with and into Old EVI, with
Old EVI ultimately surviving (the "Acquisition"). Prior to the Acquisition
Closing Date, (i) EVI Audio LLC, a subsidiary wholly owned by GSCP and certain
affiliated investors, purchased all the issued and outstanding shares of common
stock and Pay-in-Kind Preferred Stock of EV Holdings for an aggregate amount of
$57.6 million and (ii) EV Holdings, a Delaware corporation organized by GSCP to
hold all the issued and outstanding stock of the EVI, contributed $57.6 million
to the Old EVI.
Financing for the Acquisition, and the related fees and expenses,
consisted of (i) $57.6 million of equity capital provided by GSCP and certain
affiliated investors, (ii) a $60.0 million senior credit facility (consisting of
a term loan and a revolving credit facility), and (iii) a $75.0 million senior
subordinated credit facility issued as interim financing by Chase Securities
Inc. and Smith Barney Inc., the initial purchasers of the EVI Existing Notes (as
defined herein), and certain other lenders. Of these amounts, $156.4 million was
used for the purchase price for the Acquisition and $10.4 million was used for
financing and transaction fees and expenses. Under the Purchase Agreement, the
purchase price was subject to adjustment on the basis of (i) the audited working
capital and audited cash flow of Old EVI as at and for the 10-month period ended
December 31, 1996 and (ii) the net intercompany transfers of cash between Mark
IV and its affiliates (other than Old EVI and its subsidiaries), on the one
hand, and Old EVI and its subsidiaries, on the other hand, during the period
between December 31, 1996 and the Acquisition Closing Date. Based on these
provisions Mark IV has requested a purchase price increase of $405,000, which
amount the Company is currently disputing pursuant to the applicable provisions
of the Purchase Agreement.
On March 24, 1997, Old EVI issued 11% Senior Subordinated Notes due
2007 in an aggregate principal amount of $100.0 million (the "EVI Existing
Notes"), all of which were subsequently exchanged
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in September, 1997 for a like principal amount of new 11% Senior Subordinated
Notes due 2007, Series A (together with the EVI Existing Notes, the "EVI
Notes"), in an offering registered under the Securities Act of 1933, as amended
(the "Securities Act"). The proceeds from the EVI Notes were used to repay the
$75.0 million of indebtedness under the interim financing in its entirety and a
portion of EVI's term loan. The foregoing transactions, including the issuance
of the EVI Notes, are referred to herein as the "Acquisition Transactions." The
Acquisition was accounted for using the purchase method of accounting, pursuant
to which the purchase price was allocated among the acquired assets and
liabilities in accordance with estimates of fair market value on February 10,
1997 (i.e., the Acquisition Closing Date).
In connection with the Acquisition, Mark IV and Old EVI entered into a
transition services agreement pursuant to which Mark IV agreed to provide
certain services, including accounting, tax planning, foreign currency hedging,
cash management and administering certain pension plan assets pending their
transfer to Old EVI, for a period not to exceed twelve months following the
Acquisition Closing Date. In Fiscal 1998, the Company paid an aggregate of
approximately $41,000 in fees for services provided pursuant to such transition
services agreement, which services terminated on January 31, 1998. In addition,
Mark IV and Old EVI entered into a sublease agreement with respect to certain
premises located in Austin, Texas and a non-exclusive, royalty-free license to
use certain names which incorporate the "Mark IV" name, including related
tooling and sales and marketing materials, and to sell products incorporating
such names for periods ranging from 18 to 36 months after the Acquisition
Closing Date.
The Recapitalization. On May 6, 1997 (the "Recapitalization Closing
Date"), Old Telex completed a recapitalization (the "Recapitalization") pursuant
to an Agreement (the "Recapitalization Agreement") among Old Telex, Greenwich
II, LLC ("G-II"), a Delaware limited liability company formed by GSCP and
certain other investors, and GST Acquisition Corp. ("GST"), a Delaware
corporation and a wholly owned subsidiary of G-II. In connection with the
Recapitalization, all of the shares of common stock of Holdings ("Holdings
Common Stock") and all options and warrants to acquire Holdings Common Stock
(other than certain shares of Holdings Common Stock and certain options to
acquire Holdings Common Stock owned by certain members of management of Old
Telex) were converted into the right to receive an aggregate amount of cash (the
"Recapitalization Consideration") equal to approximately $253.9 million. In
addition, in connection with the Recapitalization Agreement, certain shares of
Holdings Common Stock held by management of Old Telex (such shares, the
"Rollover Shares") and certain options to acquire additional shares of Holdings
Common Stock (the "Rollover Options"), with an aggregate value of approximately
$21.2 million (which represented approximately 14% of the equity of Holdings on
a non-diluted basis and approximately 20% on a fully diluted basis) were
retained by such managers. In connection with the Recapitalization, Old Telex
completed (i) a tender offer (the "Tender Offer") to repurchase all of Old
Telex's then outstanding 12% Senior Notes due 2004, in aggregate principal
amount of $100.0 million, for $118.3 million (including premium and consent fees
along with accrued interest), and (ii) a solicitation of consents with respect
to certain amendments to the indenture pursuant to which such notes were issued.
The Recapitalization, the financing thereof (including the issuance by Old Telex
of 10 1/2% Senior Subordinated Notes due 2007 (the "Existing Telex Notes") to
Chase Securities, Inc., Morgan Stanley & Co. Incorporated and Smith Barney,
Inc.), the Tender Offer and the payment of the related fees and expenses are
herein referred to as the "Recapitalization Transaction." See "The
Recapitalization" and "Interests of Certain Persons."
The Recapitalization was financed by (i) $108.4 million of new equity
provided by GSCP and certain other co-investors, (ii) the Rollover Shares and
Rollover Options valued at $21.2 million, (iii) a $140.0 million senior secured
credit facility (the "Senior Secured Credit Facility") with The Chase Manhattan
Bank, Morgan Stanley Senior Funding, Inc. and certain other lenders, consisting
of (a) a $115.0 million term loan facility (the "Term Loan Facility"), and (b) a
$25.0 million revolving credit facility (the
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"Revolving Credit Facility"), (iv) $125.0 million of Existing Telex Notes and
(v) $36.5 million of available cash of Old Telex. Of the $108.4 million of new
equity contributed by GSCP and certain other co-investors, $25.2 million
consisted of proceeds from the issuance by GST (a predecessor of Holdings) of
Deferred Pay Subordinated Debentures due 2009 (the "GST Subordinated
Debentures").
Pursuant to the Recapitalization of Old Telex on May 6, 1997, the
historical basis of all assets and liabilities was retained for financial
reporting purposes, and the repurchases of existing Holdings Common Stock and
issuance of new Holdings Common Stock have been accounted for as equity
transactions.
In October 1997, Old Telex completed an exchange offer of $125 million
aggregate principal amount of new 10 1/2% Senior Subordinated Notes Due 2007,
Series A (the "New Telex Notes"), which were registered under the Securities
Act, for a like principal amount of the Existing Telex Notes (together with the
New Telex Notes, the "Telex Notes"). All of the Existing Telex Notes were
tendered and accepted for exchange.
The Mergers. On February 2, 1998, Old EVI merged with Old Telex, a
wholly owned subsidiary of Holdings and an affiliate of GSCP, with Old EVI
surviving. In the Merger, Old EVI changed its corporate name to "Telex
Communications, Inc." The Merger was effected pursuant to an agreement and plan
of merger, dated January 29, 1998 under which Greenwich I LLC ("G-I"), a
subsidiary wholly owned by GSCP and certain affiliated investors, exchanged all
of the issued and outstanding common and preferred stock of EVI Holdings, the
former parent of Old EVI, for 1,397,400 shares of Holdings' Common Stock, and
13,000 shares of Holdings' Series A Pay-in-Kind Preferred Stock, respectively,
and EVI Holdings was merged with and into Holdings, with Holdings continuing as
the surviving corporation. The Mergers have been accounted for essentially as a
pooling of interests from May 6, 1997, the date on which Old EVI and Old Telex
came under common control, and the financial statements of the Company for
Fiscal 1998 accordingly include the results of Old Telex from May 6, 1997.
Immediately prior to the Mergers, approximately $12.7 million of indebtedness
outstanding under Old EVI's senior credit facility was paid in full and Old
EVI's senior credit facility was terminated. Such indebtedness, together with
$0.4 million of certain fees and expenses associated with the Mergers, was
repaid by utilizing free cash at closing from Old EVI of $3.8 million and by
borrowings under Old Telex's Revolving Credit Facility of approximately $9.3
million. The EVI Notes remain outstanding following the Mergers.
The Acquisition Transactions, the Recapitalization Transaction, and the
Mergers are referred to herein collectively as the "Transactions."
OVERVIEW
The Company, formed as a result of the February 2, 1998 merger of Old
Telex and Old EVI (see "The Mergers"), is a leader in the design, manufacture
and marketing of sophisticated audio, wireless and multimedia communications
equipment to commercial, professional and industrial customers. The Company
provides high value-added communications products designed to meet the specific
needs of customers in commercial, professional and industrial markets, and does
not participate in the competitive retail consumer electronics market. The
Company offers a comprehensive range of products worldwide for professional
audio systems as well as for multimedia and other communications product
markets, including wired and wireless microphones, wired and wireless intercom
systems, mixing consoles, signal processors, amplifiers, loudspeaker systems,
headphones and headsets, tape duplication products, talking book players, LCD
projectors, wireless LAN and PCS antennas, hearing aids and wireless assistive
listening devices.
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Subsequent to the Mergers, the Company has reorganized its business
into two business segments: Professional Sound and Entertainment and
Multimedia/Communications. Prior to the Mergers, essentially all of the
Company's business consisted of Old EVI's three principal lines of business
within the overall professional audio market: Fixed Installation, Professional
Music Retail and Concert/Recording/Broadcast. These businesses now comprise a
part of the Company's Professional Sound and Entertainment business segment. In
addition, as a result of the Mergers, the Multimedia/Communications business
segment (consisting mostly of businesses of Old Telex) accounts for a greater
proportion of the Company's business.
The Mergers contributed $137.4 million to Fiscal 1998 reported sales,
approximately one-third of which is attributable to the Professional Sound and
Entertainment business segment and approximately two-thirds of which is
attributable to the Multimedia/Communications business segment. As a result of
the Mergers, the Professional Sound and Entertainment business segment accounted
for approximately 68% of the Company's Fiscal 1998 reported sales, down from
approximately 93% in Fiscal 1997. The corresponding proportions for
Multimedia/Communications business segment were 32% and 7%.
Over 40% of the Company's sales are made internationally, in over 80
countries. The Company conducts its foreign sales through its foreign
subsidiaries in Germany, Japan, Hong Kong, the United Kingdom, Canada,
Australia, Switzerland, Singapore and France, and exports products from its
manufacturing locations in the U.S., Germany, the United Kingdom and Mexico for
sales through its independent distributors and dealers in other countries.
Overall, the Company's business is not subject to significant seasonal
fluctuations. Management does not believe that inflation has had a material
impact on its financial position or results of operations during the periods
covered by the Consolidated Financial Statements included herein. The Company
has generally been able to effect price increases equal to, or moderately
exceeding, the inflationary increase in costs.
The Company maintains assets and/or operations in a number of foreign
jurisdictions, the most significant of which are Germany, the United Kingdom,
Japan, Singapore, and Hong Kong. In addition, the Company conducts business in
local currency in many countries, the most significant of which are Germany, the
United Kingdom, Japan, Singapore, Hong Kong, Canada, Australia, Switzerland and
France. Exposure to U.S. dollar/German mark and U.S. dollar/British pound
exchange rate volatility is mitigated to some extent by the Company's ability to
source its production needs with existing manufacturing capacity in Germany and
Great Britain, and the exposure to U.S. dollar/Japanese yen exchange rate
volatility is to some extent mitigated by sourcing products denominated in yen
from Japan or through contractual provisions in sales agreements with certain
customers. Nevertheless, the Company has a direct and continuing exposure to
both positive and negative foreign currency movements.
The Company reports the foreign exchange gains or losses on
transactions as part of other (income) expense. Gains and losses on translation
of foreign currency denominated balance sheets are classified as currency
translation adjustments and are included as part of the shareholders' equity.
The Company's predecessor financial statements (i.e., Old EVI's financial
statements) excluded realized foreign currency transaction gains and losses
since these were viewed as an integral part of Mark IV's consolidated risk
management.
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RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1998 COMPARED TO YEAR ENDED FEBRUARY 28, 1997
Net Sales. The Company's net sales increased $123.5 million, or 64.3%,
from $192.0 million in Fiscal 1997 to $315.5 million in Fiscal 1998. Of this
amount, Old Telex contributed $137.5 million. Excluding the impact of Old Telex,
net sales decreased $14.0 million, or 7.3%, from $192.0 million in Fiscal 1997
to $178.1 million in Fiscal 1998, primarily as a result of a decrease in the
Company's net sales to customers outside of the U.S. Excluding the impact of Old
Telex, net sales to customers in the U.S. increased $5.8, or 7.3%, from $79.6
million in Fiscal 1997 to $85.4 million in Fiscal 1998. Excluding the impact of
Old Telex, net sales to customers outside of the United States decreased $19.8
million, or 17.6%, from $112.5 million in Fiscal 1997 to $92.7 million in Fiscal
1998. The decrease in net sales to customers outside of the U.S. was due in part
to the stronger U.S. dollar, principally against the German mark and Japanese
yen, which reduced the foreign currency denominated translated sales, and to the
weak economies in Japan and in certain other Asian countries. Excluding the
impact of Old Telex, the stronger U.S. dollar reduced foreign currency
denominated translated sales by approximately $7.8 million in Fiscal 1998.
As a result of the Merger, a greater proportion of the Company's sales
mix is now from the Multimedia/Communications business segment. The Professional
Sound and Entertainment business segment accounted for approximately 68% of the
Fiscal 1998 reported net sales, down from approximately 93% in Fiscal 1997. The
Multimedia/Communications business segment sales accounted for approximately 32%
of the Fiscal 1998 reported net sales, up from approximately 7% in Fiscal 1997.
Net sales in the Company's Professional Sound and Entertainment segment
increased $36.6 million, or 20.6%, from $177.9 million in Fiscal 1997 to $214.5
million in Fiscal 1998. Excluding the impact of Old Telex, this segment's net
sales decreased $13.2 million, or 7.3%, from net sales of $177.9 million in
Fiscal 1997 to $164.7 million in Fiscal 1998 . This decrease is attributed
primarily to the decrease, as described above, in net sales to customers outside
of the U.S.
Net sales in the Company's Multimedia/Communications segment increased
$86.9 million, or 614.6%, from $14.1 million in Fiscal 1997 to $101.0 million in
Fiscal 1998. Excluding the impact of Old Telex, this segment's net sales
decreased $0.7 million, or 5.2%, from $14.1 million in Fiscal 1997 to $13.4
million in Fiscal 1998.
Gross Profit. The Company's gross profit increased $48.9 million, or
69.0%, from $70.9 million in Fiscal 1997 to $119.8 million in Fiscal 1998. As a
percentage of sales, the gross margin rate improved from 36.9% in Fiscal 1997 to
38.0% in Fiscal 1998. Excluding the impact of Old Telex, the Company's gross
profit decreased $9.1 million, or 12.9%, and its gross margin rate declined from
36.9% in Fiscal 1997 to 34.7% in Fiscal 1998. The decline in the gross margin
rate is attributed mainly to the unfavorable movement in exchange rates, the
Company's aggressive pricing strategy employed to maintain its foreign market
positions, and a delay in the introduction of certain new products. The
unfavorable movement in exchange rates primarily affected the gross margin rates
on sales made in Japan and Germany due to the higher costs of goods that were
produced in the U.S. and the U.K.
Engineering. The Company's engineering expenses increased $8.3 million,
or 97.7%, from $8.5 million, or 4.4% of net sales in Fiscal 1997 to $16.8
million, or 5.3% of net sales, in Fiscal 1998. Excluding the impact of Old
Telex, engineering expenses increased $1.1 million, or 12.5%, from $8.5
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million in Fiscal 1997 to $9.6 million in Fiscal 1998. The increase in spending
rate is attributable primarily to the increase in outside development costs
incurred to accelerate new product development.
Selling, General and Administrative. Selling, general and
administrative expenses increased $33.8 million, or 76.0%, from $44.5 million,
or 23.2% of net sales, in Fiscal 1997 to $78.3 million, or 24.8% of net sales,
in Fiscal 1998. Included in the Fiscal 1998 selling, general and administrative
expenses, as described below, are $36.8 million attributed to Old Telex.
Excluding the impact of Old Telex, selling, general and administrative expenses
decreased $3.0 million, or 6.8%, from $44.5 million in Fiscal 1997 to $41.5
million in Fiscal 1998. The decrease was primarily due to spending restraints in
Fiscal 1998.
Fiscal 1998 selling, general and administrative expenses attributed to
Old Telex were $36.8 million. Included in these expenses were $12.5 million of
costs related to the Recapitalization consisting 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 in Fiscal 1998. In addition, as part of the
Recapitalization 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. In Fiscal 1998, the Company recognized $3.0 million of
compensation expense related to these option grants.
Restructuring Charges. In the fourth quarter of Fiscal 1998 the Company
recorded a pre-tax restructuring charge of $6.2 million attributable to the
Merger-related consolidation of certain product lines, and the consolidation of
certain of its worldwide manufacturing, engineering, distribution, marketing,
service and administrative operations to reduce costs, to better utilize the
available manufacturing and operating capacity and to enhance competitiveness.
The consolidation will include the closure of some facilities and will also
include the transfer of a portion of the work from certain facilities to the
Company's remaining locations. The Company expects to complete substantially all
of the restructuring of the operations by early Fiscal 2000, and expects to
complete the sale and disposal of the owned facilities and equipment related to
those operations by late Fiscal 2000.
Included in the restructuring charges are $2.5 million associated with
severance pay for terminated employees, most of whom work in the facilities to
be closed or from which work is to be transferred to other locations, $2.8
million associated with write-down to fair market value of certain assets
(primarily inventories related to the products to be discontinued, and land,
building and equipment to be sold, made obsolete or redundant), and $0.9 million
associated with other costs.
Corporate Charges. Corporate charges of $2.1 million in Fiscal 1998
represent fees for consulting and management services provided by GCSP under a
management and services agreement.
Special Charges. In Fiscal 1998 the Company recognized an impairment
loss of $2.2 million, charged to operating income, in accordance to the
provisions of Statement of Financial Accounting Standards (SFAS) No. 121
"Accounting for Impairment of Long-Lived Assets and Assets to be Disposed Of."
SFAS 121 requires impairment losses to be recorded on long-lived assets used in
the operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. The impairment loss is measured by comparing the fair value of
the assets, as determined by discounting the future cash flows at a market rate
of interest, to its carrying value.
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Other (income) expense. The Company recorded a $1.0 million charge
attributed to foreign exchange loss, which was essentially offset by license fee
income. The foreign exchange loss was primarily due to the unfavorable exchange
rate movement in the German mark and Japanese yen against the U.S. dollar.
Recapitalization expense. The Company recorded a $6.7 million
recapitalization expense in Fiscal 1998, attributed to Old Telex. The charge
consists of fees for investment advisory, legal, audit and other professional
services attributed to the Recapitalization Transactions.
Interest (income) expense. Interest expense increased from $0.8 million
in Fiscal 1997 to $39.5 million in Fiscal 1998. The increase is attributed to
$8.7 million of bank fees paid in connection with a bridge loan commitment
related to the Acquisition, $4.7 million related to write-off of deferred
financing costs, $1.7 million of bank and other fees in connection with the
Mergers, and an increase in average outstanding indebtedness resulting from the
Transactions.
Income Taxes. The Company's income tax benefit, excluding the $16.5
million income tax provision related to the net deferred tax asset valuation
allowance, was 32.1% of the pretax loss including the extraordinary item for
Fiscal 1998. The tax rate for Fiscal 1997 was 42.7%. The lower effective tax
rate for Fiscal 1998 is principally due to the nondeductibility of certain
costs related to the Recapitalization Transaction and the Mergers, and goodwill
amortization costs.
The Company has established a net deferred tax valuation allowance of
$16.5 million, charged to income tax provision for Fiscal 1998, due to the
uncertainty of the realization of future tax benefits. The realization of the
future tax benefits related to the deferred tax asset is dependent on many
factors, including the Company's ability to generate taxable income within the
net operating loss carryforward period. Management has considered these factors
in reaching its conclusion as to the valuation allowance for financial
reporting purposes.
Extraordinary Loss. In connection with the Transactions, the Company
recorded a pre-tax extraordinary loss of $20.6 million on the early retirement
of debt, consisting of bond premium, consent and tender fees, along with the
write-off of deferred financing costs associated with the repurchase and early
retirement in Old Telex's $100.0 million 12% Senior Notes due 2004 and the
termination of Old EVI's senior credit agreement.
YEAR ENDED FEBRUARY 28, 1997 COMPARED TO YEAR ENDED FEBRUARY 29, 1996
Net Sales. Net sales decreased $3.5 million, or 1.8%, from $195.5
million in Fiscal 1996 to $192.0 million in Fiscal 1997. During the comparable
periods, net sales to customers in the United States remained flat at $88.2
million, and net sales of $103.9 million in Fiscal 1997 to customers outside
the United States decreased $3.4 million, or 3.2%, from $107.3 million in
Fiscal 1996. Principal factors accounting for the overall decrease in sales
included the relative strengthening of the U.S. dollar against certain European
currencies, the termination by the Company of several unauthorized exporters in
the U.S., the Company's decision to cease production of certain low-margin
items under its University Sound brand and the effect of business dislocations
due to a fire at the Company's Swiss facility. These factors were offset in
part by increased sales in the Pacific region, Argentina and Brazil and an
out-of-cycle price increase introduced at the end of fiscal 1996.
Gross Profit. Gross profit decreased $0.7 million, or 1.0%, from
$71.6 million in Fiscal 1996 to $70.9 million in Fiscal 1997. As a percentage
of net sales, the gross margin rate increased from 36.6% in Fiscal 1996 to
36.9% in Fiscal 1997. Principal factors for this gross margin rate improvement
included
8
<PAGE> 10
sales of high-margin loudspeaker systems and products into foreign markets, a
reduction of sales of certain low-margin University Sound products,
manufacturing cost reductions during the second and third quarters of fiscal
1997 and the continuing effects of the out-of-cycle price increase. This was
offset in part by product mix shifts and unfavorable currency exchange rates.
Engineering. Engineering expenses of $8.5 million in Fiscal 1997 were flat
with Fiscal 1996. As a percentage of net sales, engineering expenses increased
to 4.4% in Fiscal 1997 from 4.3% in Fiscal 1996. The Company continues to
emphasize the development of digital technologies, systems and products.
Selling, General and Administrative. Selling, general and administrative
expenses of $44.5 million in Fiscal 1997 were about flat with $44.3 million in
Fiscal 1996. As a percentage of net sales, selling, general and administrative
expenses increased to 23.2% in Fiscal 1997 from 22.7% in Fiscal 1996. The
expense rate increased because the Company has not yet realized the full
benefit of its continuing effort to lower expenses and to streamline support
functions, including the consolidation of certain selling, general and
administrative functions from Oklahoma City, Oklahoma into Buchanan, Michigan
and from Ipsach, Switzerland into Straubing, Germany.
Income Taxes. The Company's provision for income taxes as a percentage of
income before provision for taxes was 42.7% for Fiscal 1997 compared to 39.2%
for Fiscal 1996. The higher rate principally relates to the amortization of
nondeductible goodwill recorded as a result of the Acquisition and certain
other nondeductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
At February 28, 1998 the Company had cash and cash equivalents of $5.2
million compared to $7.0 million at February 28, 1997. The Company's principal
source of funds has consisted of cash generated from operating activities. Net
cash provided by operations in Fiscal 1998 was $8.8 million. Excluding the
impact of Old Telex, the Company's operations used $1.5 million of cash in
Fiscal 1998 compared with $4.9 million of cash provided by operations in Fiscal
1997. This increase in cash used by operations, exclusive of Old Telex, is
attributable primarily to lower operating profit, an increase in interest
expense and other expenses related to the Transactions, and an increase in
inventory, partially offset by a decrease in receivables.
The Company's investing activities consist mainly of capital
expenditures to maintain facilities, to acquire machines or tooling, to update
certain manufacturing processes and to improve efficiency. Capital expenditures
totaled $8.9 million in Fiscal 1998 compared with $3.4 million in Fiscal 1997.
Excluding the impact of Old Telex, Fiscal 1998 capital expenditures were $4.8
million. This increase in capital expenditures from Fiscal 1997 is attributed
primarily to investments in equipment to improve operating efficiencies. The
Company estimates its annual maintenance levels of capital expenditures to be
approximately $6.3 million. The Company's ability to make capital expenditures
is subject to certain restrictions under its Senior Secured Credit Facility.
The Company's consolidated indebtedness increased $242.3 million from
$110.0 million at February 28, 1997 to $352.3 million at February 28, 1998. The
increase in indebtedness was due primarily to the indebtedness of Old Telex,
which was assumed by the Company in the Merger.
The Company's liquidity needs arise primarily from debt service on
indebtedness incurred in connection with the Transactions, working capital needs
and capital expenditure requirements. The Company incurred substantial
indebtedness in connection with the Acquisition Transactions and the
9
<PAGE> 11
Recapitalization Transaction and its related debt service obligations represent
significant liquidity requirements for the Company.
The Company relies mainly on internally generated funds, and, to the
extent necessary, borrowings under the Revolving Credit Facility and foreign
working capital lines to meet its liquidity needs. Prior to the consummation of
the Acquisition Transactions, Old EVI operated as a division of Mark IV and
substantially all of its cash needs were historically funded through
interest-free cash requisitions from Mark IV.
The Company's current credit facilities include the Senior Secured
Credit Facility consisting of the Term Loan Facility of $115.0 million and the
Revolving Credit Facility, subject to certain borrowing base limitations, of
$25.0 million, and foreign working capital lines, subject to certain
limitations, of $4.7 million. In certain instances the foreign working capital
lines are secured by a lien on foreign real property, leaseholds, accounts
receivable and inventory or are guaranteed by another subsidiary.
As of February 28, 1998, $10.1 million of the Company's $115.0 million
Term Loan Facility is payable in the next 12 months. Of such amount, $1.9
million was paid on March 2, 1998. In addition, the Company had $10.5 million
outstanding under the Revolving Credit Facility, and $0.4 million outstanding
under the foreign working capital lines. Net availability at February 28, 1998
under the Revolving Credit Facility, computed by deducting approximately $7.6
million of open letters of credit and applying applicable borrowing base
limitations, totaled $6.9 million. Net availability at February 28, 1998 under
such foreign working capital lines totaled $4.3 million. Outstanding balances
under substantially all of these credit facilities bear interest at floating
rates based upon the interest rate option selected by the Company; therefore,
the Company's financial condition is and will continue to be affected by changes
in the prevailing interest rates. The effective interest rate under these credit
facilities in Fiscal 1998 was 8.5%.
In addition, pursuant to the Term Loan Facility, the Company is
required to make permanent principal payments under (i) the $50.0 million
Tranche A Term Loan Facility, $8.0 million, $8.0 million, $9.0 million, $13.0
million and $8.5 million of which is payable in each of Fiscal 1999, 2000, 2001,
2002 and 2003 (which has a final maturity date of November 6, 2002),
respectively, and (ii) the $65.0 million Tranche B Term Loan Facility, $0.5
million, $0.5 million, $0.5 million, $0.5 million, $12.8 million, $31.3 million
and $18.8 million of which is payable in each of Fiscal 1999, 2000, 2001, 2002,
2003, 2004 and 2005 (which has a final maturity date of November 6, 2004),
respectively. In addition, under the terms of the Senior Secured Credit
Facility, the Company is required to make mandatory prepayments with (i)
non-ordinary asset sale proceeds, (ii) any additional indebtedness and equity
proceeds (with certain exceptions) and (iii) with 75% of the excess cash flow of
the Company and its subsidiaries for each fiscal year commencing on April 1,
1997, and each fiscal year thereafter.
The Company expects to generate cash flow from expected cost-savings
attributable to expected Merger-related restructurings 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 $4.0 million
intercompany line of credit with Holdings, and is seeking to replace the working
capital lines of Old EVI's former subsidiaries with a foreign working capital
facility to be secured by the Company's foreign assets. Under the Senior Secured
Credit Facility and the indentures governing the EVI Notes and the Telex Notes,
the Company's foreign subsidiaries are permitted to obtain working capital
lines, subject to certain restrictions. As of February 28, 1998 the Company had
the ability to borrow approximately $19.0 million against foreign working
capital, subject to certain restrictions, of which approximately $4.7 million
was being utilized.
10
<PAGE> 12
The Company believes that these additional sources of funds, together with
the Company's Revolving Credit Facility and cash from operations will be
adequate to meet its debt service and principal payment requirements, capital
expenditure needs, working capital requirements, and the funding needed for the
restructuring and other related expenditures attributed to the Mergers. However,
no assurance can be given in this regard, because, among other reasons, 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."
11
<PAGE> 13
3. ITEM 14. Item 14 of the Report on Form 10-K, including the financial
statements filed as part of the Report on Form 10-K, is hereby amended and
restated to read in its entirety as follows (the Registrant notes for the
convenience of the reader that the only substantive changes it is making to Item
14 (and the related financial statements) of the Report on Form 10-K are (i) the
deletion of the last sentence of the first paragraph of Note 7 of the Notes to
Consolidated Financial Statements (New Basis of Accounting) and (ii) the
correction of a few figures in Note 6 of the Notes to Consolidated Financial
Statements (Old Basis of Accounting)):
"ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this report: Page
1. Financial Statements:
CONSOLIDATED FINANCIAL STATEMENTS (NEW BASIS OF ACCOUNTING)
Report of Independent Public Accountants ......................... 18
Consolidated Balance Sheets as of February 28, 1998 and 1997 ..... 19
Consolidated Statements of Operations for the year ended
February 28, 1998 and for the period from February 11, 1997
through February 28, 1997 ........................................ 20
Consolidated Statements of Shareholder's Equity (Deficit)
for the year ended February 28, 1998 and for the period
from February 11, 1997 through February 28, 1997 ................. 21
Consolidated Statements of Cash Flows for the year ended
February 28, 1998 and for the period from February 11, 1997
through February 28, 1997 ........................................ 22
Notes to Consolidated Financial Statements ....................... 23
CONSOLIDATED FINANCIAL STATEMENTS (PREDECESSOR BASIS OF ACCOUNTING)
Report of Independent Public Accountants ......................... 44
Report of Independent Accountants ................................ 45
Consolidated Statements of Income and Retained Earnings
for the period from March 1, 1996 through February 10, 1997
and for the year ended February 29, 1996 ......................... 46
Consolidated Statements of Cash Flows for the period
from March 1, 1996 through February 10, 1997 and for
the year ended February 29, 1996 ................................. 47
Notes to Consolidated Financial Statements ....................... 48
2. Financial Statement Schedule:
All schedules have been omitted because they are inapplicable, not
required, or the information is included elsewhere in the financial
statements or notes thereto.
12
<PAGE> 14
3. The Exhibits are listed in the Exhibit Index required by Item
601 of the Regulation S-K at Item (c) below and included
immediately following the Consolidated Financial Statements.
The Exhibit Index is incorporated herein by reference.
(b) On January 8, 1998, Old EVI filed a Current Report on Form 8-K with the
Securities and Exchange Commission reporting that Old EVI had announced
their intent to merge with Old Telex. On April 21, 1998, the Company
filed Current Report on Form 8-K reporting the Mergers, which Form 8-K
included the following financial statements: Unaudited Pro Forma
Condensed Statement of Operations for the year ended February 28, 1997
for Old EVI and March 31, 1997 for Old Telex, respectively; Unaudited
Pro Forma Condensed Statement of Operations for the nine months ended
November 30, 1997 for Old EVI and December 31, 1997 for Old Telex,
respectively; Unaudited Pro Forma Condensed Balance Sheet as of
November 30, 1997 and December 31, 1997 for Old Telex, respectively;
and Notes to the Unaudited Pro Forma Condensed Financial Statements.
(c) The Exhibit Index and required Exhibits are included following the
Consolidated Financial Statements. The Company will furnish to any
security holder, upon written request, any exhibit listed in the
accompanying Exhibit Index upon payment by such security holder of the
Company's reasonable expenses in furnishing any such exhibit.
(d) The Index to Consolidated Financial Statements is included following
the signature page of this report.
13
<PAGE> 15
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT:
The Company has not sent to its security holders an annual report
covering the fiscal year ended February 28, 1998 nor any proxy material relating
to any annual or other meeting of security holders. The indentures governing the
EVI Notes and the Telex Notes require the Company to provide to the holders of
such notes with such annual reports and such information, documents and other
reports as are specified in Sections 13 and 15(d) of the Securities Exchange Act
of 1934, as amended."
14
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K/A
to be signed on its behalf by the undersigned, thereunto duly authorized, as of
the 19th day of June 1998.
TELEX COMMUNICATIONS, INC.
By: /s/ John L. Hale
---------------------------------
John L. Hale, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K/A has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ John L. Hale President, Chief Executive June 19, 1998
- -------------------- Officer and Chairman of
John L. Hale the Board of Directors (principal
executive officer)
/s/ John T. Hislop Vice President, Chief Financial June 19, 1998
- ------------------- Officer, Treasurer and
John T. Hislop Assistant Secretary (principal
financial and accounting officer)
*
- ------------------- Director June 19, 1998
Jeffrey J. Rosen
*
- ------------------- Director June 19, 1998
Edgar S. Woolard, Jr.
*
- ------------------- Director June 19, 1998
Evan M. Marks
15
<PAGE> 17
*
- ------------------- Director June 19, 1998
Christopher P. Forester
*
- ------------------- Director June 19, 1998
Alfred C. Eckert III
*
- -------------------- Director June 19, 1998
Keith W. Abell
*
- --------------------- Director June 19, 1998
Christine K. Vanden Beukel
By/s/ John T. Hislop
-------------------
Name: John T. Hislop
Title: Attorney-in-Fact
16
<PAGE> 18
TELEX COMMUNICATIONS, INC.
INDEX OF FINANCIAL
STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
CONSOLIDATED FINANCIAL STATEMENTS (NEW BASIS OF ACCOUNTING)
Page
Report of Independent Public Accountants .................................. 18
Consolidated Balance Sheets as of February 28, 1998 and 1997 .............. 19
Consolidated Statements of Operations for the year ended
February 28, 1998 and for the period from February 11, 1997
through February 28, 1997 .............................................. 20
Consolidated Statements of Shareholder's Equity (Deficit)
for the year ended February 28, 1998 and for the period
from February 11, 1997 through February 28, 1997 ....................... 21
Consolidated Statements of Cash Flows for the year ended
February 28, 1998 and for the period from February 11, 1997
through February 28, 1997 .............................................. 22
Notes to Consolidated Financial Statements ................................ 23
CONSOLIDATED FINANCIAL STATEMENTS
(PREDECESSOR BASIS OF ACCOUNTING)
Report of Independent Public Accountants .................................. 44
Report of Independent Accountants ......................................... 45
Consolidated Statements of Income and Retained Earnings
for the period from March 1, 1996 through February 10, 1997
and for the year ended February 29, 1996 ............................... 46
Consolidated Statements of Cash Flows for the period from
March 1, 1996 through February 10, 1997 and for the year
ended February 29, 1996. ............................................... 47
Notes to Consolidated Financial Statements ................................ 48
17
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Telex Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Telex
Communications, Inc. (a Delaware corporation formerly known as EV International,
Inc.) and subsidiaries as of February 28, 1998 and 1997, and the related
consolidated statements of operations, shareholder's equity (deficit), and cash
flows for the year ended February 28, 1998 and for the period from February 11,
1997 through February 28, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Telex Communications, Inc. and
subsidiaries as of February 28, 1998 and 1997 and the results of their
operations and their cash flows for the year ended February 28, 1998 and for the
period from February 11, 1997 through February 28, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
May 26, 1998
18
<PAGE> 20
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................. $ 5,163 $ 7,044
Accounts receivable, net of allowance for doubtful accounts
(1998--$2,876; 1997--$2,203) ......................... 59,106 42,856
Inventories ............................................... 81,945 51,141
Other current assets ...................................... 15,511 7,926
--------- ---------
Total current assets ................................. 161,725 108,967
Property, plant and equipment, net ............................. 50,942 31,411
Deferred financing costs and other, net ........................ 12,186 7,224
Intangible assets, net ......................................... 78,568 60,513
--------- ---------
$ 303,421 $ 208,115
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Revolving line of credit .................................. $ 12,339 $ --
Current maturities of long-term debt ...................... 10,125 1,000
Accounts payable .......................................... 21,039 15,250
Accrued wages and benefits ................................ 11,155 6,726
Accrued interest .......................................... 10,828 625
Other accrued liabilities ................................. 20,956 6,831
Income taxes .............................................. 4,062 997
--------- ---------
Total current liabilities ............................ 90,504 31,429
Long-term debt ................................................. 329,875 109,000
Other long-term liabilities .................................... 6,051 9,294
--------- ---------
Total liabilities ......................................... 426,430 149,723
--------- ---------
Commitments and contingencies (Note 12)
Shareholder's equity (deficit):
Common stock, $.01 par value, 1,000 shares authorized,
110 shares issued and outstanding .................... -- --
Capital in excess of par .................................. 3,009 57,600
Cumulative translation adjustment ......................... 1,506 (49)
Retained earnings (accumulated deficit) ................... (127,524) 841
--------- ---------
Total shareholder's equity (deficit) ................. (123,009) 58,392
--------- ---------
$ 303,421 $ 208,115
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
19
<PAGE> 21
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FEBRUARY 11, 1997
YEAR ENDED THROUGH
FEBRUARY 28, 1998 FEBRUARY 28, 1997
----------------- -----------------
<S> <C> <C>
Net sales ...................................................... $ 315,544 $ 14,916
Cost of sales .................................................. 195,776 9,254
--------- ---------
Gross profit .......................................... 119,768 5,662
--------- ---------
Operating expenses:
Engineering ........................................... 16,810 471
Selling, general and administrative ................... 78,251 2,755
Restructuring charges ................................. 6,222 --
Corporate charges ..................................... 2,123 37
Special charges ....................................... 2,231 --
Amortization of goodwill and other intangibles ........ 3,128 54
--------- ---------
108,765 3,317
--------- ---------
Operating profit ............................................... 11,003 2,345
Interest expense ............................................... 39,535 843
Recapitalization expense ....................................... 6,710 --
Other (income) expense ......................................... (84) 10
--------- ---------
Income (loss) before income taxes and extraordinary
item ...................................................... (35,158) 1,492
Provision (benefit) for income taxes ........................... (1,371) 651
--------- ---------
Income (loss) before extraordinary item ........................ (33,787) 841
Extraordinary loss from early retirement of debt ............... 20,579 --
--------- ---------
Net income (loss) ............................................. $ (54,366) $ 841
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
20
<PAGE> 22
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(In thousands, except share data)
<TABLE>
<CAPTION>
Retained
Common Stock Capital in Cumulative Earnings Shareholder's
---------------- Excess of Translation (Accumulated Equity
Shares Amount Par Adjustment Deficit) (Deficit)
------ ------ ---------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at February 10, 1997 ................. -- $ -- $ -- $ -- $ -- $ --
Initial capitalization .................. 110 -- 57,600 -- -- 57,600
Cumulative translation
adjustment ............................. -- -- (49) -- (49)
Net income .............................. -- -- -- -- 841 841
-------- ------- --------- --------- --------- ---------
Balance at February 28, 1997 ................. 110 -- 57,600 (49) 841 58,392
Equity from merger (Note 2) ............. -- -- 20,001 (27) (13,156) 6,818
Equity contribution ..................... -- -- 108,353 -- -- 108,353
Change in terms of rollover
options ................................ -- -- 7,410 -- (309) 7,101
Repurchase of common stock
and outstanding options ................ -- -- (193,364) -- (60,534) (253,898)
Vesting of new options .................. -- -- 3,009 -- -- 3,009
Cumulative translation
adjustment ............................. -- -- -- 1,582 -- 1,582
Net loss ................................ -- -- -- -- (54,366) (54,366)
-------- ------- --------- --------- --------- ---------
Balance at February 28, 1998 ................. 110 $ -- $ 3,009 $ 1,506 $(127,524) $(123,009)
======== ======== ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
21
<PAGE> 23
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the period
from February 11
Year Ended Through
February 28, February 28,
1998 1997
-------------- ----------------
<S> <C> <C>
Operating activities:
Net income (loss) ........................................... $ (54,366) $ 841
Adjustments to reconcile net income (loss) to cash flows from
operations:
Depreciation ............................................ 8,223 331
Amortization of intangibles and deferred financing costs 4,711 234
Provision for bad debts ................................ 891 --
Write-off of deferred financing costs .................. 4,737 --
Recapitalization costs incurred ........................ 6,710 --
Restructuring and special charges ...................... 8,453 --
Extraordinary loss on early retirement of debt ......... 20,579 --
Stock option compensation expense ...................... 10,419 --
Deferred income taxes .................................. 6,332 --
Change in operating assets and liabilities:
Income taxes ...................................... (12,169) 691
Accounts receivable ............................... 9,781 (4,846)
Inventories ....................................... (6,851) 1,855
Other current assets .............................. 1,008 94
Accounts payable and accrued liabilities .......... 2,032 537
Other non-current liabilities ..................... (1,681) (99)
--------- ---------
Net cash provided by (used in) operating activities .... 8,809 (362)
--------- ---------
Investing activities:
Cash paid for acquisition, net of cash acquired ............. -- (154,615)
Additions to property, plant and equipment .................. (8,878) (67)
Additions to equipment leased to customers .................. (372) --
--------- ---------
Net cash used in investing activities .................. (9,250) (154,682)
--------- ---------
Financing activities:
Proceeds from issuance of long-term debt .................... 340,000 110,000
Borrowings under revolving line of credit, net .............. 12,339 --
Repurchase of long-term debt and payment of fees ............ (225,093) --
Proceeds from equity contribution ........................... 108,353 57,600
Proceeds from merger with Old Telex ......................... 34,753 --
Repurchase of common stock and outstanding options .......... (253,898) --
Payments for deferred financing costs ....................... (12,312) (5,595)
Recapitalization costs incurred ............................. (6,710) --
Other ....................................................... (309) --
--------- ---------
Net cash provided by (used in) financing activities .... (2,877) 162,005
--------- ---------
Effect of exchange rate changes on cash and cash equivalents ..... 1,437 83
--------- ---------
Cash and cash equivalents:
Net increase (decrease) ..................................... (1,881) 7,044
Beginning of period ......................................... 7,044 --
--------- ---------
End of period ............................................... $ 5,163 $ 7,044
========= =========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest ............................................... $ 26,891 $ --
========= =========
Income taxes, net ...................................... $ 868 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE> 24
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Telex Communications, Inc., formerly known as EV International, Inc. ("Telex"
or the "Company"), a Delaware corporation, is a wholly-owned subsidiary of Telex
Communications Group, Inc. ("Holdings"). The Company, formed as a result of the
February 2, 1998 merger of Old Telex and Old EVI, is a leader in the design,
manufacture and marketing of sophisticated audio, wireless and multimedia
communications equipment to commercial, professional and industrial customers.
The Company provides high value-added communications products designed to meet
the specific needs of customers in commercial, professional and industrial
markets, and does not participate in the competitive retail consumer electronics
market. The Company offers a comprehensive range of products worldwide for
professional audio systems as well as for multimedia and other communications
product markets, including wired and wireless microphones, wired and wireless
intercom systems, mixing consoles, signal processors, amplifiers, loudspeaker
systems, headphones and headsets, tape duplication products, talking book
players, LCD projectors, wireless LAN and PCS antennas, hearing aids and
wireless assistive listening devices. Its products are used in airports,
theaters, sports arenas, concert halls, cinemas, stadiums, convention centers,
television and radio broadcast studios, houses of worship and other venues where
music or speech is amplified or transmitted, and by professional entertainers,
television and radio on-air talent, presenters, airline pilots and the hearing
impaired in order to facilitate speech or communications.
PRINCIPLES OF CONSOLIDATION
The Company's financial statements are prepared on a consolidated basis in
accordance with generally accepted accounting principles. All significant
intercompany balances and transactions have been eliminated in the accompanying
consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Ultimate results
could differ from those estimates.
CASH AND CASH EQUIVALENTS
All temporary investments with an original 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.
23
<PAGE> 25
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and include amounts for materials, labor and overhead.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost, net of accumulated
depreciation. The cost of property, plant and equipment retired or otherwise
disposed of, and the accumulated depreciation thereon, are eliminated from the
asset and related accumulated depreciation accounts, and any resulting gain or
loss is reflected in operations. Depreciation of property, plant and equipment
is computed principally by the straight-line method over the estimated useful
lives of the assets as follows:
Buildings and improvements 5 to 31 years
Machinery and equipment 1.5 to 12 years
Beginning in Fiscal 1998, the Company capitalized certain software
implementation costs. Prior to Fiscal 1998, such costs were not significant.
Direct internal and all external implementation costs and purchased software
have been capitalized and depreciated using the straight-line method over the
estimated useful lives, ranging from two to five years. As of February 28, 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.
DEFERRED FINANCING COSTS
Deferred financing costs represent costs incurred by Old EVI and Old Telex to
issue the EVI Notes and the Telex Notes (together, the Senior Subordinated
Notes) and to secure the Senior Secured Credit Facility and are being amortized
over the terms of the related debt.
INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line basis over their estimated
useful lives, as follows:
Patents and engineering drawings 5-10 years
Dealer and distributor lists 15 years
Goodwill 40 years
Other intangibles 3-5 years
LONG-LIVED ASSETS
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.
24
<PAGE> 26
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.
WARRANTY COSTS
The Company warrants certain of its products for workmanship and performance
for periods of generally up to one year. The accrual for warranty costs is based
on expected average repair costs and return rates developed by the Company using
historical data.
PRODUCT DEVELOPMENT COSTS
Engineering costs associated with the development of new products and changes
to existing products are charged to operations as incurred ($16.8 million for
the year ended February 28, 1998 and $0.5 million for the period from February
11, 1997, through February 28, 1997).
ADVERTISING EXPENSES
Advertising costs are expensed when incurred. Advertising costs for the year
ended February 28, 1998 and the period from February 11, 1997 through February
28, 1997 were $7.9 million and $0.2 million, respectively.
INCOME TAXES
The Company accounts for income taxes utilizing the liability method.
Deferred income taxes are primarily recorded to reflect the tax consequences of
differences between the tax and the financial reporting bases of assets and
liabilities. The Company's tax provision is calculated on a separate company
basis, and the Company's taxable income is included in the consolidated federal
income tax return of Holdings.
FOREIGN CURRENCY
Foreign subsidiaries' income statement accounts are translated at the average
exchange rates in effect during the period while assets and liabilities are
translated at the rates of exchange at the balance sheet date. The resulting
balance sheet translation adjustments are charged or credited directly to
shareholder's equity. Foreign exchange transaction gains and losses realized
during the year ended February 28, 1998 and the period from February 11, 1997
through February 28, 1997, and those attributable to exchange rate movements on
intercompany receivables and payables not deemed to be of a long-term investment
nature, are recorded in other (income) expense.
CONCENTRATIONS, RISKS AND UNCERTAINTIES
The Company is highly leveraged. The Company's high degree of leverage could
have important consequences, including but not limited to the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisition, general corporate purposes or other purposes may be
impaired in the future; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness, thereby reducing the funds available to the Company for other
purposes; and (iii) the Company's flexibility to adjust to changing market
conditions and ability to withstand competitive pressures could be limited, and
the Company may be more vulnerable to
25
<PAGE> 27
a downturn in general economic conditions or its business or may be unable to
carry out capital spending that is important to its growth strategy.
Technological innovation and leadership are among the important factors in
competing successfully in the Professional Sound and Entertainment market. The
Company's future results in this segment will depend, in part, upon its ability
to make timely and cost-effective enhancements and additions to its technology
and to introduce new products that meet customer demands, including products
utilizing digital technology, which are increasingly being introduced in the
professional audio industry. The success of current and new product offerings is
dependent on several factors, including proper identification of customer needs,
technological development, cost, timely completion and introduction,
differentiation from offerings of the Company's competitors and market
acceptance. Maintaining flexibility to respond to technological and market
dynamics may require substantial expenditures. There can be no assurance that
the Company will successfully identify and develop new products in a timely
manner, that products or technologies developed by others will not render the
Company's products obsolete or noncompetitive or that constraints in the
Company's financial resources will not adversely affect its ability to develop
and implement technological advances.
The Company has substantial assets located outside of the United States and a
substantial portion of the Company's sales and earnings are attributable to
operations conducted abroad and to export sales, predominantly in Western Europe
and Asia Pacific. The Company's international operations subject the Company to
certain risks, including increased exposure to currency exchange rate
fluctuations. The Company intends to hedge a portion of its foreign currency
exposure by incurring liabilities, including bank debt, denominated in the local
currencies of those countries where its subsidiaries are located and plans to
develop systems to manage and control its currency risk exposure. The Company's
international operations also subject it to certain other risks, including
adverse political or economic developments in the foreign countries in which it
conducts business, foreign governmental regulation, dividend restrictions,
tariffs and potential adverse tax consequences, including payment of taxes in
jurisdictions that have higher tax rates than does the United States.
The Company offers a range of audio products to a diverse customer base
throughout the world. Terms typically require payment within a short period of
time, however, the Company will offer extended payment terms to certain
qualified customers. As of February 28, 1998, the Company believes it has no
significant customer or geographic concentration of accounts receivable that
could expose the Company to adverse, near-term severe financial impacts.
RECLASSIFICATIONS
Certain prior-period amounts have been reclassified to conform to the year
ended February 28, 1998 presentation. These reclassifications had no impact on
the previously reported operating income, net income or shareholder's equity as
previously reported.
26
<PAGE> 28
2. TRANSACTIONS
ACQUISITION
On February 10, 1997 (the "Acquisition Closing Date"), pursuant to a purchase
agreement dated December 12, 1996 (the "Purchase Agreement") an acquisition
subsidiary wholly owned by GSCP and certain affiliated investors acquired from
Mark IV and one of its subsidiaries all of the issued and outstanding capital
stock of Gulton Industries, Inc. ("Gulton"), the former parent of Old EVI, and
each of its subsidiaries for an initial cash purchase price of $151.5 million,
plus $4.9 million in estimated adjustments paid on the closing date, which
aggregate amount was subject to further post-closing adjustments as described
herein. The acquisition subsidiary subsequently merged with and into the parent
of Old EVI, and the parent then merged with and into Old EVI, with Old EVI
ultimately surviving (the "Acquisition"). Prior to the Acquisition Closing Date,
(i) EVI Audio LLC, a subsidiary wholly owned by GSCP and certain affiliated
investors, purchased all the issued and outstanding shares of common stock and
Pay-in-Kind Preferred Stock of EV Holdings for an aggregate amount of $57.6
million and (ii) EV Holdings, a Delaware corporation organized by GSCP to hold
all the issued and outstanding stock of the EVI, contributed $57.6 million to
the Company.
Financing for the Acquisition, and the related fees and expenses, consisted
of (i) $57.6 million of equity capital provided by GSCP and certain affiliated
investors, (ii) a $60.0 million senior credit facility (consisting of a term
loan and a revolving credit facility), and (iii) a $75.0 million senior
subordinated credit facility issued as interim financing by Chase Securities
Inc. and Smith Barney Inc., the initial purchasers of the EVI Existing Notes (as
defined herein), and certain other lenders. Of these amounts, $156.4 million was
used for the purchase price for the Acquisition and $10.4 million was used for
financing and transaction fees and expenses. Under the Purchase Agreement, the
purchase price was subject to adjustment on the basis of (i) the audited working
capital and audited cash flow of the Company as at and for the 10-month period
ended December 31, 1996 and (ii) the net intercompany transfers of cash between
Mark IV and its affiliates (other than the Company and its subsidiaries), on the
one hand, and the Company and its subsidiaries, on the other hand, during the
period between December 31, 1996 and the Acquisition Closing Date. Based on
these provisions Mark IV has requested a purchase price increase of $405,000,
which amount the Company is currently disputing pursuant to the applicable
provisions of the Purchase Agreement.
On March 24, 1997, Old EVI issued 11% Senior Subordinated Notes due 2007 in
an aggregate principal amount of $100 million (the "EVI Existing Notes"), all of
which were subsequently exchanged in September, 1997 for a like principal amount
of new 11% Senior Subordinated Notes due 2007, Series A (together with the EVI
Existing Notes, the "EVI Notes"), in an offering registered under the Securities
Act of 1933, as amended (the "Securities Act"). The proceeds from the EVI Notes
were used to repay the $75.0 million of indebtedness under the interim financing
in its entirety and a portion of EVI's term loan. The foregoing transactions,
including the issuance of the EVI Notes, are referred to herein as the
"Acquisition Transactions." The Acquisition was accounted for using the purchase
method of accounting which established a new basis of accounting, pursuant to
which the purchase price was allocated among the acquired assets and liabilities
in accordance with estimates of fair market value on February 10, 1997 (i.e.,
the Acquisition Closing Date).
In connection with the Acquisition, Mark IV and the Company entered into a
transition services agreement pursuant to which Mark IV agreed to provide
certain services, including accounting, tax planning, foreign currency hedging,
cash management and administering certain pension plan assets pending their
transfer to the Company, for a period not to exceed twelve months following the
Acquisition Closing Date. In Fiscal 1998, the Company paid an aggregate of
approximately $41,000 in fees for services provided pursuant to such transition
services agreement, which services terminated on January 31, 1998. In addition,
Mark IV and the Company entered into sublease agreement with respect to certain
premises located in Austin,
27
<PAGE> 29
Texas and a non-exclusive, royalty-free license to
use certain names which incorporate the "Mark IV" name, including related
tooling and sales and marketing materials, and to sell products incorporating
such names for periods ranging from 18 to 36 months after the Acquisition
Closing Date.
RECAPITALIZATION
On May 6, 1997 (the "Recapitalization Closing Date"), Old Telex completed a
recapitalization (the "Recapitalization") pursuant to an Agreement (the
"Recapitalization Agreement") among Old Telex, Greenwich II, LLC ("G-II"), a
Delaware limited liability company formed by GSCP and certain other investors,
and GST Acquisition Corp. ("GST"), a Delaware corporation and a wholly owned
subsidiary of G-II. In connection with the Recapitalization, all of the shares
of common stock of Holdings ("Holdings Common Stock") and all options and
warrants to acquire Holdings Common Stock (other than certain shares of Holdings
Common Stock and certain options to acquire Holdings Common Stock owned by
certain members of management of Old Telex) were converted into the right to
receive an aggregate amount of cash (the "Recapitalization Consideration") equal
to approximately $253.9 million. In addition, in connection with the
Recapitalization Agreement, certain shares of Holdings Common Stock held by
management of Old Telex (such shares, the "Rollover Shares") and certain options
to acquire additional shares of Holdings Common Stock (the "Rollover Options"),
with an aggregate value of approximately $21.2 million (which represented
approximately 14% of the equity of Holdings on a non-diluted basis and
approximately 20% on a fully diluted basis) were retained by such managers. In
connection with the Recapitalization, Old Telex completed (i) a tender offer
(the "Tender Offer") to repurchase all of Old Telex's then outstanding 12%
Senior Notes due 2004, in aggregate principal amount of $100.0 million, for
$118.3 million (including premium and consent fees along with accrued interest),
and (ii) a solicitation of consents with respect to certain amendments to the
indenture pursuant to which such notes were issued. The Recapitalization, the
financing thereof (including the issuance by Old Telex of 10 1/2% Senior
Subordinated Notes due 2007 (the "Existing Telex Notes") to Chase Securities,
Inc., Morgan Stanley & Co. Incorporated and Smith Barney, Inc.), the Tender
Offer and the payment of the related fees and expenses are herein referred to as
the "Recapitalization Transaction." See "The Recapitalization" and "Interests of
Certain Persons."
The Recapitalization was financed by (i) $108.4 million of new equity
provided by GSCP and certain other co-investors, (ii) the Rollover Shares and
Rollover Options valued at $21.2 million, (iii) a $140.0 million senior secured
credit facility (the "Senior Secured Credit Facility") with The Chase Manhattan
Bank, Morgan Stanley Senior Funding, Inc. and certain other lenders, consisting
of (a) a $115.0 million term loan facility (the "Term Loan Facility"), and (b) a
$25.0 million revolving credit facility (the "Revolving Credit Facility"), (iv)
$125.0 million of Existing Telex Notes and (v) $36.5 million of available cash
of Old Telex. Of the $108.4 million of new equity contributed by GSCP and
certain other co-investors, $25.2 million consisted of proceeds from the
issuance of Deferred Pay Subordinated Debentures due 2009 (the "GST Subordinated
Debentures") contributed by GST to Old Telex in connection with the
Recapitalization.
Pursuant to the Recapitalization, the historical basis of all assets and
liabilities was retained for financial reporting purposes, and the repurchases
of existing Holdings Common Stock and issuance of new Holdings Common Stock have
been accounted for as equity transactions.
In October 1997, Old Telex completed an exchange offer of $125 million
aggregate principal amount of new 10-1/2% Senior Subordinated Notes Due 2007,
Series A (the "New Telex Notes"), which were registered under the Securities
Act, for a like principal amount of the Existing Telex Notes (together with the
New Telex Notes, the "Telex Notes"). All of the Existing Telex Notes were
tendered and accepted for exchange.
28
<PAGE> 30
THE MERGERS
On February 2, 1998, Old EVI merged with Old Telex, a wholly owned
subsidiary of Holdings and an affiliate of GSCP, with Old EVI surviving. In the
Merger, Old EVI changed its corporate name to "Telex Communications, Inc." The
Merger was effected pursuant to an agreement and plan of merger, dated January
29, 1998 under which Greenwich I LLC ("G-I"), a subsidiary wholly owned by GSCP
and certain affiliated investors, exchanged all of the issued and outstanding
common and preferred stock of EVI Holdings, the former parent of Old EVI, for
1,397,400 shares of Holdings' Common Stock, and 13,000 shares of Holdings'
Series A Pay-in-Kind Preferred Stock, respectively, and EVI Holdings was merged
with and into Holdings, with Holdings continuing as the surviving corporation.
The Mergers have been accounted for essentially as a pooling of interests from
May 6, 1997, the date on which Old EVI and Old Telex came under common control,
and the financial statements of the Company for Fiscal 1998 include the results
of Old Telex from May 6, 1997. Immediately prior to the Mergers, approximately
$12.7 million of indebtedness outstanding under Old EVI's senior credit facility
was paid in full and Old EVI's senior credit facility was terminated. Such
indebtedness, together with $0.4 million of certain fees and expenses associated
with the Mergers, was repaid by utilizing free cash at closing from Old EVI of
$3.8 million and by borrowings under the Company's Revolving Credit Facility of
approximately $9.3 million. The EVI Notes remain outstanding following the
Mergers.
PRO FORMA RESULTS OF TRANSACTIONS (UNAUDITED)
Pro forma statements of operations are presented below for the years ended
February 28, 1998 and 1997, as if the Acquisition of Old EVI, the offering by
Old EVI of the EVI Notes, the Recapitalization of Old Telex (including the
offering by Old Telex of the Telex Notes) and the Merger of Old Telex with and
into EVI had occurred at the beginning of Fiscal 1997. The pro forma results are
for illustrative purposes only and do not purport to be indicative of the actual
results which occurred, nor are they indicative of future results of operations
(in thousands).
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Full Year Full Year
Ended Ended
February 28, February 28,
1998 1997
As Adjusted As Adjusted
----------- -----------
<S> <C> <C>
Net Sales $ 345,211 $ 362,927
Operating Income(a) 24,082 43,416
Net Income (loss)(a) (15,491) 3,911
</TABLE>
- ----------------
(a) Included in Fiscal 1998 operating income and net income (loss), as
presented, are non-cash compensation charges for stock options associated
with the Recapitalization, non-recurring charges for management cash
bonus, restructuring charges and a non-cash impairment loss described in
Note 3 below.
3. RESTRUCTURING AND SPECIAL CHARGES
RESTRUCTURING CHARGES.
In the fourth quarter of Fiscal 1998, the Company recorded a pre-tax
restructuring charge of $6.2 million attributable to the Merger-related
consolidation of certain product lines, and the consolidation of certain of its
worldwide manufacturing, engineering, distribution, marketing, service and
administrative operations
29
<PAGE> 31
to reduce costs, to better utilize the available manufacturing and operating
capacity and to enhance competitiveness. The consolidation will include the
closure of some facilities and will also include the transfer of a portion of
the work from certain facilities to the Company's remaining locations. The
Company expects to complete substantially all of the restructuring of the
operations by early Fiscal 2000, and expects to complete the sale and disposal
of the owned facilities and equipment related to those operations by late Fiscal
2000.
Included in the restructuring charges are $2.5 million associated with
severance pay for terminated employees, most of whom work in the facilities to
be closed or from which work is to be transferred to other locations, $2.8
million associated with reserves established for the write-down to fair market
value of certain assets (primarily inventories related to the products to be
discontinued, and land, building and equipment to be sold, made obsolete or
redundant), and $0.9 million associated with other costs. As of February 28,
1998, the Company has not incurred any cash related restructuring costs.
LONG-LIVED ASSET IMPAIRMENT
For the year ended February 28, 1998, the Company recognized an impairment
loss of $2.2 million against operating income for certain intangible assets,
including dealer and distributor lists, patents and engineering drawings and
goodwill as a result of changed business conditions for certain product lines
within the Company's two business segments. Considerable management judgment is
necessary to estimate future cash flows. Accordingly, it is reasonably possible
that the estimated discounted future cash flows may change in the near term
resulting in the need to write these or other long-lived assets down further.
4. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
February 28,
--------------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Raw materials $ 37,653 $ 19,830
Work in progress 10,314 7,104
Finished goods 33,978 24,207
--------- ---------
$ 81,945 $ 51,141
========= =========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
February 28,
-----------------------------------
1998 1997
------- ------
<S> <C> <C>
Land $ 2,888 $ 3,583
Buildings and improvements 23,409 4,217
Machinery and equipment 85,852 23,867
Construction in progress 3,053 --
------- ------
115,202 31,667
Less accumulated depreciation 64,260 256
------- ------
$ 50,942 $ 31,411
======= ======
</TABLE>
30
<PAGE> 32
6. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28,
---------------------
1998 1997
------- -------
<S> <C> <C>
Goodwill ....................................................... $83,052 $60,588
Dealer and distributor lists ................................... 5,626 --
Patents and engineering drawings ............................... 5,762 --
Other intangibles .............................................. 2,805 --
------- -------
97,245 60,588
Less accumulated amortization .................................. 18,677 75
------- -------
$78,568 $60,513
======= =======
</TABLE>
7. DEBT
REVOLVING LINES OF CREDIT
In May 1997, the Company entered into the Revolving Credit Facility, as part
of the Senior Secured Credit Facility. Under this Facility, the Company may make
borrowings of up to $25.0 million, subject to a borrowing base calculation.
Interest on outstanding borrowings is calculated, at the Company's option, using
the bank's prime rate or LIBOR plus specified margins. The revolving line of
credit expires November 30, 2002. The facility requires an annual commitment fee
of 0.5% of the unused portion of the commitment. Borrowings are secured by
accounts receivable and inventory. The Company had letters of credit outstanding
in the amount of $7.6 million at February 28, 1998 reducing the availability
under the facility.
Certain foreign subsidiaries of the Company have entered into agreements with
banks to provide for local working capital needs. As of February 28, 1998 and
1997, the total aggregate availability of these arrangements, including letter
of credit issuance, was $4.7 million and $4.4 million, respectively. The rates
of interest in effect on these facilities as of February 28, 1998, ranged from
1.9% to 9.3%, and are generally subject to change based upon prevailing local
prime rates. In certain instances, the facilities are secured by a lien on
foreign real property, leaseholds or accounts receivables and inventory or
guaranteed by another subsidiary of the Company.
LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Senior Subordinated Notes, due May 1, 2007, bearing interest of 10 1/2%
payable semiannually, unsecured .................................. $125,000 $ --
Senior Subordinated Notes, due March 15, 2007, bearing interest of 11%
payable semiannually, unsecured .................................. 100,000 --
</TABLE>
31
<PAGE> 33
<TABLE>
<CAPTION>
FEBRUARY 28,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Senior Secured Credit Facility (Term Loan Facility)
Term Loan A, due in quarterly installments through
November 30, 2002, bearing interest at LIBOR plus 2.5% (8.19%
at February 28, 1998) payable semiannually, secured by
substantially all assets of the Company ..................... 50,000 --
Term Loan B, due in quarterly installments through
November 30, 2004, bearing interest at LIBOR plus 3.0% (8.69%
at February 28, 1998) payable semiannually, secured by
substantially all assets of the Company ..................... 65,000 --
Senior Subordinated Credit Facility (repaid during year) .............. -- 75,000
Term Loan (repaid during year) ........................................ -- 35,000
-------- ---------
340,000 110,000
Less current portion ............................................ 10,125 1,000
-------- ---------
$329,875 $109,000
======== =========
</TABLE>
The Senior Subordinated Notes and the Senior Secured Credit Facility
contain certain financial and non-financial restrictive covenants, including
limitations on: additional indebtedness, payment of dividends, certain
investments, sale of assets and consolidations, mergers, transfers of all or
substantially all of the Company's assets and capital expenditures, subject to
certain qualifications and exceptions. The Company was in compliance with or had
received waivers for all covenants related to the Senior Subordinated Notes and
Senior Secured Credit Facility as of February 28, 1998.
Aggregate annual maturities of long-term debt are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
- -----------------------
<S> <C>
1999(a) ....................................................... $ 10,125
2000 ........................................................... 8,500
2001 ........................................................... 9,250
2002 ........................................................... 12,500
2003 ........................................................... 18,375
Thereafter ..................................................... 281,250
-------
$340,000
=======
</TABLE>
(a) As of February 28, 1998, $10.1 million of the Company's Term Loan Facility
is payable in the next twelve months. Of such amount, $1.9 million was due
on February 28, 1998 and was payable, and was paid on March 2, 1998.
32
<PAGE> 34
8. INCOME TAXES
Significant components of the provision (benefit) for income taxes
attributable to income (loss) including the extraordinary item are as follows
(in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 11, 1997
YEAR ENDED THROUGH
FEBRUARY 28, 1998 FEBRUARY 28, 1997
----------------- -----------------
Current:
<S> <C> <C>
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . $(7,209) $277
State . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . (494) 374
-------- ----
(7,703) 651
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,332 --
-------- ----
$(1,371) $651
======= ====
</TABLE>
A reconciliation of the income taxes computed at the federal statutory rate
to the Company's income tax provision (benefit) including the extraordinary loss
is as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM FEBRUARY 11,
YEAR ENDED 1997 THROUGH
FEBRUARY 28, 1998 FEBRUARY 28, 1997
----------------- ----------------------
<S> <C> <C>
Federal provision (benefit) at statutory rate . . . . . . . . . $(18,950) $502
State provision (benefit), net of federal tax . . . . . . . . . (1,843) 38
Amortization and write-off of goodwill . . . . . . . . . . . . . 1,430 29
Change in deferred tax asset valuation allowance
and other income tax accruals . . . . . . . . . . . . . . . 16,533 --
Recapitalization costs . . . . . . . . . . . . . . . . . . . . . 2,522 --
Foreign tax rate differences . . . . . . . . . . . . . . . . . . (814) 82
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (249) --
-------- ----
$ (1,371) $651
======== ====
</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):
33
<PAGE> 35
<TABLE>
<CAPTION>
FEBRUARY 28,
---------------------
1998 1997
------- -------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation . . . . . . . . . . . . . . . . . . $ 7,440 $ 6,624
Unremitted foreign earnings . . . . . . . . . . . . . . . . . -- 1,650
------- -------
Total deferred tax liabilities . . . . . . . . . . . . . . . 7,440 8,274
------- -------
Deferred tax assets:
Compensation related . . . . . . . . . . . . . . . . . . . . . 3,942 --
Book over tax amortization . . . . . . . . . . . . . . . . . . 3,666 --
Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,123 --
Inventory reserves . . . . . . . . . . . . . . . . . . . . . . 2,473 1,140
Accounts receivable allowance . . . . . . . . . . . . . . . . 1,028 118
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 191 --
Vacation accrual . . . . . . . . . . . . . . . . . . . . . . . 1,125 --
Warranty reserves . . . . . . . . . . . . . . . . . . . . . . 1,055 1,290
Restructuring reserves . . . . . . . . . . . . . . . . . . . . 2,931 --
Tax loss carryforward . . . . . . . . . . . . . . . . . . . . 4,475 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,302 614
------- -------
Total deferred tax assets . . . . . . . . . . . . . . . . . . 24,311 3,162
Valuation allowance for deferred tax assets . . . . . . . . . 16,533 --
------- -------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . 7,778 3,162
------- -------
Net deferred tax assets (liabilities) . . . . . . . . . . . . $ 338 $(5,112)
======= =======
</TABLE>
The Company has established a net deferred tax valuation allowance of $16.5
million, charged to the income tax provision for the year ended February 28,
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.
In addition, the Company has not recognized any income tax benefit related to
the excess of the market price over the exercise price of the exercised options
of $27.6 million. The income tax benefit once realized will be credited to
shareholder's equity.
Prior to the merger of Old Telex and Old EVI, Old Telex received a settlement
offer from the IRS with respect to the amortization of its intangibles for the
taxable years 1990, 1991 and 1992. Old Telex reviewed the IRS settlement offer
and determined not to accept it. Any adjustment imposed by the IRS relating to
the intangible assets would not likely result in a material adjustment to the
Company's operations, because it would be recorded principally as an adjustment
to goodwill.
A deferred tax liability attributable to unremitted earnings existing at the
Acquisition Closing Date was established at the acquisition date. Subsequent to
the Acquisition, accumulated and current unremitted earnings of the Company's
foreign subsidiaries are deemed to be reinvested in each country and are not
expected to be remitted.
34
<PAGE> 36
9. RELATED PARTY TRANSACTIONS
Holdings' principal asset is its investment in the Company and, therefore,
Holdings is dependent on the operations of the Company for its cash flow needs.
However, there are no agreements between the Company and Holdings requiring the
transfer of funds from the Company to Holdings. The Senior Subordinated Notes
and the provisions of the indenture agreements pursuant to which the Senior
Subordinated Notes were issued restrict Telex's payment of dividends, loans or
advances to its affiliates.
The Company pays fees to Holdings' majority shareholder for management
services in the amount of $1.7 million annually. For the year ended February 28,
1998, the Company recorded a charge to operations of $2.1 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 and amounts
recorded are included within other long-term liabilities on the consolidated
balance sheets.
10. RETIREMENT PLANS
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>
PERIOD FROM
FEBRUARY 11,
YEAR ENDED 1997 THROUGH
FEBRUARY 28, FEBRUARY 28,
1998 1997
----------- ------------
<S> <C> <C>
Service cost for benefits earned during the period ............. $ 1,452 $16
Interest cost on projected benefit obligation .................. 1,659 --
Actual return on plan assets ................................... (5,731) --
Net amortization and deferral .................................. 4,476 --
------- ---
Net pension cost ............................................... $ 1,856 $16
======= ===
</TABLE>
35
<PAGE> 37
The following table presents the funded status of the above plan as
recognized in the consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28,
-----------------
1998 1997
---- ----
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits ........................................... $20,616 $15
Nonvested benefits ........................................ 318 1
------- ---
Accumulated benefit obligation ................................. 20,934 16
Effect of projected pay increases .............................. 6,756 --
------- ---
Projected benefit obligation ................................... 27,690 16
Less plan assets at market value ............................... 22,609 --
------- ---
Projected benefit obligation in excess of plan assets .......... 5,081 16
Less unrecognized net loss ..................................... 1,060 --
Less unrecognized net transition obligation .................... 122 --
Less unrecognized prior service cost ........................... 8 --
Additional minimum liability ................................... 80 --
------- ---
Pension liability accrued ...................................... $ 3,971 $16
======= ===
</TABLE>
Assumptions used in the accounting for the defined benefit plan were as
follows:
<TABLE>
<CAPTION>
FEBRUARY 28,
----------------------
1998 1997
---- ----
<S> <C> <C>
Weighted average discount rate . . . . . . . . . . . . . . . . . 7.0% 7.5%
Rate of increase in future compensation levels . . . . . . . . . 4.5% 0.0%
Expected long-term rate of return on plan assets . . . . . . . . 9.0% N/A
</TABLE>
Plan assets consist primarily of equity and debt securities and cash
equivalents.
As of the Acquisition Closing Date, the Company ceased withholding 401(k)
contributions from employees' payroll until the time the Company could establish
its own defined-contribution plan. Pursuant to the Purchase Agreement, the
assets of the Sellers' defined-contribution pension plan that relate to the
Company's employees will be transferred into the Company's plan, and, at such
time, employee payroll withholding for 401(k) contributions into the Company's
defined-contribution plan will continue. Accordingly, the Company has not
recognized any liability for these contributions since the date of the
Acquisition.
The Company's Japanese subsidiary also has a retirement and termination plan
(the "Retirement Plan"), which provides benefits to employees in Japan upon
their termination of employment. The benefits are based upon a multiple of the
employee's monthly salary, with the multiple determined based upon the
employee's years of service. The multiple paid to employees who retire or are
involuntarily terminated is greater than the multiple paid to those who
voluntarily terminate their services. The Retirement Plan is unfunded, and the
accompanying consolidated balance sheet includes a liability of approximately
$917 at February 28, 1998, which represents the actuarially determined estimated
present value of the Company's liability as of this date. In developing this
estimate, the actuary used appropriate discount and compensation growth rates
prevailing in Japan of 2.4% and 1.1%, respectively. For the year ended February
28, 1998 and the period from February 10, 1997 through February 28, 1997, the
Company charged $274 and $5, respectively, to expense for this plan.
36
<PAGE> 38
11. POSTRETIREMENT BENEFITS
The Company is required to provide health and life insurance benefits to
certain employees of its U.S. operations upon retirement. Contributions required
to be paid by the employees towards the cost of such plans are a flat dollar
amount per month in certain instances, or a range from 25% to 100% of the cost
of such plans in other instances.
Net postretirement benefit expense included the following components (in
thousands):
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 11,
1997
YEAR ENDED THROUGH
FEBRUARY 28, FEBRUARY 28,
1998 1997
------------ ------------
<S> <C> <C>
Service cost .................................. $ 21.5 $ 0.7
Interest cost ................................. 33.6 1.3
Actual return on plan assets .................. -- --
Net amortization and deferral ................. 2.1 --
------ -------
Net periodic postretirement benefit expense ... 57.2 $ 2.0
====== =======
Accumulated postretirement benefit
obligations:
Retirees ...................................... $ -- $ --
Fully eligible active plan participants ....... 124.1 126.0
Other active plan participants ................ 277.6 219.0
------ -------
401.7 345.0
Fair value of plan assets ..................... -- --
------ -------
Excess of accumulated postretirement benefit
obligations over plan assets ............. 508.5 345.0
Unrecognized prior service cost ............... -- --
Unrecognized net loss (gain) .................. 106.8 --
Unrecognized net transition obligation (asset) -- --
------ -------
Accrued postretirement benefit cost ........... $401.7 $(345.0)
====== =======
</TABLE>
The assumed health care cost trend rate used in measuring the benefit
obligation is 8% for the year ended February 28, 1998, declining at a rate of
1.5% per year to an ultimate rate of 5.0% in 2000. The weighted average discount
rate used in determining the benefit obligation at February 28, 1998, is 7.75%.
The Company does not provide any post-employment benefits which would require
accrual under Statement of Financial Accounting Standards No. 112.
12. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a party to various legal actions in the normal course of
business. The Company believes that it is not currently party to any litigation
which, if adversely determined, would have a material adverse effect on the
consolidated financial position or results of operations of the Company.
37
<PAGE> 39
ENVIRONMENTAL MATTERS
The Company and its operations are subject to extensive and changing U.S.
federal, state and local and foreign environmental laws and regulations,
including, but not limited to, laws and regulations that impose liability on
responsible parties to remediate, or contribute to the costs of remediating,
current or formerly owned or leased sites or other sites where solid or
hazardous wastes or substances were disposed of or released into the
environment. These remediation requirements may be imposed without regard to
fault or legality at the time of the disposal or release. The Company believes
that it currently conducts its operations, and in the past has operated its
business, in substantial compliance with applicable environmental laws and
regulations. From time to time, however, operations of the Company have
resulted, and may result in the future, in non-compliance or liability with
respect to such laws and regulations.
The Company (or, for certain sites, the Sellers, on behalf of the Company)
has undertaken or currently is undertaking remediation of contamination at
certain of its currently or formerly owned sites (some of which are unrelated to
the audio business) and the Company has agreed it is a de minimis responsible
party at a number of other such sites, which have been designated as Superfund
sites under U.S. environmental laws. The Company recently had Phase I
Environmental Site Assessments and Compliance Reviews conducted by a third-party
environmental consultant at all of its manufacturing sites and is aware of
environmental conditions at certain of such sites that require or may require
remediation or continued monitoring. In particular, the Company's site in
Buchanan, Michigan has been designated a Superfund site under U.S. environmental
laws. The Sellers have agreed to indemnify the Company fully for environmental
liabilities resulting from the Buchanan, Michigan Superfund site and certain of
the other sites at which the environmental consultant indicated monitoring or
remediation was necessary.
The Company's environmentally related expenditures for the year ended
February 28, 1998 and for the period from February 11, 1997, through February
28,1997, were not material. The Company does not believe that the costs to the
Company of environmental compliance under current laws and regulations will have
a material adverse effect on the financial position or results of operations of
the Company.
There can be no assurance that the Company's estimated environmental
expenditures, which the Company believes to be reasonable, will cover in full
the actual amounts of environmental obligations the Company does incur, that the
Sellers will pay in full the indemnified environmental liabilities when they are
incurred, that new or existing environmental laws will not affect the Company in
currently unforeseen ways or that present or future activities undertaken by the
Company will not result in additional environmentally related expenditures.
However, the Company does not believe that the costs to the Company of the
environmental compliance under current laws and regulations will have a material
adverse effect on the financial position or results of operations of the
Company.
EMPLOYMENT CONTRACTS
The Company has employment contracts with certain key executives that require
the Company to pay severance or salary continuance pay equal to amounts ranging
from nine to twelve months' salary in the event such executives are terminated
without cause.
LEASE COMMITMENTS
At February 28, 1998, the Company had various noncancellable operating leases
for manufacturing, distribution and office buildings, warehouse space and
equipment.
38
<PAGE> 40
Approximate future minimum rental commitments under all noncancelable
operating leases are as follows (in thousands):
YEAR ENDED FEBRUARY 28,
1999 ........................... $2,231
2000 ........................... 1,813
2001 ........................... 1,453
2002 ........................... 258
2003 ........................... 232
2004 and thereafter ............ 802
-----
Total minimum lease commitments $6,789
=====
13. SEGMENT INFORMATION
Subsequent to the Mergers, the Company reorganized what had been classified
as Old Telex's four strategic business units and Old EVI's four principal lines
of business into the following two business segments:
(i) Professional Sound and Entertainment, which includes Old EVI's three
principal lines of business within the overall professional audio
market: (1) Fixed Installation; (2) Professional Music Retail; and (3)
Concert/Recording/Broadcast and Old Telex's Broadcast Communications
Systems and Sound Reinforcement product groups (these businesses were
previously part of Old Telex's Professional Sound and Entertainment
Group); and
(ii) Multimedia/Communications, which includes all of Old Telex's
Multimedia/Audio Communications, RF/Communications, and Hearing
Instruments Groups, the Tape Duplication product group from Old Telex's
Professional Sound and Entertainment Group and Old EVI's Other
Applications line of business, consisting of handheld microphones and
earphones for field and aircraft communications, both military and
civilian, equipment for high-speed duplication of audio tapes, and
components marketed to original equipment manufacturers for
incorporation into their products.
The amounts in the tables below have been restated to coincide with the new
business segments. Individual product line results comprising each segment have
not been restated, and the Company has applied consistent allocation
methodologies to determine those results.
39
<PAGE> 41
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28, 1998
-----------------------------------------------
PROFESSIONAL
SOUND AND MULTIMEDIA/
ENTERTAINMENT COMMUNICATIONS CORPORATE
------------- -------------- ---------
<S> <C> <C> <C>
Net sales to unaffiliated customers:
North America ......................................... $125,149 $101,008 $ --
Europe ................................................ 51,961 -- --
Asia and other foreign ................................ 37,426 -- --
-------- -------- -------
Total net sales to customers ........................ $214,536 $101,008 $ --
======== ======== =======
Operating income (loss):
North America ......................................... $ 8,984 $ 5,544 $(4,791)
Europe ................................................ 1,042 -- --
Asia and other foreign ................................ 224 -- --
-------- -------- -------
Total operating income (loss) ......................... $ 10,250(a) $ 5,544(a) $(4,791)(a)
======== ======== =======
Depreciation and amortization:
North America ......................................... $ 4,093 $ 2,363 $ 3,387
Europe ................................................ 872 -- --
Asia and other foreign ................................ 636 -- --
-------- -------- -------
Total depreciation and amortization .......... $ 5,601 $ 2,363 $ 3,387
======== ======== =======
Capital expenditures:
North America ......................................... $ 4,131 $ 1,793 $ 2,566
Europe ................................................ 561 -- --
Asia and other foreign ................................ 199 -- --
-------- -------- -------
Total capital expenditures ................... $ 4,891 $ 1,793 $ 2,566
======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM FEBRUARY 11, 1997
THROUGH FEBRUARY 28, 1997
---------------------------------------------
PROFESSIONAL
SOUND AND MULTIMEDIA/
ENTERTAINMENT COMMUNICATIONS CORPORATE
------------- -------------- ---------
<S> <C> <C> <C>
Net sales to unaffiliated customers:
North America ......................................... $ 7,599 $796 $ --
Europe ................................................ 2,952 -- --
Asia and other foreign ................................ 3,569 -- --
------- ---- -----
Total net sales to customers ........................ $14,120 $796 $ --
======= ==== =====
Operating income (loss):
North America ......................................... $ 1,579 $120 $(100)
Europe ................................................ 375 -- --
Asia and other foreign ................................ 371 -- --
------- ---- -----
Total operating income (loss) ......................... $ 2,325 $120 $(100)
======= ==== =====
Depreciation and amortization:
North America ......................................... $ 205 $ 13 $ 10
Europe ................................................ 33 -- --
Asia and other foreign ................................ 70 -- --
------- ---- -----
Total depreciation and amortization .......... $ 308 $ 13 $ 10
======= ==== =====
Capital expenditures:
North America ......................................... $ 47 $ -- $ 10
Europe ................................................ 5 -- --
Asia and other foreign ................................ 5 -- --
------- ---- -----
Total capital expenditures ................... $ 57 $ -- $ 10
======= ==== =====
</TABLE>
<TABLE>
<CAPTION>
AS OF FEBRUARY 28, 1998 AS OF FEBRUARY 28, 1997
------------------------------------------ ----------------------------------------
PROFESSIONAL PROFESSIONAL
SOUND AND MULTIMEDIA/ SOUND AND MULTIMEDIA/
ENTERTAINMENT COMMUNICATIONS CORPORATE ENTERTAINMENT COMMUNICATIONS CORPORATE
------------- -------------- --------- ------------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Identifiable assets:
North America ................... $ 80,734 $47,989 $110,047 $ 47,758 $8,446 $82,205
Europe .......................... 39,491 -- -- 42,580 -- --
Asia and other foreign ........... 25,160 -- -- 27,126 -- --
-------- ------- -------- -------- ------ -------
Total identifiable assets.... $145,385 $47,989 $110,047 $117,464 $8,446 $82,205
======== ======= ======== ======== ====== =======
</TABLE>
(a) Included in operating income (loss) are restructuring Charges of
$5,431, $667, and $124 and special charges of $280, $1,951, and zero,
for Professional Sound and Entertainment, Multimedia/ Communications,
and Corporate, respectively.
The net sales to customers reflect the sales of the Company's operating units
in each geographic area to unaffiliated customers. Export sales from the United
States to unaffiliated customers were approximately $39,380 and $761 for the
year ended February 28, 1998 and for the period from February 11, 1997, through
February 28, 1997, respectively. Sales from the Company's subsidiaries in
Canada, Singapore, United Kingdom, Hong Kong, Germany, France, Switzerland,
Japan and Australia accounted for approximately 75%, and 50% of the total
international sales for the year ended February 28, 1998 and the period from
February 11, 1997 through February 28, 1997, 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.
40
<PAGE> 42
Corporate identifiable assets and capital expenditures relate principally to
the Company's investment in information systems and corporate facilities, as
well as cost in excess of net assets acquired included in intangible assets and
deferred financing costs.
14. EQUITY
STOCK SPLIT
On June 25, 1997, Holdings' board of directors approved a 20-for-1 stock
split of all Holdings' outstanding common stock. All common stock options have
been restated for the period presented to reflect the common stock split.
STOCK COMPENSATION PLANS
In Fiscal 1992, Holdings granted options to purchase up to 821,280 shares of
Holdings common stock at an exercise price of $0.0005 per share to the new
Chairman, President and Chief Executive Officer of the Company. Options
exercised during Fiscal 1998 were 14,000 and as of February 28, 1998, all such
options have been exercised.
In Fiscal 1993, Holdings and the Company adopted a non-qualified option plan,
the 1993 Stock Option Plan, which, as amended, authorized the issuance of
options to purchase shares of Holdings common stock, at exercise prices ranging
from $0.075 to $2.80 per share, to key employees; as of May 6, 1997, 242,000
options were granted and fully vested. Effective as of the Recapitalization
Closing Date, all options granted under the 1993 Stock Option plan became
subject to the terms of the 1997 Stock Option Plan.
The 1997 Stock Option Plan authorizes the issuance of up to 769,460 shares of
Holdings common stock, of which 557,000 have been granted. The exercise price of
these options ranges from $7.98 to $31.93. The non-qualified options may be
granted to certain key employees, directors and independent contractors of the
Company or Holdings.
A summary of the Company's stock option activity, and related information for
the period from May 6, 1997 (the date on which both entities came under common
control) through February 28, 1998, is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Beginning of period ............................................ 242,000 $ 1.27
Granted ........................................................ 557,020 14.80
Exercised ...................................................... (873) 7.98
Canceled ....................................................... (17,587) 17.63
-------
End of period .................................................. 780,560 10.61
=======
Exercisable at end of period ................................... 289,500 2.37
=======
Available for future grants .................................... 212,440
=======
</TABLE>
41
<PAGE> 43
Exercise prices for options outstanding as of February 28, 1998 range from
$0.075 to $31.93. The weighted average remaining contractual life of those
options is 9.3 years as of February 28, 1998. Compensation expense has been
recognized for options granted below fair market value as of the date of grant
over their respective vesting periods.
In accordance with the provisions of 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 using a risk-free interest
rate of 6.57% and no expected dividend yield. Had compensation expense for stock
options been determined based on the fair value method (instead of the intrinsic
value method) at the grant dates for the awards, the Company's net loss for the
year ended February 28, 1998, would have increased by $970,000. The effects of
applying the fair value method of measuring compensation expense for the periods
presented is not likely to be representative of the effects of future years in
part because the fair value method was applied only to stock options granted
after February 28, 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.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practical to estimate fair
value.
Cash and cash equivalents, accounts receivable, accounts payable and
revolving line of credit: The carrying amount approximates fair value because
of the short maturity of these instruments.
Long-term debt:
The fair value of the Company's long-term debt approximates fair value
because of the variability of the interest cost associated with these
instruments. The fair value of the Company's Senior Subordinated Notes is
estimated based on quoted market rates for the notes.
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, 1998 FEBRUARY 28, 1997
---------------------------- ----------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents ................ $ 5,163 $ 5,163 $ 7,044 $ 7,044
Accounts receivable ...................... 59,106 59,106 42,856 42,856
Accounts payable ......................... 21,039 21,039 15,250 15,250
Revolving line of credit ................. 12,339 12,339 -- --
</TABLE>
42
<PAGE> 44
<TABLE>
<S> <C> <C> <C> <C>
Long-term debt, excluding Senior
Subordinated Notes ..................... 115,000 115,000 110,000 110,000
Senior Subordinated Notes ................ 225,000 208,000 -- --
</TABLE>
16. SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENT OF CASH
FLOWS
For the period from February 11, 1997, through February 28, 1997, the net
cash used for business acquisitions, net of cash acquired, was allocated as
follows:
Working capital ............................ $ 63,878
Plant and equipment ........................ 31,649
Purchase price in excess of the net tangible
assets acquired .......................... 60,588
Deferred financing costs ................... 6,450
Other assets ............................... 1,358
Noncurrent liabilities ..................... (9,308)
---------
Net cash used for acquisition .............. $ 154,615
=========
17. SUBSEQUENT EVENT
SALE OF BUSINESS
In April, 1998 the Company sold the assets, exclusive of the land and
building, of Gauss, its California-based high-speed, bin-loop, tape duplication
business and operations, for $0.7 million subject to certain adjustments
attributed to changes in working capital. The Company does not expect the sale
to have a material impact on its consolidated financial position and results of
operations.
43
<PAGE> 45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EV International, Inc.:
We have audited the accompanying consolidated statements of income and retained
earnings and cash flows of EV International, Inc. (a Delaware corporation) for
the period from March 1, 1996 through February 10, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. An audit also includes examining on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of EV
International, Inc. for the period from March 1, 1996 through February 10, 1997,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York,
May 9, 1997
44
<PAGE> 46
REPORT OF INDEPENDENT ACCOUNTANTS
To the Management of
EV International, Inc.
We have audited the accompanying consolidated statements of income and retained
earnings, and cash flows of EV International, Inc. (the "Company") for the year
ended February 29, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of their operations and their
cash flows for the year ended February 29, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Rochester, New York
August 7, 1996
(February 10, 1997 as to effects
of the reorganization discussed
in Note 1)
45
<PAGE> 47
EV INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In thousands)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
MARCH 1, 1996
THROUGH FOR THE YEAR ENDED
FEBRUARY 10, 1997 FEBRUARY 29, 1996
------------------- ------------------
<S> <C> <C>
Net sales ................................................... $177,100 $195,500
Cost of sales ............................................... 112,100 123,900
-------- --------
Gross profit .............................................. 65,000 71,600
-------- --------
Operating expenses:
Engineering ............................................ 8,000 8,500
Selling, general and administrative .................... 41,600 44,400
Amortization of goodwill ............................... 900 1,000
-------- --------
50,500 53,900
-------- --------
Operating profit ............................................ 14,500 17,700
Gain on sale of assets ...................................... -- 400
-------- --------
Income before taxes .................................... 14,500 18,100
Provision for income taxes .................................. 6,200 7,100
-------- --------
Net income ............................................. 8,300 11,000
Retained earnings, at the beginning of the year ............. 133,000 118,700
Cash transfers (to) from Parent, net and
adjustments resulting from the acquisition
(see Note 1) ...................................... (2,000) 3,300
-------- --------
Retained earnings, at the end of the period ................. $139,300 $133,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
46
<PAGE> 48
EV INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
MARCH 1, 1996
THROUGH FEBRUARY 10, FOR THE YEAR ENDED
1997 FEBRUARY 29, 1996
-------------------- ------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ........................................... $ 8,300 $ 11,000
Items not affecting cash:
Depreciation and amortization ................... 5,100 5,100
Deferred income tax (benefit) .................. 700 (300)
Changes in assets and liabilities ....................
Accounts receivable ............................. (500) (5,100)
Inventories ..................................... (2,100) (8,500)
Other assets .................................... (2,500) (100)
Accounts payable ................................ (800) 300
Other liabilities ............................... (2,900) (2,000)
------- --------
Net cash provided by operating
activities ............................ 5,300 400
------- --------
Cash Flows From Investing Activities to
purchase equipment .............................. (3,300) (3,700)
------- --------
Net cash transferred from (to) Parent and
adjustments resulting from the
acquisition (see Note 1) .................. $(2,000) $ 3,300
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 49
EV INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
1. BACKGROUND INFORMATION AND
SIGNIFICANT ACCOUNTING POLICIES
Prior to the date of their disposition on February 10, 1997, Mark IV
Industries, Inc. ("Mark IV") was the owner of a number of operating divisions
and subsidiaries which made up its professional audio business, referred to as
the Mark IV Audio Group (the "Group"). Effective February 10, 1997, Mark IV
completed a reorganization of the Group in which certain assets and liabilities
not relating to the business of the Group were transferred out of the parent
company of the Group, Gulton Industries, Inc. ("Gulton"). On the same date, (i)
all the issued and outstanding stock of Gulton was then sold to an indirect
acquisition subsidiary of Greenwich Street Capital Partners, L.P. ("Sub"), (ii)
Sub merged with and into Gulton, with Gulton surviving, (iii) Gulton merged with
and into Electro-Voice, Incorporated ("EV"), Mark IV Audio, Inc., Mark IV Audio
Magnetic, Inc. and LFE Corporation, with EV surviving, and (iv) EV changed its
name to EV International, Inc. (the "Company"). The accompanying financial
statements have been restated to reflect the foregoing steps and include the
accounts of Gulton. All references to the Company relate to the business of the
Mark IV Audio Group, and exclude any activities which may have been a part of
the Company during the reporting periods, but which were transferred out as part
of the foregoing steps. There were no adjustments to the net assets or net
income of the Group as a result of this reorganization. The operating
subsidiaries and divisions of the Company are as follows:
Audio Consultants Co., Limited Mark IV Audio (Europe) AG
Altec Lansing International Mark IV Audio (Aust.) Pty Ltd.
Cetec International Limited Mark IV Audio Canada, Inc.
Dearden Davies Associates Limited Mark IV Audio France S.A.
Dynacord France Mark IV Audio Hong Kong Limited
Dynacord Audio GmbH Mark IV Audio Japan Ltd.
Klark-Teknik PLC Nivenfield (1992) Limited
Rebis Audio Limited
Mark IV Audio Japan had a certain minority ownership interest as of
February 29, 1996. As part of the reorganization described above, the minority
interest was acquired by Mark IV, and Mark IV Audio Japan became a 100%-owned
subsidiary.
The financial statements reflect all of the operations making up the
Company and no recognition has been made to reflect the minority interests that
existed as of the various financial statement dates. All significant intergroup
transactions have been eliminated. These consolidated financial statements have
been prepared in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of such financial statements,
and the reported amounts of revenues and expenses during the reporting periods.
It should be recognized that the actual results could differ from those
estimates. The Company's significant accounting policies are as follows:
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Property, Plant and Equipment
The Company provides for depreciation of plant and equipment primarily on
the straight-line method to amortize the cost of such plant and equipment
over their useful lives. Depreciation expense was approximately $4,200 for
the period from March 1, 1996 through February 10, 1997 and $4,100 in
fiscal 1996.
Cost in Excess of Net Assets Acquired ("Goodwill")
Management continually evaluates the existence of goodwill impairment on
the basis of whether the goodwill is fully recoverable from projected,
undiscounted net cash flows of the business. Goodwill is amortized on the
straight-line method over a 40-year period. Amortization expense was
approximately $900 for the period from March 1, 1996 through February 10,
1997, and $1,000 in fiscal 1996.
Income Taxes
Mark IV adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"), in fiscal 1994. The
adoption of this standard retroactively changed Mark IV's method of
accounting for income taxes from the deferred method to the liability
method. The Company's provisions for income taxes have been calculated on
the separate return basis.
Postretirement Benefits
Mark IV adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions"
("SFAS No. 106"), effective as of February 28, 1993. SFAS No. 106 required
the estimated present value of the Company's liability for its commitments
to provide health and life insurance benefits to its retirees to be
included in the balance sheet. The related expense is required to be
recognized on the accrual method over the remaining years of the employees'
active service, up to the dates of the individual's eligibility to retire
and begin receiving the benefit.
Research and Development Costs
Research and development costs are expensed as incurred and amounted to
approximately $7,700 for the period from March 1, 1996 through February 10,
1997, and $8,200 in the fiscal year 1996.
Foreign Currency
The assets and liabilities of the Company's foreign operations are
translated at year-end exchange rates, and resulting gains and losses are
included as a part of net equity. Realized foreign currency transactions
recognized at the Company level have been eliminated from the accompanying
consolidated statements of income, since such transactions are in integral
part of Mark IV's consolidated currency exposure, including operations
other than those of the Company.
2. INCOME TAXES
Income before taxes and the related provision for income taxes for the
period from March 1, 1996 through February 10, 1997, and for fiscal 1996,
consist of the following:
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<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Income before taxes:
United States ............................................. $10,700 $10,600
Foreign ................................................... 3,800 7,500
------- -------
Total income before taxes ........................... $14,500 $18,100
======= =======
Provision for income taxes:
Currently payable-
United States ........................................... $ 4,700 $ 5,300
Foreign ................................................. 800 2,100
------- -------
Total currently payable ............................. 5,500 7,400
------- -------
Deferred-
United States ........................................... 200 (600)
Foreign ................................................. 500 300
------- -------
Total deferred income tax (benefit) ................. 700 (300)
------- -------
Total provision for income taxes .................... $ 6,200 $ 7,100
======= =======
</TABLE>
The provision for income taxes for the period from March 1, 1996 through
February 10, 1997 and, for fiscal year 1996, differs from the amount computed
using the U.S. statutory income tax rate as follows: ||
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Expected tax at U.S. statutory income tax
rate ................................................ $ 5,100 $6,300
Permanent differences .................................. 600 200
State and local income taxes ........................... 600 400
Foreign tax rate differences ........................... (100) 200
------- ------
Total provision for income taxes ....................... $ 6,200 $7,100
======= ======
</TABLE>
For purposes of these financial statements, the undistributed earnings of
Gulton's foreign subsidiaries were considered to have been reinvested in each
country, and were not expected to be remitted back to Mark IV.
3. PENSION AND RETIREMENT SAVINGS PLANS
Prior to the consummation of the steps set forth in Note 1, the Company's
U.S. employees participated in one of a number of defined-benefit pension plans
which were funded and administered by Mark IV. Such plans provide retirement
benefits based upon the employees' age, earnings and years of service, or were
based upon years of service multiplied by stated monthly benefit amounts. The
Company recognized an expense for the estimated service cost of such plans of
approximately $350 for the period from March 1, 1996 through February 10, 1997,
and approximately $400 in fiscal 1996. The plans are a part of Mark IV's Master
Defined Benefit Plan, and the funded position and responsibility for benefit
payments were managed by Mark IV.
Certain of the Company's U.S. employees also participated in defined
contribution plans which were also funded and administered by Mark IV. The
Company recognized an expense of approximately $170 for the period from March 1,
1996 through February 10, 1997, and approximately $200 for these plans in fiscal
1996.
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The Company's Japanese subsidiary also had a retirement and termination
plan (the "Retirement Plan") which provided benefits to employees in Japan upon
their termination of employment. The benefits were based upon a multiple of the
employee's monthly salary, with the multiple determined based upon the
employee's years of service. The multiple paid to employees who retired or are
involuntarily terminated is greater than the multiple paid to those who
voluntarily terminate their services. The Company recognized an expense of
approximately $100 for these plans for the period from March 1, 1996 through
February 10, 1997 and approximately $100 in fiscal 1996.
4. POSTRETIREMENT BENEFITS
The Company provided health and life insurance benefits to a number of
existing retirees from its U.S. operations. Contributions required to be paid by
the retirees towards the cost of such plans are a flat dollar amount per month
in certain instances, or a range from 25% to 100% in other instances. The
Company also had a number of active employees who will receive such benefits
upon their retirement.
The Company's postretirement benefit expense on the accrual method for the
period from March 1 through February 10, 1997, and for fiscal 1996 includes the
following components:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Service cost-benefits earned during the period ......... $ 5 $ 10
Interest cost on the APBO .............................. 15 130
---- ----
Total expense ..................................... $ 20 $140
==== ====
</TABLE>
The postretirement liability recognized in the consolidated balance sheet
as of February 29, 1996 includes approximately $1,000 related to existing
retirees, and $200 related to active employees of the Company as of that date.
Of the total expense recognized by the Company, approximately $20 relates to the
benefits earned by the active employees in each of the fiscal years presented,
with the balance related to the existing retirees of the Company. In connection
with the disposition of the Company discussed in Note 1, Mark IV retained the
obligation for retirees and beneficiaries currently receiving benefits.
There was an increase in the unrecognized net loss during fiscal 1996 as a
result of the settlement of certain litigation actions between the Company and
certain retirees. The settlement resulted in the mutual agreement to
prospectively reduce amounts previously required to be contributed by such
retirees to the cost of their benefits. The APBO was calculated using a discount
rate of 7.50% at February 29, 1996. The rate used in the prior year was 8.75%.
The change in the discount rate did not have a significant effect on the expense
determination for fiscal 1996. The APBO determinations assume an initial health
care cost trend rate of approximately 8.0%, trending down ratably to an ultimate
rate of 4.5%. A one-percentage-point increase in such trend rate would not have
a significant effect on the Company's obligations or annual expense.
5. LEGAL AND ENVIRONMENTAL MATTERS
The Company has historically been involved in various legal and
environmental matters. In the opinion of management, the ultimate cost to
resolve these matters will not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
The Company's manufacturing facility in Michigan is adjacent to land which
has been designated as a Superfund site by the U.S. Environmental Protection
Agency ("EPA"). The Company has been identified by the EPA as the sole
Potentially Responsible Person at this site. The remediation required by the EPA
has been
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substantially completed as of February 29, 1996, and remains the financial
responsibility of Mark IV. Therefore, the accompanying consolidated financial
statements do not reflect any of the associated cleanup costs expended to date,
or remaining to be expended as of February 29, 1996.
6. FOREIGN OPERATIONS
The Company's foreign operations are located in Europe and the Far East.
Information concerning the Company's operations by geographic area for the
period from March 1,1996 through February 10, 1997, and for fiscal 1996 is as
follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net sales to customers:
United States ............................... $ 111,000 $ 125,700
Foreign ..................................... 96,300 107,300
Eliminations ................................ (30,300) (37,500)
--------- ---------
Total net sales to customers ........... $ 177,100 $ 195,500
========= =========
Operating income:
United States ............................... $ 12,700 $ 12,800
Foreign ..................................... 3,800 7,100
Eliminations ................................ (2,000) (2,200)
--------- ---------
Total operating income ................. $ 14,500 $ 17,700
========= =========
</TABLE>
The net sales to customers reflect the sales of the Company's operating
units in each geographic area to unaffiliated customers. Export sales from the
United States to unaffiliated customers were approximately $8,160 for the period
from March 1, 1996 through February 10, 1997, and approximately $8,100 in fiscal
1996.
7. RELATED PARTY TRANSACTIONS
Through February 10,1997, Mark IV provided and coordinated treasury, tax,
audit, legal, medical and risk insurance, and benefits administration services
to the various operating units of the Company. Insurance, legal, audit and
direct employee benefits related costs have been allocated directly to the
Company. An allocation of Mark IV's costs for tax, treasury and other
administrative work performed has not been made as Mark IV management did not
believe such costs to be significant. All intercompany accounts with Mark IV and
its affiliates other than the Company and its subsidiaries have been included as
a part of net equity.
Certain bank indebtedness existed in certain of the Company's foreign
subsidiaries. The amount of such indebtedness was controlled by Mark IV and is
based on Mark IV's financing plans on a consolidated country-by-country basis.
As a result, the accompanying consolidated financial statements exclude all such
indebtedness and related interest expense for the periods presented.
Mark IV also provided letters of credit for the Company's operating needs.
The Company had an informal lease arrangement with Mark IV for a facility
which it uses for its cabinet assembly requirements. The Company recognized an
expense for this lease of approximately $450 for the period from March 1, 1996
through February 10, 1997 and approximately $234 in Fiscal 1996.
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