<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999 Commission File No. 333-27341
TELEX COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 38-1853300
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 ALDRICH AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55420
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (612) 884-4051
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
AS OF JUNE 30, 1999 THERE WERE 110 SHARES OF TELEX COMMUNICATIONS, INC.,
$0.01 PAR VALUE, OUTSTANDING.
THIS DOCUMENT CONTAINS 23 PAGES.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
---------------------
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------------------- ----------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,482 $ 3,431
Accounts receivable, net 64,108 53,926
Inventories 68,685 67,758
Other current assets 11,315 10,822
----------- -----------
Total current assets 147,590 135,937
Property, plant and equipment, net 47,938 48,275
Deferred financing costs, net 10,876 11,586
Intangible and other assets, net 76,067 77,478
----------- -----------
$ 282,471 $ 273,276
=========== ===========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Revolving lines of credit $ 20,688 $ 5,703
Current maturities of long-term debt 8,361 10,811
Accounts payable 25,910 20,920
Accrued wages and benefits 12,515 9,156
Accrued interest 6,542 6,416
Other accrued liabilities 13,270 14,158
Income taxes payable 5,680 5,200
---------- ------------
Total current liabilities 92,966 72,364
Long-term debt 316,948 321,189
Other long-term liabilities 9,065 9,810
---------- ------------
Total liabilities 418,979 403,363
---------- ------------
Shareholder's deficit:
Common stock and capital in excess of par 3,089 2,980
Accumulated other comprehensive loss (4,283) (1,400)
Accumulated deficit (135,314) (131,667)
---------- ------------
Total shareholder's deficit (136,508) (130,087)
---------- ------------
$ 282,471 $ 273,276
========== ============
</TABLE>
See accompanying notes.
2
<PAGE> 3
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
---------------------------------------- --------------------------------------
JUNE 30, SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
1999 1998 1999 1998
------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $86,761 $87,392 $166,171 $166,280
Cost of Sales 54,190 55,085 104,970 104,317
------------------ ------------------ ----------------- -----------------
Gross profit 32,571 32,307 61,201 61,963
------------------ ------------------ ----------------- -----------------
Operating expenses:
Engineering 3,672 3,750 7,410 7,556
Selling, general and administrative 19,800 18,333 38,124 36,758
Corporate charges 429 429 858 858
Amortization 703 706 1,394 1,383
------------------ ------------------ ----------------- -----------------
24,604 23,218 47,786 46,555
------------------ ------------------ ----------------- -----------------
Operating profit 7,967 9,089 13,415 15,408
Interest expense 9,012 9,068 18,130 18,367
Other income (521) (1,469) (2,052) (1,632)
------------------ ------------------ ----------------- -----------------
Income (loss) before taxes (524) 1,490 (2,663) (1,327)
Provision for income taxes 766 210 984 555
------------------ ------------------ ----------------- -----------------
Net income (loss) $(1,290) $ 1,280 $ (3,647) $ (1,882)
================== ================== ================= =================
</TABLE>
See accompanying notes.
3
<PAGE> 4
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------------------
JUNE 30, SEPTEMBER 30,
1999 1998
----------------------- ----------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(3,647) $ (1,879)
Adjustments to reconcile net loss to cash flows from operations:
Depreciation, amortization and provision for bad debts 7,371 6,690
Gain on sale of facilities and product lines (234) (946)
Stock option compensation expense and special charges 109 682
Change in operating assets and liabilities (9,096) 10,799
Change in long-term liabilities 76 768
---------------------- ---------------------
Net cash provided by (used in) operating activities (5,421) 16,114
---------------------- ---------------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (5,280) (3,713)
Other - (44)
Proceeds from sale of facilities and product lines 2,248 1,990
---------------------- ---------------------
Net cash used in investing activities (3,032) (1,767)
---------------------- ---------------------
FINANCING ACTIVITIES:
Borrowings (payments) under revolving lines of credit, net 15,455 (9,268)
Repayment of long-term debt (6,691) (4,045)
---------------------- ---------------------
Net cash provided by (used in) financing activities 8,764 (13,313)
---------------------- ---------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS: (260) 26
---------------------- ---------------------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) 51 1,060
Beginning of period 3,431 2,224
---------------------- ---------------------
End of period $ 3,482 $ 3,284
====================== =====================
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $17,187 $ 18,377
====================== =====================
Income taxes (refunds), net $ 653 $ (7,129)
====================== =====================
</TABLE>
See accompanying notes.
4
<PAGE> 5
TELEX COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Telex Communications, Inc., formerly known as EV International, Inc. ("Telex"
or the "Company"), a Delaware corporation, is a wholly owned subsidiary of
Telex Communications Group, Inc. ("Holdings"). As used in these consolidated
financial statements, unless otherwise indicated or the context otherwise
requires, references to (i) "Holdings" shall mean Telex Communications Group,
Inc., a Delaware corporation and the corporate parent of the Company; (ii)
"Old Telex" shall refer to the Delaware corporation formerly named Telex
Communications, Inc., a wholly owned subsidiary of Holdings, and its
subsidiaries with respect to periods prior to the Mergers (as defined in Item
2); (iii) the "Company" or "Telex" 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; and (iv) "Old EVI"
shall mean EVI and its subsidiaries with respect to periods prior to the
Mergers and includes any predecessor companies.
The condensed consolidated balance sheet as of June 30, 1999 and the
condensed consolidated statements of operations and cash flows for the
quarters and six months ended June 30, 1999 and September 30, 1998 have been
prepared by the Company without being audited, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Effective
December 31, 1998 the Company changed its fiscal year end to December 31
from March 31. The management's discussion and analysis that follows
compares the results, which are not materially affected by seasonal
fluctuations, for the second quarter ended June 30, 1999 with the prior
year's second fiscal quarter ended September 30, 1998. The results for
prior year calendar quarter ended March 31, 1998 contain certain
Merger-related costs and expenses, some of which are not easily
quantifiable. Therefore, the Company believes that for purposes of
management's discussion and analysis, a comparison of the financial results
for the second quarter and six months ended June 30, 1999 with the results
for the second fiscal quarter and six months ended September 30, 1998 is
more meaningful than a comparison with the results for the quarter and six
months ended June 30, 1998, which includes a similar calendar quarter from
two prior fiscal years ago.
In the opinion of management, these financial statements reflect all
adjustments (which include only normal recurring accruals) necessary to
present fairly the financial position of Telex at June 30, 1999 and the
results of its operations and cash flows for all periods presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Therefore, these
statements should be read in conjunction with the more detailed information,
risk factors and financial statements, including the related notes, included
in the Registration Statements on Form S-4 filed by Old Telex and Old EVI
with the SEC on September 5, 1997 and July 30, 1997, respectively, and the
Form 10-K for the transition period from April 1, 1998 to December 31, 1998
filed by Telex with the SEC on March 31, 1999 (the "Form 10-K"). Unless
otherwise defined herein, capitalized terms shall have the meaning set forth
in the Form 10-K.
The results of operations for interim periods are not necessarily
indicative of results which will be realized for the full fiscal year.
5
<PAGE> 6
2. Inventories consist of the following, in thousands:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------------- ----------------------
(Unaudited)
<S> <C> <C>
Raw materials and parts $32,216 $32,667
Work in process 9,432 10,690
Finished products 27,037 24,401
---------------------- ----------------------
$68,685 $67,758
====================== ======================
</TABLE>
3. Telex's tax provision is calculated on a separate company basis, and Telex's
taxable income is included in the consolidated federal income tax return of
Holdings. The Company has recorded a liability to Holdings for the tax
benefit Telex received from Holdings in previous periods, which is included
in other long-term liabilities.
4. The Company recorded an income tax provision of $0.8 million and $1.0
million on pre-tax losses of $0.5 million and $2.7 million for the quarter
and six months ended June 30, 1999, respectively. The income tax provision
for the six months ended June 30,1999 is comprised of a U.S. Federal income
tax benefit of $1.1 million which is offset by a deferred tax valuation
allowance of $1.1 million and an income tax provision of $1.0 million
attributed to income of certain foreign subsidiaries for the six months
ended June 30, 1999.
The company has a net deferred tax valuation allowance of $19.0 million at
June 30, 1999 due to the uncertainty of the realization of future tax
benefits. Included in this valuation allowance is $1.1 million charged to
income tax provision for the six months ended June 30, 1999. The
realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including the Company's ability to generate
taxable income within the net operating loss carry forward period.
Management has considered these factors in reaching its conclusion as to the
adequacy of the valuation allowance for financial reporting purposes.
5. Effective April 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement established standards for reporting
and display of comprehensive income and its components. Comprehensive
income reflects the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. For the Company, comprehensive net loss represents net loss
adjusted for foreign currency translation adjustments and minimum pension
liability adjustment. Comprehensive net loss was $2.2 million and $6.6
million for the quarter and six months ended June 30, 1999 and comprehensive
net income was $3.0 million and comprehensive net loss was $1.2 for the
quarter and six months ended September 30, 1998, respectively.
6. Segment Information:
Subsequent to the Mergers, the Company reorganized what had been classified
as Old Telex's four strategic business units and Old EVI's four principal
lines of business into the following two business segments:
Professional Sound and Entertainment
Professional Sound and Entertainment includes Old EVI's three principal
lines of business within the overall professional audio market: (i) Fixed
Installation; (ii) Professional Music Retail; and (iii)
Concert/Recording/Broadcast, and Old Telex's Broadcast Communications
6
<PAGE> 7
Systems and Sound Reinforcement product groups (these businesses were
previously part of Old Telex's Professional Sound and Entertainment Group).
Multimedia/Audio Communications
Multimedia/Audio Communications includes all of Old Telex's Multimedia/Audio
Communications, RF/Communications and Hearing Instruments Groups, the Tape
Duplication product group from Old Telex's Professional Sound and
Entertainment Group, and Old EVI's Other Applications line of business,
consisting of handheld microphones and earphones for field and aircraft
communications, both military and civilian, equipment for high-speed
duplication of audio tapes, and components marketed to original equipment
manufacturers for incorporation into their products.
The amounts in the following tables have been presented to coincide with the
new business segments (in thousands).
FOR THE QUARTER ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Professional Multimedia/
Sound and Audio
Entertain- Communi-
ment cations Corporate Total
----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 51,594 $ 35,167 $ - $ 86,761
Cost of sales 30,222 23,968 - 54,190
----------------- ---------------- ---------------- ---------------
Gross profit 21,372 11,199 - 32,571
----------------- ---------------- ---------------- ---------------
Operating expenses:
Engineering - - 3,672 3,672
Selling, general and administrative - - 19,800 19,800
Corporate charges - - 429 429
Amortization of intangibles - - 703 703
----------------- ---------------- ---------------- ---------------
- - 24,604 24,604
----------------- ---------------- ---------------- ---------------
Operating profit (loss) 21,372 11,199 (24,604) 7,967
Interest expense - - 9,012 9,012
Other income - - (521) (521)
Provision for income taxes - - 766 766
----------------- ---------------- ---------------- ---------------
Net income (loss) $ 21,372 $ 11,199 $ (33,861) $ (1,290)
================= ================ ================ ===============
Depreciation expense $ 655 $ 781 $ 1,003 $ 2,439
================= ================ ================ ===============
Capital expenditures $ 1,378 $ 752 $ 1,190 $ 3,320
================= ================ ================ ===============
</TABLE>
<TABLE>
<CAPTION>
United
States Germany Other Total
----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 55,769 $ 12,521 18,471 86,761
================= ================ ================ ===============
</TABLE>
7
<PAGE> 8
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Professional Multimedia/
Sound and Audio
Entertain- Communi-
ment cations Corporate Total
---------------- --------------- --------------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 101,193 $ 64,978 $ - $ 166,171
Cost of sales 59,843 45,127 - 104,970
---------------- --------------- --------------------- --------------
Gross profit 41,350 19,851 - 61,201
---------------- --------------- --------------------- --------------
Operating expenses:
Engineering - - 7,410 7,410
Selling, general and administrative - - 38,124 38,124
Corporate charges - - 858 858
Amortization of intangibles - - 1,394 1,394
---------------- --------------- --------------------- --------------
- - 47,786 47,786
---------------- --------------- --------------------- --------------
Operating profit (loss) 41,350 19,851 (47,786) 13,415
Interest expense - - 18,130 18,130
Other income - - (2,052) (2,052)
Provision for income taxes - - 984 984
---------------- --------------- --------------------- --------------
Net income (loss) $ 41,350 $ 19,851 $ (64,848) $ (3,647)
================ =============== ==================== ==============
Depreciation expense $ 1,422 $ 1,195 $ 2,170 $ 4,787
================ =============== ==================== ==============
Capital expenditures $ 2,317 $ 1,335 $ 1,628 $ 5,280
================ =============== ==================== ==============
Total assets $ 197,126 $ 46,687 $ 38,658 $ 282,471
================ =============== ==================== ==============
</TABLE>
<TABLE>
<CAPTION>
United
States Germany Other Total
---------------- --------------- --------------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 98,156 $ 18,679 $ 49,336 $ 166,171
================ =============== ==================== ==============
Long-lived assets $ 124,656 $ 4,785 $ 5,440 $ 134,881
================ =============== ==================== ==============
</TABLE>
8
<PAGE> 9
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Professional Multimedia/
Sound and Audio
Entertain- Communi-
ment cations Corporate Total
----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 54,779 $ 32,613 $ - $ 87,392
Cost of sales 33,989 21,096 - 55,085
----------------- ---------------- ---------------- ---------------
Gross profit 20,790 11,517 - 32,307
----------------- ---------------- ---------------- ---------------
Operating expenses:
Engineering - - 3,750 3,750
Selling, general and administrative - - 18,333 18,333
Corporate charges - - 429 429
Amortization of intangibles - - 706 706
----------------- ---------------- ---------------- ---------------
- - 23,218 23,218
----------------- ---------------- ---------------- ---------------
Operating profit (loss) 20,790 11,517 (23,218) 9,089
Interest expense - - 9,068 9,068
Other income - - (1,469) (1,469)
Provision for income taxes - - 210 210
----------------- ---------------- ---------------- ---------------
Net income (loss) $ 20,790 $ 11,517 $ (31,027) $ 1,280
================= ================ ================ ===============
Depreciation expense $ 766 $ 612 $ 799 $ 2,177
================= ================ ================ ===============
Capital expenditures $ 556 $ 109 $ 1,232 $ 1,897
================= ================ ================ ===============
</TABLE>
<TABLE>
<CAPTION>
United
States Germany Other Total
----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 54,698 $ 7,174 $ 25,520 $ 87,392
================= ================ ================ ===============
</TABLE>
9
<PAGE> 10
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Professional Multimedia/
Sound and Audio
Entertain- Communi-
ment cations Corporate Total
-------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Net sales $ 104,882 $ 61,398 $ - $ 166,280
Cost of sales 63,510 40,807 - 104,317
-------------- -------------- ------------ --------------
Gross profit 41,372 20,591 - 61,963
-------------- -------------- ------------ --------------
Operating expenses:
Engineering - - 7,556 7,556
Selling, general and administrative - - 36,758 36,758
Corporate charges - - 858 858
Amortization of intangibles - - 1,383 1,383
-------------- -------------- ------------ --------------
- - 46,555 46,555
-------------- -------------- ------------ --------------
Operating profit (loss) 41,372 20,591 (46,555) 15,408
Interest expense - - 18,367 18,367
Other income - - (1,632) (1,632)
Provision for income taxes - - 555 555
-------------- -------------- ------------- -------------
Net income (loss) $ 41,372 $ 20,591 $ (63,845) $ (1,882)
============== ============== ============= =============
Depreciation expense $ 1,791 $ 1,092 $ 1,482 $ 4,365
============== ============== ============= =============
Capital expenditures $ 1,110 $ 583 $ 2,064 $ 3,757
============== ============== ============= =============
Total assets $ 213,099 $ 49,067 $ 24,411 $ 286,577
============== ============== ============= =============
</TABLE>
<TABLE>
<CAPTION>
United
States Germany Other Total
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 101,848 $ 14,420 $ 50,012 $ 166,280
============== ============== ============= =============
Long-lived assets $ 128,633 $ 5,196 $ 4,798 $ 138,627
============== ============== ============= =============
</TABLE>
7. During the Fiscal Year ended March 31, 1998, the Company recorded a
restructuring charge of $6.2 million attributable to the Merger-related
consolidation of certain product lines, and the consolidation of certain
of its worldwide manufacturing, engineering, distribution, marketing,
service and administrative operations to reduce costs, to better utilize
the available manufacturing and operating capacity and to enhance
competitiveness. At June 30, 1999, the Company had a restructuring
reserve of balance of $2.9 million. As of June 30, 1999, the Company has
charged to the restructuring reserve $3.3 million, consisting of $1.6
million of cash expenditures and $1.7 million of non-cash charges.
8. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning
after June 15, 2000. SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument,
10
<PAGE> 11
including certain derivative instruments embedded in other contracts, be
recorded on the balance sheet as either an asset or liability measured at
its fair value. SFAS No. 133 requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge criteria are
met. Special accounting for qualifying hedges allows a derivative's gains
or losses to offset related results on the hedged item in the income
statement and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. The
Company has not quantified the impacts of adopting SFAS No. 133 and has not
yet determined the timing or method of adoption.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations, as well as other sections of this Form 10-Q, may contain
forward-looking statements, including, without limitation, statements relating
to the Company's plans, strategies, objectives and expectations, that are based
on management's current opinions, beliefs, or expectations as to future results
or future events and are made pursuant to the "safe harbor" provisions of 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.
While made in good faith and with a reasonable basis based on information
currently available to the Company's management, there is no assurance that
such opinions or expectations will be achieved or accomplished. The Company
does not undertake to update, revise or correct any of the forward-looking
information contained in this document. The following factors, in addition to
those discussed elsewhere in this Form 10-Q, could affect the future results of
the Company, and could cause results to differ materially from those expressed
in such forward-looking statements: (i) the timely development and market
acceptance of new products; (ii) the financial resources of competitors and the
impact of competitive products and pricing; (iii) changes in general and
industry specific economic conditions on a national, regional or international
basis; (iv) changes in laws and regulations, including changes in accounting
standards; (v) the timing of the implementation of changes in operations to
effect cost savings; (vi) opportunities that may be presented to and pursued by
the Company following the Mergers; (vii) the Company's ability to access
external sources of capital; and (viii) such risks and uncertainties as are
detailed from time to time in the Company's Commission reports and filings.
GENERAL
The following discussion and analysis of the financial condition and results of
operations covers periods 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. 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 repurchase of existing
Holdings Common Stock and issuance of new Holding 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.
Effective December 31, 1998 the Company changed its fiscal year end to December
31 from March 31. The management's discussion and analysis that follows
compares the results, which are not materially affected by seasonal
fluctuations, for the second quarter ended June 30, 1999 with the prior year's
second fiscal quarter ended September 30, 1998. The results for prior year
calendar quarter ended March 31, 1998 contain certain Merger-related costs and
expenses, some of which are not easily quantifiable. Therefore, the Company
believes that for purposes of management's discussion and analysis, a
comparison of the financial results for the second quarter and six months ended
June 30, 1999 with the results for the second fiscal quarter and six months
ended September 30, 1998 is more meaningful than a comparison with the results
for the quarter and six months ended June 30, 1998, which includes a similar
calendar quarter from two prior fiscal years ago.
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
12
<PAGE> 13
subsidiary wholly owned by Greenwich Street Capital Partners, L.P. ("GSCP") and
certain affiliated investors acquired from Mark IV Industries ("Mark IV") and
one of its subsidiaries all of the issued and outstanding capital stock of
Gulton Industries, Inc. ("Gulton"), the former parent of Old EVI, and each of
its subsidiaries for an initial cash purchase price of $151.5 million, plus $4.9
million in estimated adjustments paid on the closing date, which aggregate
amount is subject to further post-closing adjustments (the "Acquisition"). Mark
IV and the Company are currently disputing the post-closing adjustments pursuant
to the applicable provisions of the Purchase Agreement. Pursuant to this
arbitration, the Company has incurred professional fees of $2.0 million, of
which $0.6 million remain unpaid as of June 30, 1999. Any final adjustment in
purchase price, net of costs incurred from this arbitration will result in an
adjustment to goodwill.
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.
On March 24, 1997, Old EVI issued 11% Senior Subordinated Notes due 2007 in an
aggregate principal amount of $100.0 million (the "EVI Existing Notes"), all of
which were subsequently exchanged in September, 1997 for a like principal
amount of new 11% Senior Subordinated Notes due 2007, Series A (together with
the EVI Existing Notes, the "EVI Notes"), in an offering registered under the
Securities Act of 1933, as amended (the "Securities Act"). The proceeds from
the EVI Notes were used to repay the $75.0 million of indebtedness under the
interim financing in its entirety and a portion of Old 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).
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 $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 $21.2 million (which represented 14% of
the equity of Holdings on a non-diluted basis and 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
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<PAGE> 14
expenses are herein referred to as the "Recapitalization Transaction."
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 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 $125.0 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, with Old EVI
surviving and changing its corporate name to "Telex Communications, Inc." (the
"Mergers"). 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 Audio Holdings
("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 "Parent
Merger" and together with the Merger, the "Mergers"). The Mergers have been
accounted for essentially as a pooling of interests from May 6, 1997, the date
on which Old EVI and Old Telex came under common control, 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, $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 $9.3
million. Total fees and expenses incurred as a result of the Mergers were $1.7
million, including the $0.4 million paid at closing. The EVI Notes remain
outstanding following the Mergers.
The Acquisition Transactions, the Recapitalization Transaction, and the Mergers
are referred to herein collectively as the "Transactions."
OVERVIEW
The Company, formed as a result of the February 2, 1998 merger of Old Telex and
Old EVI (see "The Mergers"), is a leader in the design, manufacture and
marketing of sophisticated audio, wireless and 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
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<PAGE> 15
participate in the competitive retail consumer electronics market. The Company
offers a comprehensive range of products worldwide for professional audio
systems as well as for multimedia and other communications product markets,
including wired and wireless microphones, wired and wireless intercom systems,
mixing consoles, signal processors, amplifiers, loudspeaker systems, headphones
and headsets, tape duplication products, talking book players, LCD projectors,
wireless LAN and PCS antennas, hearing aids and wireless assistive listening
devices.
Subsequent to the Mergers, the Company has reorganized its business into two
business segments: Professional Sound and Entertainment and Multimedia/Audio
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/Audio Communications
business segment (consisting mostly of businesses of Old Telex) accounts for a
significant proportion of the Company's business.
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 the 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. Gains and losses on translation of foreign currency
denominated balance sheets are classified as currency translation adjustments
and are included as part of shareholder's deficit.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, the Company's
net sales, in thousands:
<TABLE>
<CAPTION>
Quarter ended Six months ended
------------------------------------ ----------------------------------
June 30, September 30, June 30, September 30,
1999 1998 1999 1998
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Sales:
Professional Sound and Entertainment $51,594 $54,779 $101,193 $104,882
Multimedia/Communications 35,167 32,613 64,978 61,398
----------------- ----------------- ---------------- ----------------
$86,761 $87,392 $166,171 $166,280
================= ================= ================ ================
</TABLE>
QUARTER AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO QUARTER AND SIX MONTHS
ENDED SEPTEMBER 30, 1998
Net Sales. The Company's net sales decreased $0.6 million, or 0.7%, from $87.4
million in the quarter ended September 30, 1998 to $86.8 million in the quarter
ended June 30, 1999. Net sales remained flat at $166.3 million for the six
months ended September 30, 1998 compared to $166.2 million for the six months
ended June 30, 1999. A decrease in the Professional Sound
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<PAGE> 16
and Entertainment segment's net sales was offset by an increase in the
Multimedia/Audio Communications segment's net sales.
Net sales in the Company's Professional Sound and Entertainment segment
decreased $3.2 million, or 5.8%, from $54.8 million in the quarter ended
September 30, 1998 to $51.6 million in the quarter ended June 30, 1999. Net
sales decreased $3.7 million, or 3.5% from $104.9 million for the six months
ended September 30, 1998 to $101.2 million for the six months ended June 30,
1999. The decrease in net sales for the quarter and six months ended June 30,
1999 was attributed primarily to the discontinuation of certain product lines,
the sale of the Gauss business, and to the destruction by fire of the Company's
Mishawaka, IN factory partially offset by sales of new products.
Net sales in the Company's Multimedia/Audio Communications segment increased
$2.6 million, or 7.8%, from $32.6 million to in the quarter ended September 30,
1998 to $35.2 million in the quarter ended June 30, 1999. Net sales increased
$3.6 million, or 5.8% from $61.4 million for the six months ended September 30,
1998 to $65.0 million for the six months ended June 30, 1999. The increase in
net sales for the quarter and six months ended June 30, 1999 was attributed
primarily to the increase in new electronic imaging products.
Gross Profit. The Company's gross profit increased $0.3 million, or 0.8%, from
$32.3 million in the quarter ended September 30, 1998 to $32.6 million in the
quarter ended June 30, 1999. Gross profit decreased $0.8 million, or 1.2% from
$62.0 million for the six months ended September 30, 1998 to $61.2 million for
the six months ended June 30, 1999. As a percentage of sales, the gross margin
rate increased from 37.0% in the quarter ended September 30, 1998 to 37.5% in
the quarter ended June 30, 1999 and decrease from 37.3% for the six months
ended September 30, 1998 to 36.8% for the six months ended June 30, 1999. The
increase in the gross margin rate for the quarter ended June 30, 1999 was
attributed mainly to the cost reduction efforts implemented by the Company
while the slight decrease in gross margin rate for the six months ended June
30, 1999 was attributed mainly to early in the year discounting and promotions
on initial sales of certain new products.
Engineering. The Company's engineering expenses remained flat, decreasing $0.1
million, or 2.1%, from $3.8 million in the quarter ended September 30, 1998 to
$3.7 million in the quarter ended June 30, 1999. Engineering expenses
decreased $0.2 million, or 1.9% from $7.6 million for the six months ended
September 30, 1998 to $7.4 million for the six months ended June 30, 1999.
Selling, General and Administrative. The Company's selling, general and
administrative expenses increased $1.5 million, or 8.0%, from $18.3 million in
the quarter ended September 30, 1998 to $19.8 million in the quarter ended June
30, 1999. Selling, general and administrative expenses increased $1.3 million,
or 3.7% from $36.8 million for the six months ended September 30, 1998 to $38.1
million for the six months ended June 30, 1999. The increase in selling,
general and administrative expenses was attributed mainly to increased spending
for information technology and advertising and promotion.
Corporate Charges. Corporate charges of $0.4 million and $0.9 million in the
quarter and six months ended June 30, 1999 and $0.4 million and $0.9 million in
the quarter ended September 30, 1998, respectively, represent fees to GSCP for
consulting and management services provided under a management and services
agreement.
Other income. The Company's royalty income, together with gains on the sales
of certain of its facilities vacated in 1998 due to merger-related
restructuring and the expected business interruption insurance benefit
resulting from a fire that destroyed the Company's Mishawaka, IN facility,
exceeded other expenses in the quarter and six months ended June 30, 1999.
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<PAGE> 17
In the six months ended June 30, 1999, the Company recorded a gain of $0.2
million on $2.2 million of proceeds on the sales of certain vacated facilities
and certain product lines.
The Company's Mishawaka, IN facility was destroyed by fire in 1998. The
Company has recognized the expected business interruption insurance benefit of
$1.0 million in the six months ended June 30, 1999.
Interest expense. Interest expense decreased from $9.1 million and $18.4 in
the quarter and six months ended September 30, 1998 to $9.0 million and $18.1
million in the quarter and six months ended June 30, 1999. The decrease was
primarily due to the reduction in outstanding indebtedness, partially offset by
slightly higher interest rates on the Company's Senior Secured Credit Facility.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999 the Company had cash and cash equivalents of $3.5 million
compared to $3.4 million at December 31, 1998. The Company's principal source
of funds in the six months ended June 30, 1999 consisted of cash generated from
financing activities. Net cash provided by financing activities was $8.8
million, while net cash used in operations was $5.4 million and cash used in
investing activities was $3.0 million, net of $2.2 million in proceeds from the
sales of certain product lines and vacated facilities.
The Company's investing activities consisted of capital expenditures to
maintain facilities, acquire machines or tooling, update certain manufacturing
processes, introduce new products and improve efficiency, offset by of $2.2
million in proceeds from the sales of certain product lines and vacated
facilities. Capital expenditures totaled $5.3 million for the six months ended
June 30, 1999 compared with $3.8 million for the six months ended September 30,
1998. 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 $8.3 million from $337.7
million at December 31, 1998 to $346.0 million at June 30, 1999. The increase
in indebtedness is comprised of increased borrowings under the Company's
Revolving Credit Facility, which were partially offset by scheduled and
accelerated principal reductions on the Company's Term Loan Facility.
The Company's liquidity needs arise primarily from debt service on indebtedness
incurred in connection with the Transactions, working capital needs and capital
expenditure requirements. The Company incurred substantial indebtedness in
connection with the Acquisition Transactions and the Recapitalization
Transaction. As a result, debt service represents 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.
The Company's current credit facilities include the Senior Secured Credit
Facility consisting of the Term Loan Facility of $100.3 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 $6.1 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.
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<PAGE> 18
As of June 30, 1999, $8.4 million of the Company's $100.3 million Term Loan
Facility is payable in the next 12 months. In addition, the Company had $15.7
million outstanding under the Revolving Credit Facility, and $5.0 million
outstanding under the foreign working capital lines. Net availability at June
30, 1999 under the Revolving Credit Facility, computed by deducting $6.4
million of open letters of credit and applying applicable borrowing
limitations, totaled $2.9 million. Net availability at June 30, 1999 under
foreign working lines totaled $1.1 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 the six months ended June 30, 1999 was 8.2%.
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
($38.5 million outstanding at June 30, 1999), $4.0 million in the remainder of
1999 and $8.5 million, $11.0 million and $15.0 million of which is payable in
each of 2000, 2001 and 2002 (which has a final maturity date of November 6,
2002), respectively, and (ii) the $65.0 million Tranche B Term Loan Facility
($61.8 million outstanding at June 30, 1999), $0.1 million in the remainder of
1999 and $0.5 million, $0.5 million, $0.5 million, $24.1 million and $36.1
million of which is payable in each of 2000, 2001, 2002, 2003 and 2004 (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. During the six months ended June 30, 1999, the Company made a
mandatory prepayment, equal to 75% of the Company's Excess Cash Flow, of $4.2
million.
The Company expects to generate additional cash flows from operations,
partially from collection of the increase in accounts receivable attributed to
a record sales month in June 1999, and has arranged a $4.0 million intercompany
line of credit with Holdings. In addition, the Company is actively
implementing plans to reduce inventory, improve the accounts receivable
collection experience, and sell the remaining vacated property, vacant land and
other non-productive or non-core assets.
The Company believes that these additional sources of funds, together with the
Company's Revolving Credit Facility and cash from operations will be adequate
to meet its debt service and principle payment requirements, capital
expenditure needs, and working capital requirements. However, no assurance can
be given in this regard, because working capital requirements and other
circumstances may change. The Company's future performance and its ability to
service its obligations will also be subject to future economic conditions and
to financial, business and other factors, many of which are beyond the
Company's control.
ENVIRONMENTAL MATTERS
The Company is a party in a number of environmental enforcement matters and
related claims which have arisen in the ordinary course of business. Certain
environmental matters are indemnified by Mark IV, the former parent company of
Old EVI. Based upon reliance of this indemnification, the Company believes
that such matters and claims, if finally determined in a manner adverse to the
Company, whether considered separately or in the aggregate, would not have a
material adverse effect on the operating results or financial condition of the
Company. The Company believes that compliance with current federal, state and
local environmental protection laws and provisions should not have a material
adverse effect on the operating income or financial condition of the Company.
The assessment of materiality of such environmental matters and
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<PAGE> 19
claims is based on a gross determination of such charges that could occur and
does not give effect to possible third party recoveries.
YEAR 2000
Some companies' computer systems used today may be unable to interpret or
process data correctly after December 31, 1999 because they allow only two
digits to indicate the year in a date. The Company uses computer systems for
various operations, including financial reporting, billing, order processing,
purchasing, inventory management and certain manufacturing operations. In
addition, certain manufacturing systems, plant and facilities systems may
contain date-related functionality, software or embedded microprocessors that
could malfunction if they are not Year 2000 ready.
Most of the Company's products do not contain date-related functionality,
software or embedded microprocessors and therefore are not subject to Year 2000
issues. The Company believes all its currently-produced products are Year 2000
ready. The Company is completing programs to identify non-Year 2000 ready
products and is developing strategies to address problems, if any, for
customers who own such products.
The Company has completed an internal inventory and assessment of Year 2000
readiness of its computer hardware and software and it's non-information
technology and has in recent years replaced, modified or upgraded more than 80%
of its information systems with Year 2000 ready systems. The replacement,
upgrade, changes to and testing of the Company's remaining critical non-ready
systems was completed in July 1999.
In addition to internal remediation activities, the Company has initiated
communications with key third parties, including suppliers and customers, to
determine the extent to which their systems, their products, or their
electronic data interchange with the Company, are vulnerable to Year 2000
issues. Data collection continues and the Company has not yet received
sufficient information from such parties to fully assess the risks relating to
non-timely compliance by third parties.
The Company is in the process of developing contingency plans for critical
systems in the event that the Company or any of its key suppliers are not Year
2000 ready by the required dates. The Company's target for finalizing such
contingency planning is September 1999.
If the systems of the Company or its key suppliers are not Year 2000 ready in a
timely fashion, the Company believes that the most likely worst case scenario
would include some temporary disruptions in the Company's acceptance and
processing of orders and billing and in its ability to secure raw materials for
production from suppliers. This could cause a temporary interruption of some
materials or services the Company needs to make its products or process
customer orders, which could result in some delayed shipments to customers,
delayed collections and lost sales and profits for the Company.
The Company believes that the replacement, upgrade and changes to the remaining
non-ready critical systems to address Year 2000 issues will require incremental
future expenditures of less than $1.0 million. The Company does not separately
track internal costs incurred for its Year 2000 program, which costs are
principally related to payroll costs for its information systems group. The
costs of the Year 2000 program are being funded through operating cash flows
and are expensed as incurred or capitalized as appropriate.
Although the Company expects its critical systems to be ready by the third
quarter of 1999, there can be no assurance that its Year 2000 program will be
effective or that estimates about timing and cost will be accurate. The
outcome of the Company's Year 2000 program is subject to a
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<PAGE> 20
number of risks and uncertainties, some of which (such as the availability of
qualified personnel and the Year 2000 preparation of third parties) are beyond
its control. Therefore, there can be no assurances that the Company will not
incur material remediation costs beyond the above anticipated future costs, or
that the Company's business, financial condition, or results of operations will
not be significantly impacted if Year 2000 problems with its systems, or with
the products or systems of other parties with whom it does business, are not
resolved in a timely manner.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" effective for fiscal years beginning after
June 15, 2000. SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133 requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge criteria are met. Special accounting for qualifying
hedges allow a derivative's gains or losses to offset related results on the
hedged item in the income statement and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. The Company has not quantified the impacts of adopting SFAS
No. 133 and has not yet determined the timing or method of adoption.
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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as foreign
exchange and interest rates. The Company does not enter into derivatives or
other financial instruments for trading or speculative purposes. The
counter-parties to these transactions are major financial institutions.
EXCHANGE RATE SENSITIVITY ANALYSIS
The Company enters into forward exchange contracts principally to hedge the
currency fluctuations in transactions denominated in foreign currencies,
thereby limiting the Company's risk that would otherwise result from changes in
exchange rates. During the quarter ended June 30, 1999, the principal
transactions hedged were certain intercompany balances attributed primarily to
intercompany sales. Gains and losses on forward exchange contracts and the
offsetting losses and gains on the hedged transactions are reflected in the
consolidated statement of operations.
At June 30, 1999, the Company had $4.0 million of gross outstanding forward
exchange contracts, with a weighted remaining maturity of 33 days.
At June 30, 1999, the difference between the fair value of all outstanding
contracts, as estimated by the amount required to enter into offsetting
contracts with similar remaining maturities based on quoted prices, and the
contract amounts was immaterial. A 10% fluctuation in exchange rates for these
currencies would change the fair value by approximately $0.4 million. However,
since these contracts hedge foreign currency denominated transactions, any
change in the fair value of the contracts would be offset by changes in the
underlying value of the transactions being hedged.
INTEREST RATE AND DEBT SENSITIVE ANALYSIS
For fixed rate debt, interest rate changes affect the fair market value but do
not impact earnings or cash flows. Conversely, for floating rate debt,
interest rate changes generally do not affect the fair market value but do
impact future earnings and cash flows, assuming other factors are held
constant.
At June 30, 1999, the Company had fixed rate debt of $225.0 million and
floating rate debt of $121.0 million. Holding all other variables constant
(such as foreign exchange rates and debt levels), a one percentage point
decrease in interest rates would increase the unrealized fair market value of
the $225.0 million fixed rate debt by approximately $9.2 million. The earnings
and cash flow impact for the next twelve months resulting from a one percentage
point increase in interest rates on the $121.0 million floating rate debt would
be approximately $1.2 million, holding all other variables constant.
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PART II. OTHER INFORMATION
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*10(h) The 1997 Telex Communications Group, Inc. Amended and Restated Stock
Option Plan
*10(ee) Amended and Restated 1998 Telex Communications Group, Inc. Performance
Stock Option Plan
27 Financial data schedule
__________________________
* Denotes management contract, executive compensation plan, or arrangement.
(b) Reports on Form 8-K
None.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
TELEX COMMUNICATIONS, INC.
Dated: August 16, 1999 By: /s/ Ned C. Jackson
--------------- ---------------------------------------------
Ned C. Jackson
President and Chief Executive Officer
TELEX COMMUNICATIONS, INC.
Dated: August 16, 1999 By: /s/ Richard J. Pearson
--------------- --------------------------------------------
Richard J. Pearson
Vice President and Chief Financial Officer
22
<PAGE> 23
TELEX COMMUNICATIONS, INC.
FORM 10-Q
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
*10(h) The 1997 Telex Communications Group, Inc. Amended and Restated Stock
Option Plan
*10(ee) Amended and Restated 1998 Telex Communications Group, Inc.
Performance Stock Option Plan
27 Financial data schedule
__________________________
* Denotes management contract, executive compensation plan, or arrangement.
23
<PAGE> 1
EXHIBIT 10(h)
THE 1997 TELEX COMMUNICATIONS GROUP, INC.
AMENDED AND RESTATED STOCK OPTION PLAN
ARTICLE I
PURPOSE
The purpose of The 1997 Telex Communication Group, Inc. Amended and
Restated Stock Option Plan is to foster and promote the long-term financial
success of the Company and to increase materially stockholder value by (a)
motivating superior performance by participants in the Plan, (b) providing
participants in the Plan with an ownership interest in the Company and (c)
enabling the Company to attract and retain the services of an outstanding
management team upon whose judgment, interest and special effort the successful
conduct of its operations is largely dependent.
ARTICLE II
DEFINITIONS
2.1 Definitions. For purposes of this Plan, the following terms shall
have the meanings set forth below:
(a) "Affiliate" means an Affiliate as defined in the Merger
Agreement.
(b) "Alternative Option" has the meaning given in Section 8.2.
(c) "Beneficiary" means the person(s) designated by a Participant
in writing to the Board or, if none are so designated or living at the
time of the Participant's death, the person(s) and/or trust(s) by will
or the laws of descent and distribution or the estate or personal
representative entitled to receive the benefits specified under this
Plan in the event of the Participant's death.
(d) "Board" means the Board of Directors of the Company.
(e) "Cause" has the meaning specified in the Stockholders
Agreement (as defined below).
(f) "Change in Control" means the occurrence of any of the
following events:
(i) the acquisition by any person, entity or "group" (as
defined in Section 13(d) of the Securities Exchange Act of 1934,
as amended), other than any stockholder of the Company immediately
after giving effect to the Merger, or any Affiliate of any such
stockholder, of 50% or more of the combined voting power of the
Company's then outstanding voting securities;
(ii) if at any time after the initial public offering of
Common Stock of the Company, (A) any "person" (as such term is
used in Section 13(d) and 14(d) of the Exchange Act), excluding
for this purpose GSCP, is or becomes the Beneficial Owner of more
than thirty-five percent (35%) of the total voting power of the
Company or of Telex, (B) GSCP beneficially owns a lesser
percentage of the voting power of the Company or of Telex and (C)
GSCP does not have the right or ability by voting power, contract
or otherwise to elect or
24
<PAGE> 2
designate a majority of the Board of the Company or Telex or the
Board of Directors of such corporation in Control;
(iii) if after the initial public offering of the Common
Stock of the Company, a change in the composition of the Board or
the Company occurs during any period of two consecutive years such
that the directors who were in office at the beginning of the
period cease to constitute at least a majority of the Board of the
Company or Telex, as the case may be, unless the election of an
individual by such Board or whose nomination for election by the
shareholders of the Company was approved by a vote of at least
two-thirds (66-2/3%) of the directors then still in office who
were either directors at the beginning of such period or whose
election or nomination for election was previously so approved; or
(iv) more than 65% of the total value of the assets of the Company
and its subsidiaries are sold and the acquiror of such assets is
not GSCP, or an Affiliate of GSCP.
(g) "Change in Control Price" means the price per share of Common
Stock paid in conjunction with any transaction resulting in a Change
in Control (as determined in good faith by the Board if any part of
such price is payable other than in cash).
(h) "Code" means the Internal Revenue Code of 1986, as amended.
References to Sections of the Code shall be deemed to refer to such
Sections as in effect on the date this Plan is adopted as such
Sections may, from time to time, be amended.
(i) "Common Stock" means the Common Stock, par value $.0005 per
share, of the Company.
(j) "Company" means Telex Communications Group, Inc., a Delaware
corporation, and its successors and assigns.
(k) "Control" of a corporation means the direct or indirect
ownership of 50% or more of the voting power, and of a partnership or
limited liability company means the direct or indirect ownership of
50% or more of the combined voting power of the Company's outstanding
voting securities.
(l) "Determination Date" means the date as of which the Fair
Market Value of the Common Stock is to be determined pursuant to the
Plan or the applicable Option Agreement.
(m) "Disability" has the meaning specified in the Stockholders
Agreement.
(n) "Effective Date" means, May 6, 1997, the date on which the
Effective Time of the Merger occurs.
(o) "Employee" means any executive, senior officer or other key
employee of the Company or any Subsidiary.
(p) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(q) "Fair Market Value" means, (x) as of any Determination Date
prior to an Initial Public Offering, the fair market value per share
of Common Stock based on the Valuation Formula most recently
established prior to such Determination Date pursuant to Section 4 of
the Stockholders Agreement, and (y) as of any Determination Date after
an Initial Public Offering, the fair market value per share of Common
Stock specified in Section 4 of the Stockholders Agreement.
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<PAGE> 3
(r) "Good Reason" has the meaning specified in the Stockholders
Agreement.
(s) "Grant Date" means, with respect to any Option, the date on
which such Option is granted pursuant to the Plan.
(t) "GSCP" means Greenwich Street Capital Partners, Inc. and its
Affiliates.
(u) "Initial Option Grants" means the Option grants described in
Section 6.2.
(v) "Initial Public Offering" has the meaning specified in the
Stockholders Agreement.
(w) "Merger" means the merger provided for under the Merger
Agreement.
(x) "Merger Agreement" means the Recapitalization Agreement and
Plan of Merger, dated as of March 4, 1997, by and among Greenwich II,
LLC, a Delaware limited liability company ("Parent"), GST Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of Parent,
and the Company, pursuant to which the Purchaser will merge with and
into the Company, with the Company being the Surviving Corporation of
such Merger.
(y) "New Employer" means the Participant's employer, or the
parent or a subsidiary of such employer, immediately following a
Change in Control.
(z) "Option" means an option, granted to a Participant hereunder
to purchase one share of Common Stock at a price determined in
accordance with the Plan and on the terms and conditions set forth
hereunder. Options shall not be incentive stock options within the
meaning of Section 422 of the Code.
(aa) "Option Agreement" means an agreement between the Company
and the Participant embodying the terms of any Options granted
hereunder.
(bb) "Participant" means any Employee who has been granted an
Option pursuant to the Plan.
(cc) "Plan" means this 1997 Telex Communications Group, Inc.
Amended and Restated Stock Option Plan, as the same may be amended
from time to time.
(dd) "Retirement" means normal or early retirement under a
retirement plan maintained by the Company or its Subsidiaries in which
the Participant participates, or if the Participant does not
participate in any such plan, then voluntary termination of employment
by the Participant under circumstances in which he or she would be
entitled to normal or early retirement under the Company's Employees'
Pension Plan if the Participant were an employee of the Company
eligible to participate in such plan taking into account service with
the Company or the Subsidiary as service under such plan.
(ee) "Rollover Options" means the Rollover Options as defined in
the Merger Agreement.
(ff) "Stockholders Agreement" means the Stockholders and
Registration Rights Agreement of Telex Communications Group, Inc.,
dated as of March 4, 1997, as amended and restated as of May 6, 1997.
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<PAGE> 4
(gg) "Subsidiary" means any corporation or other entity a
majority or more of whose outstanding voting stock or voting power is
beneficially owned directly or indirectly by the Company.
(hh) "Telex" means Telex Communications, Inc.
(ii) "Valuation Formula", in the case of any Option holder, has
the meaning specified in the Stockholders Agreement. For the
avoidance of doubt, for purposes of the Plan and such Stockholders
Agreement, in determining the number of vested options granted under
the Company's 1998 Performance Stock Option Plan that are deemed to be
exercisable as of any date of determination prior to the occurrence of
an Exit Event for the purposes of such Valuation Formula, GSCP's IRR
(as defined in such 1998 Performance Stock Option Plan) shall be
determined as if GSCP realized its entire investment based on the
value of the Company as of such date of determination, and after
giving effect to any such Options that are so deemed to be
exercisable, as determined in good faith by Greenwich Street Capital
Partners, Inc. and certified to the Board by Greenwich Street Capital
Partners, Inc.
(jj) "Vested Option" means any Option, including Rollover
Options, which pursuant to the Plan or any Option Agreement is
immediately exercisable, but shall not mean any option granted under
any other option plan of the Company.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
Participants in the Plan shall be those Employees (other than the Chief
Executive Officer) recommended by the Chief Executive Officer of the Company
and approved by the Board to participate in the Plan. The Chief Executive
Officer's participation in the Plan shall be designated by the Board. The
selection of an Employee as a Participant shall neither entitle such Employee
to nor disqualify such Employee from participation in any other award or
incentive plan.
ARTICLE IV
POWERS OF THE BOARD
4.1 Power to Grant. The Board shall determine the Participants to whom
Options shall be granted and the terms and conditions of any and all options
granted to Participants, provided that nothing in the Plan shall limit the
right of the members of the Board who are also employees to receive awards
hereunder.
4.2 Administration. The Board shall be responsible for the
administration of the Plan. Any authority exercised by the Board under the
Plan shall be exercised by the Board in its sole discretion. Subject to the
terms of the Plan, the Board, by majority action thereof, is authorized to
prescribe, amend and rescind rules and regulations relating to the
administration of the Plan, to provide for conditions and assurances deemed
necessary or advisable to protect the interests of the Company and the
Subsidiaries, and to make all other determinations necessary or advisable for
the administration and interpretation of the Plan in order to carry out its
provisions and purposes. Determinations, interpretations or other actions made
or taken by the Board pursuant to the provisions of the Plan shall be final,
binding and conclusive for all purposes and upon all persons.
4.3 Delegation by the Board. All of the powers, duties and
responsibilities of the Board specified in the Plan may, to the full extent
permitted by applicable law, be exercised and
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<PAGE> 5
performed by any duly constituted committee of the Board, in any such case, to
the extent authorized by the Board to exercise and perform such powers, duties
and responsibilities.
ARTICLE V
OPTIONS SUBJECT TO PLAN
5.1 Number. Subject to the provisions of Sections 5.2 and 5.3, the
maximum number of shares of Common Stock subject to Options granted under the
Plan (excluding all shares subject to the Rollover Options) may not exceed
267,728 shares of the Company's Common Stock. The shares of Common Stock to be
delivered upon the exercise of Options granted under the Plan may consist, in
whole or in part, of treasury Common Stock or authorized but unissued Common
Stock not reserved for any other purpose.
5.2 Cancelled, Terminated or Forfeited Options. Any shares of Common
Stock subject to an Option which for any reason is cancelled, terminated or
otherwise forfeited, in whole or in part, without having been exercised, shall
again be available for grant under the Plan to the extent so canceled,
terminated or otherwise forfeited.
5.3 Adjustment in Capitalization. The number and class of shares of
Common Stock available for issuance upon exercise of Options granted under the
Plan, and the number, class and exercise price of any shares of Common Stock
subject to outstanding Options, may be adjusted by the Board, in its sole
discretion, if it shall deem such an adjustment to be necessary or appropriate
to reflect any Common Stock dividend, stock split or share combination or any
recapitalization, merger, consolidation, exchange of shares or similar
transaction or any liquidation or dissolution of the Company.
ARTICLE VI
TERMS OF OPTIONS
6.1 Grant of Options. The Board may provide that different terms apply
to Options granted to the same or different Participants on the same Grant Date
or to the same Participant on different Grant Dates. Each Option granted to a
Participant shall be evidenced by an Option Agreement that shall specify the
exercise price for each share of Common Stock which may be purchased pursuant
to such Option, the vesting schedule for, and the duration of, such Option and
such other terms consistent with the Plan as the Board shall determine.
6.2 Initial Option Grants.
(a) Number of shares. Options to purchase 228,042 shares of Common
Stock issuable under the Plan shall be granted to Participants selected by
the Board at such time or times as determined by the Board. By adopting
this Plan, the Board hereby grants, effective as of the Effective Time and
subject to the applicable terms hereof, Initial Option Grants to the
Participants set forth in the attached Option Agreements, in the applicable
amounts and having the applicable vesting schedules as set forth in such
Option Agreements.
(b) Exercise Price. The exercise price per share of Common Stock
purchased upon the exercise of each Initial Option Grant granted as of the
Effective Date shall be $7.98 per share. The exercise price per share of
Common Stock purchased upon the exercise of each Initial Option Grant
granted after the Effective Date shall be the Fair Market Value of a share
of Common Stock on the Grant Date.
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<PAGE> 6
(c) Exercise of Options. An Initial Option Grant shall vest and
become exercisable in accordance with the vesting schedule set forth in
each Participant's Option Agreement; provided that no portion of any
Initial Option Grant shall vest or become exercisable on or after the date
on which the holder thereof ceases to be employed by the Company or a
Subsidiary.
6.3 Special Service Option Grants.
(a) Number of Shares. (i) Options to purchase 39,696 shares of
Common Stock issuable under the Plan shall be granted to Participants
selected by the Board at such time or times as determined by the Board. By
adopting this Plan, as amended and restated, the Board hereby grants
Special Service Option Grants to the Participants set forth in the attached
Option Agreements in the applicable amounts set forth in such Option
Agreements. No additional Special Service Options shall be available for
grant.
(b) Exercise price. The exercise price per share of Common Stock
purchased upon the exercise of a Special Service Option Grant shall be
equal to $7.98 per share.
(c) Exercise of Options. Special Service Option Grants shall be fully
vested and exercisable upon grant.
6.4 Term of Options. Notwithstanding any other Plan provision, no
portion of any Option shall be exercisable for more than 10 years after the
Grant Date.
6.5 Payment. The Board shall establish procedures governing the exercise
of Options, which procedures shall generally require that written notice of the
exercise thereof be given and that the exercise price thereof be paid in full
in cash or cash equivalents, including by personal check, at the time of
exercise. If so determined by the Board in its sole discretion at or after the
Grant Date, the exercise price of any Options may be paid in full or in part in
the form of shares of Common Stock of the Company already owned by the
Participant, based on the Fair Market Value of such Common Stock on the date of
exercise or at such time as shall be set forth in the Option Agreement. As
soon as practicable after receipt of a written exercise notice and payment in
full of the exercise price of any exercisable Options, the Company shall
deliver to the Participant a certificate or certificates representing the
shares of Common Stock acquired upon the exercise thereof. Notwithstanding the
foregoing, the Company may, with the consent of a Participant, in lieu of
issuing shares of Common Stock upon the exercise of any Option, return to the
Participant any payment tendered to exercise the Option and pay the Participant
an additional amount in cash equal to the product of (i) the excess of (x) the
Fair Market Value of the Option over (y) the per share exercise price of the
Option being exercised times (ii) the number of shares as to which the
Participant has exercised the Option.
6.6 Stockholders Agreement. The Company and the Participant shall be
subject to and have the rights and obligations which are set forth in the
Stockholders Agreement. Following any termination of the Participant of a type
referred to in Section 2.1 of the Stockholders Agreement, any Vested Options
held by such Participant shall remain exercisable until the tenth anniversary
of the Grant Date.
ARTICLE VII
TERMINATION OF EMPLOYMENT
7.1 Special Termination. Unless otherwise determined by the Board at or
after the Grant Date and except as provided herein, in the event that a
Participant's employment with the Company and the Subsidiaries terminates due
to (i) the Participant's death or (ii) the Participant's
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<PAGE> 7
Disability (each a "Special Termination") then, subject to Section 6.6, any
Vested Options shall remain exercisable, solely until the first to occur of (x)
the first anniversary of the Participant's termination of employment or (y) the
expiration of the term of the Option. Except as provided herein, any Options
held by the Participant that are not vested and exercisable at the date of the
Participant's termination shall terminate and be cancelled immediately and,
upon such termination, any Options described in the preceding sentence that are
not exercised (or repurchased pursuant to the Stockholders' Agreement) within
the period described in such sentence shall terminate and be cancelled upon the
expiration of such period.
7.2 Termination for Cause. Unless otherwise determined by the Board at
or after the Grant Date, in the event that a Participant's employment with the
Company and the Subsidiaries is terminated for Cause, any Options held by such
Participant (other than Rollover Options and whether or not then vested and
exercisable) shall terminate and be cancelled immediately upon such termination
of employment.
7.3 Other Termination of Employment. Unless otherwise determined by the
Board at or after the Grant Date and except as provided herein, in the event
that a Participant's employment with the Company and the Subsidiaries
terminates (i) due to Retirement; (ii) voluntarily; or (iii) involuntarily for
any reason other than a Special Termination or for Cause, any Options held by
such Participant that are vested and exercisable as of the date of such
termination shall, subject to Sections 6.6 and 10.11, remain vested and
exercisable for a period of 90 days (or, if shorter, during the remaining term
of the Options). Except as provided herein, any Options held by the
Participant that are not exercisable at the date of the Participant's
termination of employment shall terminate and be cancelled immediately upon
such termination, and any Options described in the preceding sentence that are
not exercised (or repurchased pursuant to the Stockholders' Agreement) within
the period described in such sentence shall terminate and be cancelled upon the
expiration of such period.
ARTICLE VIII
CHANGE IN CONTROL
8.1 Accelerated Exercisability and Payment. Unless the Board shall
otherwise determine in the manner set forth in Section 8.2, in the event of a
Change in Control, each Option (whether or not then vested and exercisable)
shall be cancelled in exchange for a payment in cash of an amount equal to the
excess, if any, of the Change in Control Price over the exercise price for such
Option.
8.2 Alternative Options. Notwithstanding Section 8.1, no cancellation,
acceleration of exercisability, vesting or cash settlement or other payment
shall occur with respect to any Option if the Board reasonably determines in
good faith, prior to the occurrence of a Change in Control, that such Option
shall be honored or assumed, or new rights substituted therefor (such honored,
assumed or substituted Option being hereinafter referred to as an "Alternative
Option") by the New Employer, provided that any such Alternative Option must:
(a) provide the Participant that held such Option with rights
and entitlements substantially equivalent to or better than the
rights, terms and conditions applicable under such Option, including,
but not limited to, an identical or better exercise and vesting
schedule, identical or better timing and methods of payment, and the
rights and entitlements set forth in the Stockholders Agreement;
(b) have substantially equivalent or better economic value to
such Option (determined in good faith by the Board at the time of the
Change in Control); and
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<PAGE> 8
(c) provide that, in the event such Participant is involuntarily
terminated for any reason within two years following a Change in
Control, any conditions on such Participant's rights under, or any
restrictions on transfer or exercisability, including vesting,
applicable to each such Alternative Option shall be waived or shall
lapse, as the case may be.
ARTICLE IX
AMENDMENT, MODIFICATION AND
TERMINATION OF THE PLAN
The Board at any time may terminate or suspend the Plan, and from time to
time may amend or modify the Plan. No amendment, modification, termination or
suspension of the Plan shall in any manner adversely affect any Option
theretofore granted under the Plan, without the consent of the Participant
holding such Option.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Nontransferability of Awards. Except to the extent otherwise
expressly provided under Section 2 and 3 of the Stockholders' Agreement, no
options granted under the Plan may be sold, transferred, pledged, assigned,
encumbered or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution. All rights with respect to Options granted
to a Participant under the Plan shall be exercisable during his life-time by
such Participant only. Following a Participant's death, all rights with
respect to Options that were exercisable at the time of such Participant's
death and have not terminated shall be exercised by his designated Beneficiary
or by his estate in accordance with, and subject to, the terms and conditions
hereof and of the applicable Option Agreement.
10.2 Beneficiary Designation. Each Participant under the Plan may from
time to time name any Beneficiary or Beneficiaries (who may be named
contingently or successively) by whom any right under the Plan is to be
exercised in case of his death. Each designation will revoke all prior
designations by the same Participant, shall be in a form reasonably prescribed
by the Board, and will be effective only when received by the Board and only if
received during the Participant's lifetime.
10.3 No Guarantee of Employment or Participation. Nothing in the Plan or
in any Option Agreement shall interfere with or limit in any way the right of
the Company or any Subsidiary to terminate any Participant's employment at any
time, or confer upon any Participant any right to continue in the employ of the
Company or any Subsidiary. No Participant shall have a right to be selected as
a Participant or, having been so selected, to receive any Options.
10.4 Tax Withholding. The Company or the Subsidiary employing a
Participant shall have the power to withhold, or to require such Participant to
remit to the Company or such Subsidiary, subject to such other arrangements as
the Board may set forth in the Option Agreement to which such Participant is a
party, an amount sufficient to satisfy all federal, state, local and foreign
withholding tax requirements in respect of any Option granted under the Plan or
any share of Common Stock purchased upon the exercise of any such Option.
10.5 Indemnification. Each person who is or shall have been a member of
the Board or any committee of the Board shall be indemnified and held harmless
by the Company to the fullest extent permitted by law from and against any and
all losses, costs, liabilities and expenses (including any related attorneys'
fees and advances thereof) in connection with, based upon or arising or
resulting from any claim, action, suit or proceeding to which he may be made a
party or
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in which he may be involved by reason of any action taken or failure to act
under the Plan and from and against any and all amounts paid by him in
settlement thereof, with the Company's approval, or paid by him in satisfaction
of any judgment in any such action, suit or proceeding against him, provided
that he shall give the Company an opportunity, at its own expense, to defend
the same before he undertakes to defend it on his own behalf. The foregoing
right of indemnification shall not be exclusive and shall be independent of any
other rights of indemnification to which such persons may be entitled under the
Company's Certificate of Incorporation or By-laws, by contract, as a matter of
law, or otherwise.
10.6 Requirements of Law. The granting of Options and the issuance of
shares of Common Stock pursuant to such Options shall be subject to all
applicable laws, rules and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required. No
Options shall be granted under the Plan, and no shares of Common Stock shall be
issued upon exercise of any Options granted under the Plan, if such grant or
exercise would result in a violation of applicable law, including the federal
securities laws and any applicable state or foreign securities laws.
10.7 Freedom of Action. Subject to ARTICLE IX, nothing in the Plan or
any Option Agreement shall be construed as limiting or preventing the Company
or any Subsidiary from taking any action that it deems appropriate or in its
best interest.
10.8 Term of Plan. The Plan shall be effective as of the Effective Date.
The Plan shall thereafter continue in effect, unless sooner terminated
pursuant to ARTICLE IX, until the tenth anniversary of the Effective Date. The
provisions of the Plan, however, shall continue thereafter to govern all
outstanding Options theretofore granted.
10.9 No Voting Rights. No Participant holding any Options granted under
the Plan shall have any right, in respect of such Options, to vote on any
matter submitted to the Company's stockholders until such time as the shares of
Common Stock issuable upon exercise of such Options have been so issued.
10.10 Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Delaware,
regardless of the law that might be applied under principles of conflict of
laws.
10.11 Rollover Options. Rollover Options will be subject to the terms and
conditions set forth in the Plan other than Sections 6.1 through 6.4 and
Article VII. The Option Agreements with regard to these Rollover Options shall
continue to govern the exercise price of these Options. Following any
termination of a Participant's employment other than for Cause, any Rollover
Options held by such Participant shall remain exercisable until May 6, 2007.
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<PAGE> 1
EXHIBIT 10(ee)
AMENDED AND RESTATED
1998 TELEX COMMUNICATIONS GROUP, INC.
PERFORMANCE STOCK OPTION PLAN
ARTICLE I
PURPOSE
The purpose of this Amended and Restated 1998 Telex Communication Group,
Inc. Performance Stock Option Plan is to foster and promote the long-term
financial success of the Company and to increase materially stockholder value
by (a) motivating superior performance by participants in the Plan, (b)
providing participants in the Plan with an ownership interest in the Company
and (c) enabling the Company to attract and retain the services of an
outstanding management team upon whose judgment, interest and special effort
the successful conduct of its operations is largely dependent.
ARTICLE II
DEFINITIONS
2.1 Definitions. For purposes of this Plan, the following terms shall
have the meanings set forth below:
(a) "Affiliate" means with respect to any person, (a) any person
that directly or indirectly controls, is controlled by or under common
control with, such person, or (b) any director, officer, partner,
member or employee of such person or any person specified in clause
(a) above. Notwithstanding the foregoing, none of The Travelers
Insurance Company, The Travelers Life and Annuity Company, Smith
Barney Holdings Inc. or any of their respective subsidiaries shall be
deemed to be an Affiliate of the Company.
(b) "Alternative Option" has the meaning given in Section 8.1.
(c) "Beneficiary" means the person(s) designated by a Participant
in writing to the Board or, if none are so designated or living at the
time of the Participant's death, the person(s) and/or trust(s) by will
or the laws of descent and distribution or the estate or personal
representative entitled to receive the benefits specified under this
Plan in the event of the Participant's death.
(d) "Board" means the Board of Directors of the Company.
(e) "Cause" means (i) the willful failure by the Participant to
perform substantially his duties as an employee of the Company or any
Subsidiary (other than any such failure due to physical or mental
illness) after a demand for substantial performance is delivered to
the Participant by the executive to which the Participant reports or
by the Board, which notice identifies the manner in which such
executive or the Board, as the case may be, believes that the
Participant has not substantially
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<PAGE> 2
performed his duties, (ii) the Participant's engaging in willful and
serious misconduct that is or is expected to be injurious to the
Company or any Subsidiary, (iii) the Participant's having been
convicted of, or entered a plea of guilty or nolo contendere to, a
crime that constitutes a felony, (iv) the willful and material breach
by the Participant of any written covenant or agreement with the
Company or any Subsidiary not to disclose any information pertaining
to the Company, any Subsidiary or any Affiliate or not to compete or
interfere with the Company, any Subsidiary or any Affiliate or (v) any
willful material violation by the Participant of any federal, state or
foreign securities laws; provided that (1) in the event that the
Participant is employed by the Company or a Subsidiary under an
effective employment agreement on the date of determination and such
employment agreement shall contain a different definition of Cause,
the definition of Cause contained in such employment agreement shall
be substituted for the definition set forth above for all purposes
hereunder (2) if the Participant is a party to the 1997 Stockholders
Agreement, the definition of Cause in such agreement shall be
substituted for the definition set forth above for all purposes
hereunder.
(f) "Change in Control" means the occurrence of any of the
following events:
(i) the acquisition by any person, entity or "group" (as
defined in Section 13(d) of the Securities Exchange Act of 1934,
as amended), other than any stockholder of the Company immediately
after giving effect to the Merger, or any Affiliate of any such
stockholder, of 50% or more of the combined voting power of the
Company's then outstanding voting securities;
(ii) if at any time after the initial public offering of
Common Stock of the Company, (A) any "person" (as such term is
used in Section 13(d) and 14(d) of the Exchange Act), excluding
for this purpose GSCP, is or becomes the Beneficial Owner of more
than thirty-five percent (35%) of the total voting power of the
Company or of Telex, (B) GSCP beneficially owns a lesser
percentage of the voting power of the Company or of Telex and (C)
GSCP does not have the right or ability by voting power, contract
or otherwise to elect or designate a majority of the Board of the
Company or Telex or the Board of Directors of such corporation in
Control;
(iii) if after the initial public offering of the Common
Stock of the Company, a change in the composition of the Board or
the Company occurs during any period of two consecutive years such
that the directors who were in office at the beginning of the
period cease to constitute at least a majority of the Board of the
Company or Telex, as the case may be, unless the election of an
individual by such Board or whose nomination for election by the
shareholders of the Company was approved by a vote of at least
two-thirds (66-2/3%) of the directors then still in office who
were either directors at the beginning of such period or whose
election or nomination for election was previously so approved; or
(iv) more than 65% of the total value of the assets of the Company
and its subsidiaries are sold and the acquiror of such assets is
not GSCP, or an Affiliate of GSCP.
(g) "Change in Control Price" means the price per share of Common
Stock paid
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<PAGE> 3
in conjunction with any transaction resulting in a Change in Control
(as determined in good faith by the Board if any part of such price is
payable other than in cash).
(h) "Code" means the Internal Revenue Code of 1986, as amended.
References to Sections of the Code shall be deemed to refer to such
Sections as in effect on the date this Plan is adopted as such
Sections may, from time to time, be amended.
(i) "Common Stock" means the Common Stock, par value $.0005 per
share, of the Company.
(j) "Company" means Telex Communications Group, Inc., a Delaware
corporation, and its successors and assigns.
(k) "Control" of a corporation means the direct or indirect
ownership of 50% or more of the voting power, and of a partnership or
limited liability company means the direct or indirect ownership of
50% or more of the combined voting power of the Company's outstanding
voting securities.
(l) "Determination Date" means the date as of which the Fair
Market Value of the Common Stock is to be determined pursuant to the
Plan or the applicable Option Agreement.
(m) "Disability" means the termination of the employment of any
Participant by the Company or any of its subsidiaries following an
illness or accident occurring during the period of such Participant's
employment which prevents such Participant from performing such
Participant's duties for a period in excess of 270 days (whether or
not consecutive) or 180 consecutive days, as the case may be, in any
twelve-month period during such period of employment.
(n) "Effective Date" means the date on which the Plan is approved
by the Board and the Company's shareholders.
(o) "Employee" means any executive, senior officer or other key
employee of the Company or any Subsidiary.
(p) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(q) "Fair Market Value" means, the fair market value of a share
of Common Stock on any Determination Date (i) prior to an Initial
Public Offering, as determined and established by the Board based on
such relevant facts as the Board considers appropriate (which may
include appraisals of the fair market value of the Company as may be
available to the Board) and (ii) following an Initial Public Offering,
the closing price of the Stock on a national securities exchange (or
on such other recognized quotation system on which the trading prices
of the Stock are quoted at the relevant time) on such date, provided
that in the event that there are no Stock transactions reported on
such exchange (or such other system) on such date, Fair Market Value
shall mean the closing price on the immediately preceding date on
which Stock transactions were so reported.
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(r) "Grant Date" means, with respect to any Option, the date on
which such Option is granted pursuant to the Plan.
(s) "GSCP" means Greenwich Street Capital Partners, Inc. and its
Affiliates.
(t) "Initial Public Offering" means the initial public offering
of the Company's Common Stock following which the Company's Common
Stock is traded on the New York Stock Exchange, the American Stock
Exchange or the National Association of Securities Dealers Automated
Quotation System.
(u) "New Employer" means the Participant's employer, or the
parent or a subsidiary of such employer, immediately following a
Change in Control.
(v) "Option" means an option, granted to a Participant hereunder
to purchase one share of Common Stock at a price determined in
accordance with the Plan and on the terms and conditions set forth
hereunder. Options shall not be incentive stock options within the
meaning of Section 422 of the Code.
(w) "1997 Stockholders Agreement" means the Stockholders and
Registration Rights Agreement of Telex Communications Group, Inc.,
dated as of March 4, 1997, as amended and restated as of May 6, 1997.
(x) "Option Agreement" means an agreement between the Company and
the Participant embodying the terms of any Options granted hereunder.
(y) "Participant" means any Employee who has been granted an
Option pursuant to the Plan.
(z) "Plan" means this Amended and Restated 1998 Telex
Communications Group, Inc. Performance Stock Option Plan, as the same
may be further amended from time to time.
(aa) "Retirement" means normal or early retirement under a
retirement plan maintained by the Company or its Subsidiaries in which
the Participant participates, or if the Participant does not
participate in any such plan, then voluntary termination of employment
by the Participant under circumstances in which he or she would be
entitled to normal or early retirement under the Company's Employees'
Pension Plan if the Participant were an employee of the Company
eligible to participate in such plan taking into account service with
the Company or the Subsidiary as service under such plan.
(bb) "Subsidiary" means any corporation or other entity a
majority or more of whose outstanding voting stock or voting power is
beneficially owned directly or indirectly by the Company.
(cc) "Telex" means Telex Communications, Inc.
36
<PAGE> 5
(dd) "Vested Option" means any Option, which pursuant to the Plan
or any Option Agreement is vested as of the applicable date of
determination.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
Participants in the Plan shall be those Employees (other than the Chief
Executive Officer) recommended by the Chief Executive Officer of the Company
and approved by the Board to participate in the Plan. The Chief Executive
Officer's participation in the Plan shall be designated by the Board. The
selection of an Employee as a Participant shall neither entitle such Employee
to nor disqualify such Employee from participation in any other award or
incentive plan.
ARTICLE IV
POWERS OF THE BOARD
4.1 Power to Grant. The Board shall determine the Participants to whom
Options shall be granted and the terms and conditions of any and all options
granted to Participants, provided that nothing in the Plan shall limit the right
of the members of the Board who are also employees to receive awards hereunder.
4.2 Administration. The Board shall be responsible for the
administration of the Plan. Any authority exercised by the Board under the Plan
shall be exercised by the Board in its sole discretion. Subject to the terms of
the Plan, the Board, by majority action thereof, is authorized to prescribe,
amend and rescind rules and regulations relating to the administration of the
Plan, to provide for conditions and assurances deemed necessary or advisable to
protect the interests of the Company and the Subsidiaries, and to make all other
determinations necessary or advisable for the administration and interpretation
of the Plan in order to carry out its provisions and purposes. Determinations,
interpretations or other actions made or taken by the Board pursuant to the
provisions of the Plan shall be final, binding and conclusive for all purposes
and upon all persons.
4.3 Delegation by the Board. All of the powers, duties and
responsibilities of the Board specified in the Plan may, to the full extent
permitted by applicable law, be exercised and performed by any duly constituted
committee of the Board, in any such case, to the extent authorized by the Board
to exercise and perform such powers, duties and responsibilities.
ARTICLE V
OPTIONS SUBJECT TO PLAN
5.1 Number. Subject to the provisions of Sections 5.2 and 5.3, the
maximum number of shares of Common Stock subject to Options granted under the
Plan may not exceed 880,732 shares of the Company's Common Stock. The shares
of Common Stock to be delivered upon the exercise of Options granted under the
Plan may consist, in whole or in part, of treasury Common Stock or authorized
but unissued Common Stock not reserved for any other purpose.
37
<PAGE> 6
5.2 Cancelled, Terminated or Forfeited Options. Any shares of Common
Stock subject to an Option which for any reason is cancelled, terminated or
otherwise forfeited, in whole or in part, without having been exercised, shall
again be available for grant under the Plan to the extent so canceled,
terminated or otherwise forfeited.
5.3 Adjustment in Capitalization. The number and class of shares of
Common Stock available for issuance upon exercise of Options granted under the
Plan, and the number, class and exercise price of any shares of Common Stock
subject to outstanding Options, may be adjusted by the Board, in its sole
discretion, if it shall deem such an adjustment to be necessary or appropriate
to reflect any Common Stock dividend, stock split or share combination or any
recapitalization, merger, consolidation, exchange of shares or similar
transaction or any liquidation or dissolution of the Company.
ARTICLE VI
TERMS OF OPTIONS
6.1 Grant of Options. The Board may provide that different terms apply
to Options granted to the same or different Participants on the same Grant Date
or to the same Participant on different Grant Dates. Each Option granted to a
Participant shall be evidenced by an Option Agreement that shall specify the
exercise price for each share of Common Stock which may be purchased pursuant
to such Option, the vesting schedule for, and the duration of, such Option and
such other terms consistent with the Plan as the Board shall determine.
6.2 Performance Option Grants.
(a) Number of shares. Options to purchase 880,732 shares of Common
Stock issuable under the Plan shall be granted to Participants selected by
the Board in consultation with the management of the Company. If and to
the extent any Performance Options were not at any time previously granted
prior to the first occurrence of an Exit Event, then, without any further
action of the Board, such Performance Options shall be granted, effective
as of immediately before such Exit Event, to each Participant then holding
an Performance Option pro rata in accordance with the relative number of
shares of Common Stock subject to his or her Performance Options to the
aggregate number of Performance Options held by all Participants at such
time.
(b) Exercise Price. The exercise price per share of Common Stock
purchased upon the exercise of an Performance Option Grant shall be equal
to $.01.
(c) Exercise of Options.
(i) Acceleration of Exercise. All or a portion (as provided
herein) of the Performance Options shall become exercisable if, on
the date of the first occurrence of an Exit Event, GSCP's IRR (as
defined below) exceeds twenty percent (20%), in which case the
Applicable Percentage (as defined below) of the Performance
Options shall become exercisable on such date. If, as of such
first occurrence of an Exit Event, GSCP's IRR does not exceed
twenty percent (20%), then no portion of the Performance Options
shall become exercisable as of such
38
<PAGE> 7
date. In the event that any portion of the Performance Options
does not become exercisable on the first occurrence of an Exit
Event, such portion of such Performance Options shall not become
exercisable as a result of any subsequent Exit Event and shall be
cancelled.
(ii) Exercise Absent Acceleration. Performance Options that
have not theretofore been cancelled shall become exercisable on
the ninth anniversary of the Grant Date at an exercise price equal
to the Fair Market Value of a share of Common Stock on the
applicable Grant Date, subject to the Participant's continued
employment with the Company or its Subsidiaries from the Grant
Date to such ninth anniversary.
(d) Certain Definitions. As used herein:
"Applicable Percentage" shall be determined as follows
(subject to Section 6.2(e)):
(i) If GSCP's IRR is greater than 20% without giving
effect to the issuance of shares under the Performance
Options, the Applicable Percentage shall be equal to the sum
of (x) the lesser of (I) 10% and (II) such lesser percentage
of the Performance Options that, if exercised, would reduce
GSCP's IRR to 20% plus (y) any amount determined under clauses
(ii) and (iii) below. If GSCP's IRR would equal or exceed 21%
after giving effect to the exercise of 10% of the Performance
Options, the remaining Performance Options shall be divided
into ten tranches, consisting of five equal tranches of five
percent (5%) of the total number of Performance Options and
five equal tranches of thirteen percent (13%) of the total
number of Performance Options, each tranche corresponding to a
whole 1% increment in GSCP's IRR from and including 21% to 30%
as set forth in clauses (ii) and (iii) below.
(ii) The first five tranches shall become exercisable as
follows: if GSCP's IRR after giving effect to the exercise of
the 10% of the Performance Options would equal or exceed 21%,
an additional amount of the first tranche of 5% of the
Performance Options would become exercisable, such amount
being equal to the lesser of (I) the full amount of such 5%
tranche (i.e., 44,037 Performance Options) and (II) such
lesser percentage that, if added to the applicable percentage
determined without regard to such calculation, would not
reduce GSCP's IRR below 21%. Such calculation shall be
repeated, for each whole 1% increment in GSCP's IRR above 21%
up to and including 26% and for each of the remaining four
tranches of 5% of the Performance Options, and the applicable
percentage shall be increased by the amount determined under
each such computation until GSCP's IRR would equal or exceed
26% after giving effect to the exercise of a total of 35% of
the Performance Options.
(iii) The remaining five tranches shall become
exercisable as follows: if GSCP's IRR after giving effect to
the exercise of 35% of the Performance Options would
39
<PAGE> 8
exceed 26%, an additional amount of the first tranche of 13% of the
Performance Options would become exercisable, such amount being equal to
the lesser of (I) the full amount of such 13% tranche (i.e., 114,495
Performance Options) and (II) such lesser percentage that, if added to
the applicable percentage determined without regard to such calculation,
would not reduce GSCP's IRR below 26%. Such calculation shall be
repeated, for each whole 1% increment in GSCP's IRR above 26% and for
each of the remaining four tranches of 13% of the Performance Options,
and the applicable percentage shall be increased by the amount
determined under each such computation. Accordingly, if GSCP's IRR
would equal or exceed 30% after giving effect to the exercise of all of
the Performance Options, the Applicable Percentage shall be 100%.
"Exit Event" shall mean: (i) the first date on which sixty
percent (60%) of the Company's common stock is held by the public;
(ii) the sale by GSCP of Company stock to one or more parties
other than a Permitted Assignee (as defined in the 1997
Stockholders Agreement) if, after giving effect to such sale, GSCP
(and any Permitted Assignees) shall have sold sixty percent (60%)
or more of stock in the Company it owned as of February 2, 1998;
(iii) any merger, recapitalization, reorganization or other
similar event having substantially the same result as described in
the preceding clauses (i) or (ii); or (iv) if so requested
Participants holding at the time a majority of the Performance
Options, the receipt by the Company of a bona fide offer to
purchase the Company that GSCP's nominees to the Board have
determined not to pursue. For purposes of the foregoing, an offer
shall be considered a bona fide offer only if a bona fide
definitive written offer has been submitted to the Board and the
Board, after consultation with its independent financial advisors,
determines that the person making such offer is reasonably capable
of completing such offer, taking into account the legal,
financial, regulatory and other aspects thereof.
"GSCP's IRR" shall mean the internal rate of return,
compounded annually, realized by GSCP on its investment in the
stock (preferred and common) of the Company as if GSCP realized
its entire investment at the value inherent in the transaction or
proposed transaction that constitutes the Exit Event, as
determined in good faith by Greenwich Street Capital Partners,
Inc. and certified to the Board by Greenwich Street Capital
Partners, Inc.
(e) Termination of Employment. Notwithstanding anything in Article
VII to the Contrary:
(i) If a Participant's employment with the Company or its
Subsidiaries terminates for any reason after the first anniversary
of the Grant Date, such Participant's Performance Options shall
not terminate or be canceled solely as a result of such
termination of employment (other than a termination for Cause).
Unless otherwise determined by the Board at the time of grant with
respect to a particular Participant, if a Participant's employment
with the Company or its Subsidiary terminates prior to such first
anniversary, such Participant's Performance Options shall
terminate and be cancelled; provided that if a Participant was
employed with the Company or a Subsidiary on January 28, 1998,
such Participant's Performance Options shall not terminate or be
cancelled
40
<PAGE> 9
solely as a result of such termination of employment (other than a
termination for Cause).
(ii) If (A) the exercisability of Performance Options is
accelerated in accordance with Section 6.2(c)(i) and (B) and there
has been a termination of the employment of the holder of a
Performance Options after the first anniversary of the Grant Date
and prior to the date of such acceleration (other than a
termination for Cause), in determining the Applicable Percentage
with respect to such Performance Options, the Applicable
Percentage will itself be multiplied by the percentage set forth
below:
<TABLE>
<CAPTION>
Date of Termination of Employment Percentage
- -------------------------------------------------------------------- ----------
<S> <C>
After the first anniversary of the Grant Date 10%
After the second anniversary of the Grant Date 40%
After the third anniversary of the Grant Date 70%
After the fourth anniversary of the Grant Date 100%
</TABLE>
In the case of a Participant who was employed with the Company or
subsidiary on January 28, 1998, "January 28, 1998" shall be substituted
for "Grant Date" for purposes of the preceding table and, in the case
of any other Participant the Board may, at the time of grant, select a
date other than "January 28, 1998" with respect to such Participant
that shall be substituted for "Grant Date" for purposes of the
preceding table. If the Participant's employment terminates for Cause,
for the avoidance of doubt, any Performance Options held by such
Participant shall be forfeited, terminated and cancelled.
6.3 Term of Options. Notwithstanding any other Plan provision, no
portion of any Option shall be exercisable for more than 10 years after the
Grant Date.
6.4 Payment. The Board shall establish procedures governing the exercise
of Options, which procedures shall generally require that written notice of the
exercise thereof be given and that the exercise price thereof be paid in full
in cash or cash equivalents, including by personal check, at the time of
exercise. If so determined by the Board in its sole discretion at or after the
Grant Date, the exercise price of any Options may be paid in full or in part in
the form of shares of Common Stock of the Company already owned by the
Participant, based on the Fair Market Value of such Common Stock on the date of
exercise or at such time as shall be set forth in the Option Agreement. As
soon as practicable after receipt of a written exercise notice and payment in
full of the exercise price of any exercisable Options, the Company shall
deliver to the Participant a certificate or certificates representing the
shares of Common Stock acquired upon the exercise thereof. Notwithstanding the
foregoing, the Company may, with the consent of a Participant, in lieu of
issuing shares of Common Stock upon the exercise of any Option, return to the
Participant any payment tendered to exercise the Option and pay the Participant
an additional amount in cash equal to the product of (i) the excess of (x) the
Fair Market Value of the Option over (y) the per share exercise price of the
Option being exercised times (ii) the number of shares as to which the
Participant has exercised the Option.
41
<PAGE> 10
6.5 Stockholders Agreement. Prior to an Initial Public offering, the
Company may require, as a condition to any Participant exercising an Option,
that the Participant enter into a stockholders agreement having such terms as
the Board determines appropriate in its discretion (including, but not limited
to, a prohibition prior to an Initial Public Offering of any transfers of any
shares of Common Stock held by the Participant while employed with the Company,
rights to participate in, and to be required to participate in, certain sales
by GSCP and the Company's right to repurchase any shares from the Participant
following termination of employment). The foregoing shall not apply to a
Participant who is a party to the 1997 Stockholders Agreement.
ARTICLE VII
TERMINATION OF EMPLOYMENT
7.1 Termination other than for Cause. Unless otherwise determined by the
Board at or after the Grant Date and except as provided herein, in the event
that a Participant's employment with the Company and the Subsidiaries
terminates, any Vested Options that become exercisable in accordance with
Section 6.2(c) shall remain exercisable, solely until the first to occur of (x)
the date, if any, that is 90 days following the date such Vested Options become
exercisable pursuant to Section 6.2(c)(i), or (y) the expiration of the term of
the Option. Except as provided herein, any Options held by the Participant
that are not vested at the date of the Participant's termination shall
terminate and be cancelled immediately and, upon such termination, any Options
described in the preceding sentence that are not exercised (or repurchased
pursuant to the Stockholders' Agreement) within the period described in such
sentence shall terminate and be cancelled upon the expiration of such period.
7.2 Termination for Cause. Unless otherwise determined by the Board at
or after the Grant Date, in the event that a Participant's employment with the
Company and the Subsidiaries is terminated for Cause, any Options held by such
Participant (whether or not then vested and exercisable) shall terminate and be
cancelled immediately upon such termination of employment.
ARTICLE VIII
CHANGE IN CONTROL
8.1 Accelerated Exercisability and Payment. Unless the Board shall
otherwise determine in the manner set forth in Section 8.2, in the event of a
Change in Control, each Option shall be cancelled in exchange for a payment in
cash (or in stock of the New Employer if the stock of such entity is
publicly-traded ) in an amount equal to the excess, if any, of the Change in
Control Price over the exercise price for such Option.
8.2 Alternative Options. No cancellation, acceleration of
exercisability, vesting or cash settlement or other payment shall occur with
respect to any Option if the Board reasonably determines in good faith, prior
to the occurrence of a Change in Control, that such Option shall be honored or
assumed, or new rights substituted therefor (such honored, assumed or
substituted Option being hereinafter referred to as an "Alternative Option") by
the New Employer, provided that any such Alternative Option must:
42
<PAGE> 11
(a) provide the Participant that held such Option with rights
and entitlements substantially equivalent to or better than the
rights, terms and conditions applicable under such Option, including,
but not limited to, an identical or better exercise and vesting
schedule, identical or better timing and methods of payment;
(b) have substantially equivalent or better economic value to
such Option (determined in good faith by the Board at the time of the
Change in Control); and
(c) provide that, in the event such Participant is involuntarily
terminated for any reason within two years following a Change in
Control, any conditions on such Participant's rights under, or any
restrictions on transfer or exercisability, including vesting,
applicable to each such Alternative Option shall be waived or shall
lapse, as the case may be.
ARTICLE IX
AMENDMENT, MODIFICATION AND
TERMINATION OF THE PLAN
The Board at any time may terminate or suspend the Plan, and from time to
time may amend or modify the Plan. No amendment, modification, termination or
suspension of the Plan shall in any manner adversely affect any Option
theretofore granted under the Plan, without the consent of the Participant
holding such Option.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Nontransferability of Awards. Except to the extent otherwise
expressly provided under Section 2 and 3 of the Stockholders' Agreement, no
options granted under the Plan may be sold, transferred, pledged, assigned,
encumbered or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution. All rights with respect to Options granted
to a Participant under the Plan shall be exercisable during his life-time by
such Participant only. Following a Participant's death, all rights with
respect to Options that were exercisable at the time of such Participant's
death and have not terminated shall be exercised by his designated Beneficiary
or by his estate in accordance with, and subject to, the terms and conditions
hereof and of the applicable Option Agreement.
10.2 Beneficiary Designation. Each Participant under the Plan may from
time to time name any Beneficiary or Beneficiaries (who may be named
contingently or successively) by whom any right under the Plan is to be
exercised in case of his death. Each designation will revoke all prior
designations by the same Participant, shall be in a form reasonably prescribed
by the Board, and will be effective only when received by the Board and only if
received during the Participant's lifetime.
10.3 No Guarantee of Employment or Participation. Nothing in the Plan or
in any Option Agreement shall interfere with or limit in any way the right of
the Company or any Subsidiary to terminate any Participant's employment at any
time, or confer upon any Participant any right to continue in the employ of the
Company or any Subsidiary. No Participant shall have a right to be selected as
a Participant or, having been so selected, to receive any Options.
43
<PAGE> 12
10.4 Tax Withholding. The Company or the Subsidiary employing a
Participant shall have the power to withhold, or to require such Participant to
remit to the Company or such Subsidiary, subject to such other arrangements as
the Board may set forth in the Option Agreement to which such Participant is a
party, an amount sufficient to satisfy all federal, state, local and foreign
withholding tax requirements in respect of any Option granted under the Plan or
any share of Common Stock purchased upon the exercise of any such Option.
10.5 Indemnification. Each person who is or shall have been a member of
the Board or any committee of the Board shall be indemnified and held harmless
by the Company to the fullest extent permitted by law from and against any and
all losses, costs, liabilities and expenses (including any related attorneys'
fees and advances thereof) in connection with, based upon or arising or
resulting from any claim, action, suit or proceeding to which he may be made a
party or in which he may be involved by reason of any action taken or failure
to act under the Plan and from and against any and all amounts paid by him in
settlement thereof, with the Company's approval, or paid by him in satisfaction
of any judgment in any such action, suit or proceeding against him, provided
that he shall give the Company an opportunity, at its own expense, to defend
the same before he undertakes to defend it on his own behalf. The foregoing
right of indemnification shall not be exclusive and shall be independent of any
other rights of indemnification to which such persons may be entitled under the
Company's Certificate of Incorporation or By-laws, by contract, as a matter of
law, or otherwise.
10.5 Requirements of Law. The granting of Options and the issuance of
shares of Common Stock pursuant to such Options shall be subject to all
applicable laws, rules and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required. No
Options shall be granted under the Plan, and no shares of Common Stock shall be
issued upon exercise of any Options granted under the Plan, if such grant or
exercise would result in a violation of applicable law, including the federal
securities laws and any applicable state or foreign securities laws.
10.6 Freedom of Action. Subject to ARTICLE IX, nothing in the Plan or
any Option Agreement shall be construed as limiting or preventing the Company
or any Subsidiary from taking any action that it deems appropriate or in its
best interest.
10.7 Term of Plan. The Plan shall be effective as of the Effective Date.
The Plan shall thereafter continue in effect, unless sooner terminated
pursuant to ARTICLE IX, until the tenth anniversary of the Effective Date. The
provisions of the Plan, however, shall continue thereafter to govern all
outstanding Options theretofore granted.
10.9 No Voting Rights. No Participant holding any Options granted under
the Plan shall have any right, in respect of such Options, to vote on any
matter submitted to the Company's stockholders until such time as the shares of
Common Stock issuable upon exercise of such Options have been so issued.
10.8 Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Delaware,
regardless of the law that might be applied under principles of conflict of
laws.
44
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,482
<SECURITIES> 0
<RECEIVABLES> 64,108
<ALLOWANCES> 0
<INVENTORY> 68,685
<CURRENT-ASSETS> 147,590
<PP&E> 47,938
<DEPRECIATION> 0
<TOTAL-ASSETS> 282,471
<CURRENT-LIABILITIES> 92,966
<BONDS> 316,948
0
0
<COMMON> 3,089
<OTHER-SE> (136,508)
<TOTAL-LIABILITY-AND-EQUITY> 282,471
<SALES> 86,761
<TOTAL-REVENUES> 86,761
<CGS> 54,190
<TOTAL-COSTS> 24,604
<OTHER-EXPENSES> (521)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,012
<INCOME-PRETAX> (524)
<INCOME-TAX> 766
<INCOME-CONTINUING> (1,290)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,290)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
