<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM COMMISSION FILE NO. 333-27341
APRIL 1, 1998 TO DECEMBER 31, 1998
TELEX COMMUNICATIONS, INC.
(FORMERLY KNOWN AS EV INTERNATIONAL, INC.)
(Exact name of registrant as specified in its charter)
DELAWARE 38-1853300
(State or other jurisdiction of (I.R.S. Employer
incorporation or Identification No.)
organization)
9600 ALDRICH AVENUE SOUTH, BLOOMINGTON, MINNESOTA 55420
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 884-4051
Securities registered pursuant to Section 12(b) of the Act
NONE
Securities registered pursuant to Section 12(g) of the Act
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of Common Stock held by non-affiliates on February
28, 1999 was $0.
As of February 28, 1999 there were 110 shares of Telex Communications, Inc.
Common Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE> 2
TABLE OF CONTENTS TO FORM 10-K
<TABLE>
PAGE
----
<S> <C> <C>
PART I................................................................... 1
ITEM 1. BUSINESS.............................................. 1
ITEM 2. PRODUCTION AND FACILITIES............................. 15
ITEM 3. LEGAL PROCEEDINGS..................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS...................................... 17
PART II.................................................................. 18
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS........................... 18
ITEM 6. SELECTED FINANCIAL DATA............................... 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK........................................... 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........... 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................... 35
PART III................................................................. 36
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS...................... 36
ITEM 11. EXECUTIVE COMPENSATION................................ 39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT........................................ 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........ 47
PART IV.................................................................. 48
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K................................... 48
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
CORPORATE HISTORY:
Telex Communications, Inc. (together with its subsidiaries and, as the
context may require, any predecessor companies, "Telex" or the "Company") is a
leader in the design, manufacture and marketing of sophisticated audio, wireless
and multimedia communications equipment for 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 currently 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 satellite-based mobile phone antennas, personal computer speech recognition
and speech dictation systems, and hearing aids and wireless assistive listening
devices. Its products are used in airports, theaters, sports arenas, concert
halls, cinemas, stadiums, convention centers, television and radio broadcast
studios, houses of worship and other venues where music or speech is amplified
or transmitted, and by professional entertainers, television and radio on-air
talent, presenters, airline pilots and the hearing impaired in order to
facilitate speech or communications. The Company is a wholly owned subsidiary of
Telex Communications Group, Inc. ("Holdings"), a holding company whose assets
consist primarily of its investment in the Company.
The Company was formed as a result of the February 2, 1998 merger (the
"Merger") of EV International, Inc. (together with its subsidiaries and any
predecessor companies in respect of periods prior to the Merger, "Old EVI") and
Telex Communications, Inc. (together with its subsidiaries and any predecessor
companies in respect of periods prior to the Merger, "Old Telex"), with Old EVI
surviving. In connection with the Merger, Old EVI changed its corporate name to
"Telex Communications, Inc.", and as such is referred to in this report as
"Telex" or the "Company". Immediately prior to the Merger, Greenwich I, LLC
("G-I"), a subsidiary wholly owned by Greenwich Street Capital Partners, L.P.
("GSCP") and certain affiliated investors, exchanged all of the issued and
outstanding common and preferred stock of EVI Holdings, the former parent of Old
EVI, for 1,397,400 shares of common stock of Holdings, par value $0.0005 per
share (the "Common Stock") and 13,000 shares of Series A Pay-in-Kind Preferred
Stock, par value $0.01 per share, of Holdings, respectively, and EVI Holdings
was merged with and into Holdings, with Holdings continuing as the surviving
corporation (the "Parent Merger," and together with the Merger, the "Mergers").
The Mergers have been accounted for essentially as a pooling of interests from
May 6, 1997, the date on which the two constituent companies came under the
common control of GSCP, and the financial statements of the Company for Fiscal
1998 accordingly include the results of Old Telex from May 6, 1997.
Old EVI was formed from the professional audio business that was formerly
part of Mark IV Industries, Inc. ("Mark IV"). Prior to February 10, 1997, Mark
IV conducted Old EVI's original business through various operating divisions and
subsidiaries. On February 10, 1997, GSCP and certain affiliated investors
acquired from Mark IV and one of its subsidiaries all of the issued and
outstanding capital stock of the former parent of Old EVI, for a cash purchase
price of approximately $156.4 million, which amount is subject to further
post-closing adjustments. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--The Acquisition." The predecessor company
of Old Telex was founded in 1936 as a manufacturer and distributor of hearing
aid products. In May 1989, Memorex Telex N.V. sold the assets that comprised the
Company's business to Holdings and Old Telex. On May 6, 1997, Old Telex
<PAGE> 4
completed a recapitalization pursuant to an agreement among Old Telex, Holdings,
GSCP and certain other investors. Additional information on the Old EVI
acquisition and Old Telex recapitalization is set forth in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Effective December 31, 1998, the Company changed its fiscal year end from
March 31 to December 31. This report contains information concerning the
business, operations and financial results of the Company as of and for the
nine-month period ended December 31, 1998 (the "Transition Period"). In
connection with the Merger, the Company previously changed its fiscal year end,
effective as of March 31, 1998, from the last day of February to March 31, the
fiscal year historically utilized by Holdings. The Company filed with the
Securities and Exchange Commission (the "SEC") the following reports in
connection with the Merger and related changes in fiscal year end: (i) on July
14, 1998, an annual report on Form 10-K for the fiscal year ended March 31, 1998
and the one-month transition period of March, 1997; (ii) on May 29, 1998 and
June 19, 1998, respectively, an annual report on Form 10-K and Form 10-K/A for
the fiscal year ended February 28, 1998, covering the business, operations and
financial results of the Company after giving effect to the Merger; and (iii) on
May 4, 1998, a transition report on Form 10-K covering the business, operations
and financial results of Old Telex on a stand-alone basis for the period from
April 1, 1997 to February 2, 1998, immediately prior to the Merger, but after
giving effect to certain Merger-related transactions. Such reports contain
disclosures concerning the Company and its predecessors which may be helpful in
better understanding the information included in this Form 10-K.
Unless otherwise indicated, all references in this Form 10-K to Fiscal 1995
and 1996 are to the fiscal years ending on the last day of February of each year
(e.g., Fiscal 1996 refers to the fiscal year ended February 28, 1996) and all
references to Fiscal 1998 are for the fiscal year ending March 31, 1998. Fiscal
1997, which fiscal year ended on the last day of February, 1997, includes the
one month transition period of March 1997, which resulted from the Company's
1998 change in fiscal year end from the last day of February to March. For
further information concerning the Company's consolidated financial statements
and certain changes in the basis of presentation, see "Selected Financial Data"
and the Company's consolidated financial statements and notes thereto that are
included elsewhere herein.
The Company is a Delaware corporation, with principal executive offices
currently located at 9600 Aldrich Avenue South, Bloomington, Minnesota 55420.
The Company's telephone number is (612) 884-4051.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements, such as statements which
relate to the Company's business objectives, plans, strategies, and expectations
or describe the potential markets for the Company's products, that are based on
management's current opinions, beliefs, or expectations as to future results or
future events. While made in good faith and with a reasonable basis based on
information currently available to the Company's management, there is no
assurance that such opinions or expectation beliefs will be achieved or
accomplished. Various factors, including those described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this report, could cause actual results and events to vary
significantly from those expressed in any forward-looking statement. Such types
of statements are intended to be "forward-looking statements" for purposes of
the Private Securities Litigation Reform Act of 1995, and should be read in
conjunction with the cautionary statements set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Risks Related to Telex's Business."
2
<PAGE> 5
SEGMENT INFORMATION:
OVERVIEW
Subsequent to the Mergers, the Company reorganized what had been classified
as Old Telex's four strategic business units and Old EVI's four principal lines
of business into two business segments, Professional Sound and Entertainment and
Multimedia/Audio Communications. A more detailed discussion concerning each of
the Company's two business segments follows. The Company manages these two
business segments under a matrix management structure whereby the
responsibilities associated with the management, on a worldwide basis, of the
Company's numerous sales territories and distribution channels, as well as its
product development and product management groups, are shared by three business
unit presidents. Two of these business unit presidents share the management
responsibility for the Professional Sound and Entertainment Group as well as the
overall responsibility for the sale of most of the Company's products outside of
the United States. The other business unit president has the management
responsibility for the Multimedia/Audio Communications Group as well as the
sales responsibility for certain of this business segment's product lines
distributed outside of the United States.
Financial information for the Company's two business segments for the nine
months ended December 31, 1998, Fiscal 1998 and the period from February 11,
1997 through March 31, 1997, is set forth in Note 13 to the Consolidated
Financial Statements.
PROFESSIONAL SOUND AND ENTERTAINMENT
Professional Sound and Entertainment combines Old EVI's three principal
lines of business within the overall professional audio market (i.e., (i) Fixed
Installation, or permanently installed sound systems in public venues; (ii)
Professional Music Retail, or sound products used by professional musicians and
sold principally through retail channels; and (iii) Concert/Recording/Broadcast,
or sound products used in professional concerts, recording projects and radio
and television broadcast) and the Broadcast Communications Systems and Sound
Reinforcement product groups from Old Telex's Professional Sound and
Entertainment Group (i.e., advanced digital matrix intercoms used by
broadcasters, including all major television networks, to control production
communications; intercoms, headsets and wireless communications systems used by
professional, college and high school football teams and stadiums and other
professional and school sports teams; and wired and wireless microphones used in
the education, sports, broadcast, music and religious markets).
Fixed Installation. Fixed Installation encompasses permanently installed
sound systems in airports, sports arenas, theaters, concert halls, cinemas,
stadiums, convention centers, houses of worship and other venues where music or
speech is amplified. Within the Fixed Installation line of business there are
varying requirements, ranging from concert halls and theatres, which need the
highest quality of fidelity output and broad frequency response, to mass transit
facilities and office buildings, where sound communication is important but need
not be full-range output. The products sold for each type of installation vary
widely in characteristics and price; however, management estimates that the
majority of Fixed Installation contracts generally generate less than $25,000 of
product sales. In this business line prices for the Company's products range
from $65 for a basic microphone to $110,000 for a large-scale, multi-functional
mixing console. The Company's products in the Fixed Installation line of
business are sold through professional audio contractors and distributors.
The market for Fixed Installation products is generally driven by new
construction and upgrades of existing installations. In the United States, new
uses of audio products are spurring growth. More dynamic
3
<PAGE> 6
sound and music, requiring more sophisticated audio products, are increasingly
being used in cinemas, religious services and sporting events. Abroad, the
development of infrastructure and the upgrade of existing facilities, such as
auditoriums, public places, theaters and sports facilities, in emerging
economies is also a source of increasing demand. Another source of growth in the
Fixed Installation business line is the U.S. cinema market, where the number of
U.S. movie screens is forecast to grow by approximately 12% during the years
1998 through 2000. Many cinemas periodically update their sound amplification
systems to realize fully the new sound technology in motion pictures. Management
believes that houses of worship are another important source of retrofits.
Historically, sound technology has been used in houses of worship to provide
sound reinforcement to the sermon. In contemporary worship services, the sermon
is increasingly complemented by music that demands more sophisticated sound.
Professional Music Retail. Professional Music Retail products are used
mainly by musicians for live performance, recording and reproduction of
recording material and are generally sold directly to end users through
specialized retail stores that market to musicians, bands and local
entertainment venues. Professional Music Retail products appeal to performers
seeking an improved level of sound system performance, reliability and quality.
The Company's Professional Music Retail products generally range from $85 for a
basic microphone to $1,800 for a loudspeaker system and are sold through its
sales representatives and distributors through retail outlets to musicians.
The demand for Professional Music Retail products is driven primarily by an
increase in both the number of new users and the number of users upgrading to
take advantage of enhanced sound technology. Most of the end users targeted in
this business line are 18 to 30 years old. In addition, sales are also driven by
demand for smaller and lighter weight products which are easier to use and
transport.
Concert/Recording/Broadcast. The Concert/Recording/Broadcast lines of
business include sound systems for musical concerts and theater productions,
sound recording and radio and television broadcast and production. The Company's
sales of these products are generally made through its distributors and
retailers or directly to touring companies. The Company's Concert/Recording/
Broadcast products range from $65 for a basic microphone to $110,000 for a
large-scale, multi-functional mixing console. Management believes that sales in
the Concert/Recording/Broadcast line of business to established, high-profile
touring companies influence and stimulate purchases of products by smaller
groups and lesser known professional musicians. Management estimates that the
Company produces over 50% of the microphones used for electronic news gathering
by major U.S. television networks and radio station personalities.
Concert/Recording/Broadcast demand is driven by a combination of the
factors that determine growth in the Fixed Installation and Professional Music
Retail lines of business, including technological improvement and an increase in
product applications. For example, most professional sporting events now include
musical performances that require increased sound quality and amplification.
Management believes that audiences have become increasingly accustomed to
improved sound quality while event producers and live musicians have become
accustomed to more advanced technology. The demand for smaller, lighter weight
products is another driver of growth as such products reduce operating costs for
touring applications. In addition, an increase in popularity of remote
electronic news gathering is driving the demand for wired and wireless
microphones as well as portable broadcast mixers.
Broadcast Communications Systems. The Company is a leader in broadcast
communications equipment for end markets such as sports and broadcasting. The
Company produces a broad line of broadcast communications equipment. The
Company's smallest system, the Telex(R) Audiocom(R) modular intercom system, is
used by theaters, small sporting arenas, network affiliates and independent
cable channels for their communications needs. Typically, these systems are used
to link 20 to 30 people so they can communicate during
4
<PAGE> 7
an event or performance. The Company's middle market offering, the RTS(TM) TW
intercom system, is used by larger broadcast network affiliates, larger sporting
venues and production studios. This system is also used in broadcast trucks as a
remote, portable studio for news gathering or sporting events, and typically
provides communications links for 50 to 60 people at a time. The Company's
high-end product, the RTS(TM) ADAM(TM) (Advanced Digital Audio Matrix) intercom
system, is used by the major networks in order to cover large events such as the
Olympics and the Superbowl. The ADAM(TM) system allowed NBC to provide
communications in any combination between 400 separate individuals -- from
person-to-person to one person to all four hundred at a touch of a button -- for
its 1996 Summer Olympics coverage. This system was also used by networks from
Australia, Finland, Canada, Japan, Korea and other countries for their Olympics'
coverage.
The Company also provides wired and wireless communication systems and
related components to the National Football League (the "NFL") as well as high
school and college teams and World, Canadian and Arena Football Leagues. In
1996, the Company began providing NFL, college and high school coaches with an
encrypted wireless intercom system, which allows the head coach to communicate
confidentially with their offensive and defensive coordinators on the side lines
and in the booths above the fields.
Sound Reinforcement. Sound Reinforcement is divided into two main product
groups: (i) wired and wireless microphones, which serve the professional needs
of sound contractors, entertainers, and speakers, and are used in a variety of
settings such as theaters, stadiums and hotels; and (ii) wireless assistive
listening devices, used by the hearing impaired to diminish the effects of
background noise and poor building acoustics in theaters, stadiums, court rooms
and other facilities using public address systems.
The Company believes that it offers one of the industry's most extensive
lines of wireless microphone, receiver and transmitter systems, including a
wide variety of handheld, lapel and guitar microphone options. The Company
offers microphones (including noise canceling) with a wide variety of
directional patterns to meet the needs for general sound reinforcement as well
as the specific needs of users such as drummers, vocalists and public address
announcers. Many of these lines incorporate the Company's Posi-Phase(TM) true
diversity antenna circuitry which produces a stronger signal for higher quality
sound over a longer distance without the signal dropouts or the switching noise
common in other systems. Some of the Company's wireless microphones also
incorporate an advanced proprietary multi-crystal tuning system that allows any
specific frequency to be used within the operating limits of the receiver. The
crystal control and associated radio frequency filtering provide superior radio
frequency performance and maximum protection from interference.
The second product group in Sound Reinforcement is wireless assistive
listening devices, sold to arenas, theaters, churches, funeral homes, hotels and
other public facilities. The Company's principal product in this product group
is the Telex(R) SoundMate(R) wireless assistive listening systems. Assistive
listening devices are now mandated by the Americans with Disabilities Act,
passed in 1994, which requires that assistive listening devices be provided to
all hearing impaired individuals free of charge at facilities using public
address systems. The Company believes that continued implementation of this law
and the aging of America's population should generate continued growth in this
market.
BRANDS AND PRODUCTS
The Company has built a broad and diverse product line through the
development of new products and the selective acquisition of product lines. The
following table sets forth the Company's primary Professional Sound and
Entertainment product offerings and principal brands and the business lines to
which they relate. Management estimates that worldwide sales of its Telex and
Electro-Voice brands accounted for approximately 60% of the Professional Sound
and Entertainment segment's net sales in the nine-month period
5
<PAGE> 8
ending December 31, 1998 and that the balance of this segment's net sales are
approximately evenly split among the Company's other Professional Sound and
Entertainment brands.
<TABLE>
<CAPTION>
PRINCIPAL BRAND PRIMARY PRODUCTS BUSINESS LINE
- - --------------- ---------------- -------------
<S> <C> <C>
Telex Wired and wireless microphones, headsets, Fixed Installation
headphones, wireless assistive listening Professional Music Retail
devices Concert/Recording/Broadcast
RTS Intercoms, microphones, headsets Concert/Recording/Broadcast
Fixed Installation
Electro-Voice Microphones, mixing consoles, signal Fixed Installation
processors and amplifiers, loudspeaker Professional Music Retail
systems, wireless microphones Concert/Recording/Broadcast
Other Applications
Dynacord Amplifiers, mixing consoles, signal Fixed Installation
processors and loudspeaker systems Professional Music Retail
Altec Lansing Loudspeaker systems, amplifiers, Fixed Installation
signal processors and mixing consoles.
Klark-Teknik Signal processors Fixed Installation
Concert/Recording/Broadcast
Midas Mixing consoles Concert/Recording/Broadcast
Vega Wireless microphones Fixed Installation
Professional Music Retail
Concert/Recording/Broadcast
Other Applications
DDA Mixing consoles Fixed Installation
Concert/Recording/Broadcast
Merlin Signal processors Fixed Installation
Concert/Recording/Broadcast
</TABLE>
Microphones. Microphones are the most common method of converting audible
sound waves into electrical signals that can be processed, modified and
amplified. Microphones come in a variety of sizes and shapes, from handheld or
mounted models of all sizes to very small models meant to be hidden from view.
The Company also produces wireless microphones under the Telex, Electro-Voice
and Vega brand names that use radio instead of cable. The technology employed in
the Company's wireless microphones results in audio quality that, management
believes, is indistinguishable from that of a wired microphone and is targeted
to the needs of the working professional in broadcast and production, concert
sound, live theater, theme parks and related applications.
Mixing Consoles. The primary function of a mixing console is to accept
input of electrical signals from a number of microphone sources, such as
multiple singers and instruments in a band, and blend them together to achieve
the desired balance of sound output. Other sound inputs can be fed into a mixing
console as well, such as recorded music. A mixing console also serves as the
center of a sound system, as it sends the electrical signals it receives back
out to the other components of the system. The Company's top-end mixing consoles
are marketed under the Midas brand name, which are used mainly for touring
applications. The Company also sells mixing consoles under the DDA,
Electro-Voice, Altec Lansing and Dynacord brands.
Signal Processors and Amplifiers. Signal processors modify sound signals to
increase or decrease volume or mix them with other sound signals. The signal
processor with which most people are familiar is the bass and treble adjustment,
or "tone control." In a professional signal processor, the tone control may be
divided into 31 or more bands, allowing separate adjustment of each. The
controls used to effect these adjustments are called "equalizers." Another
familiar signal processor is called the reverberation unit, which can adjust a
signal to make a sound seem as if it were performed in a large hall. Yet another
function of a signal processor is to
6
<PAGE> 9
provide signal delay so that sound arrives at the same time for an entire
audience whether they sit in the back or front of a venue. The Company markets
signal processors under the Dynacord, Merlin, Electro-Voice, Altec Lansing and
Klark-Teknik names, and was one of the first manufacturers, in 1987, to
introduce a reasonably priced signal processor using digital technology.
The level of signal output from mixing consoles or signal processors is too
low to drive loudspeakers and must be increased by amplifiers. The Company
produces amplifiers under the Altec Lansing, Dynacord and Electro-Voice brands,
many of which contain built-in digital signal processors necessary to achieve
low-frequency output that is often missing in non-digital amplifiers.
Loudspeaker Systems. Loudspeaker systems convert the electrical signals
created from audible sound waves back into sound audible to the human ear. In a
large professional sound system, specialized loudspeakers called horns direct
sound to parts of the audience so that the level of sound in a large venue can
be equalized. The Company produces its high-end loudspeakers under the
Electro-Voice, Altec Lansing and Dynacord names. Certain of these products use
technologies developed by the Company, including "constant directivity" and
"variable intensity," which help deliver uniform frequency and level of output
across an audience, and RMD(TM) (ring mode decoupling) manifold technology,
which delivers louder output.
MULTIMEDIA/AUDIO COMMUNICATIONS
Multimedia/Audio Communications combines all of Old Telex's
Multimedia/Audio Communications, RF Communications and Hearing Instruments
Groups, the Tape Duplication product group from Old Telex's Professional Sound
and Entertainment Group and Old EVI's Other Applications line of business
(consisting of handheld microphones and earphones for field and aircraft
communications, both military and civilian, and components to original equipment
manufacturers for incorporation into their products).
Within the Multimedia/Audio Communications segment, the Company supplies
computer audio microphones, headsets and headphones used to facilitate voice
communications between computers and their users; LCD video and data projectors
used to make multimedia presentations; and aircraft intercoms, microphones and
headsets (including active noise reduction headsets) for use in high-noise
environments such as the cockpits of airplanes and helicopters. Customers for
computer audio microphones include a number of computer hardware and modem
manufacturers, such as Compaq, Hewlett-Packard, IBM, Gateway and 3Com. In
addition, the Company sells its LCD projectors to corporate and educational
training specialists, while principal customers for the Company's aircraft
products are the major aircraft manufacturers and airlines, including Boeing,
American Airlines and Delta, as well as airport fixed base operators. Within
this segment, the Company also offers a broad line of acoustic accessories and
antennas for various communications needs and applications. The Company markets
such products to wireless local area network providers, public safety and law
enforcement groups (police, fire departments, emergency services, CIA, FBI and
the Secret Service) amateur radio, citizens band radio, land mobile radio,
telephony and various commercial, industrial and military markets. The Company
also produces audio products for the Library of Congress' talking book program
as well as a broad line of high value, technologically differentiated hearing
aids and other assistive listening devices for the hearing impaired including
in-the-ear, behind-the-ear and in-the-canal hearing aids, as well as FM wireless
auditory trainers and personal assistive listening devices. The Company's
patented Adaptive Compression(R) technology offers superior signal processing
and provides the user with superior intelligibility and understanding of speech
in the presence of background noise. The Company's hearing instruments business
dates back to 1936, making it one of the oldest hearing aid manufacturers in the
United States.
Within the Company's Multimedia/Audio Communications segment, the Company
targets nine principal product markets; (i) computer audio, (ii) tape
duplication, (iii) multimedia presentation/training, (iv)
7
<PAGE> 10
aviation communications/other applications, (v) wireless LAN and
satellite-based, mobile phone antennas, (vi) talking book players, (vii)
wireless communications, (viii) hearing aids and (ix) wireless assistive
listening devices.
Computer Audio. The Company believes that it is the largest supplier of
microphones, headphones and headsets to the computer industry. The Company
currently sells to most of the major computer manufacturers, with whom it enjoys
close working relationships, including Compaq, Gateway, Hewlett-Packard and IBM,
as well as dozens of other component and OEM manufacturers. In addition, the
Company serves the computer education market, selling a full line of headphones,
headsets and group listening centers for use in the classroom with computers,
VCRs, CD-ROMs and laserdisc players. The largest portion of the Company's
revenues in the computer audio market are generated from the sales of computer
microphones for speech recognition. Many of the Company's microphones are also
sold to modem manufacturers, such as 3Com, who then package these microphones
with their modems, to ensure compatibility of the application to the end-user.
Tape Duplication. The Company's cassette duplicators and copiers are
primarily used to copy the spoken word and serve two principal markets:
religious (houses of worship, missionaries and tape ministries) and training
programs/seminars (professional seminar presenters, self-improvement programs,
teachers, legal documentation and law enforcement). The Company produces a line
of high-speed audiocassette duplicators designed for "in-cassette" copying of
standard audiocassette tapes. This is in contrast to the high volume music
cassette duplication market, where bulk audiotape is copied before it is loaded
into the cassette cartridge. The current product line is comprised of four
models: the Replica(TM) and the Copyette(TM), simple portable units, the ACC
Series(TM), a duplicator that is expandable and capable of adjusting copy
quality, and the 6120 Series(TM), which is capable of duplicating open-reel and
cassette tapes and meets the needs of the professional recorder. These products
offer high speed tape handling, high frequency audio circuit designs and low
vibration mechanical drives at competitive prices within their respective
categories.
Multimedia Presentation/Training. The Multimedia Presentation/Training
product group manufactures and markets projection products, such as the
Firefly(TM), a lightweight portable data/video projector, and Caramate(R) slide
projector products, which are used in many types of educational, training
institutions and presentation settings, primarily for corporate and educational
markets. The Company's LCD projector line also includes other lightweight and
boardroom data/video projectors.
Aviation Communications/Other Applications. The Company supplies a broad
line of aviation communications headsets, intercoms and microphones to major
commercial and commuter airlines and pilots as well as to airframe
manufacturers. The Company's aviation communications products are known for
their design innovation, lightweight construction, technological strength and
product value. The Company uses its ANR(R) (Active Noise Reduction) patented
technology in several of its designs. In addition, the Company produces
hand-held microphones and earphones for field and aircraft communications, both
military and civilian, and sells its components to original equipment
manufacturers for incorporation into their products.
Wireless LAN and SBA Antennas. At the end of 1994, Old Telex entered the
wireless local area networks ("LAN") and satellite-based, mobile phone antenna
("SBA") markets to capitalize on the Company's antenna design and communications
technology expertise. The Company believes that wireless LAN and SBA technology
has broad-based applications in today's business world. End users include
corporations, retailers, warehouses and distribution centers. The Company's
products are used by a wide variety of companies to set up more efficient and
cost-effective LAN and SBA systems through wireless connections. As an example,
Sears has installed the Company's wireless LAN antennas to remotely connect its
cash registers to the store's main computer, which allows Sears to move the cash
registers as needed to meet demand without worrying about wires.
8
<PAGE> 11
Talking Book. The Company produces a unique cassette player that is sold to
the Library of Congress ("LOC") for use in their talking book program for the
blind and physically handicapped. Under the talking book program, the LOC
distributes books on tape to the blind and physically handicapped, free of
charge, throughout the United States. The talking book players were designed
using special features for ease of use and facilitate playing the books back at
different speeds. A unique tape format ensures that these tapes cannot be played
on standard equipment. Old Telex began providing talking book players to the LOC
in 1969. In April 1998, the Company entered into a new contract with the LOC
with a maximum term of five years. While the revenue from this program in recent
years has been relatively stable, the program supplies a steady source of cash
flow. The talking book machines have also been sold internationally to similar
programs in Canada, New Zealand and Australia.
Wireless Communications. The Company also produces a broad line of wireless
communications products such as headsets, microphones, antennas, and rotors for
three primary markets: public safety and law enforcement groups (police, fire
departments, emergency services, CIA, FBI and the Secret Service), commercial
truck drivers and amateur radio operators. The Company believes that it has
established a reputation within these markets for providing reliable
communications, which is the key requirement of most of its users. Many of the
Company's products, such as the Ear-Mike(TM) microphone/receiver system and the
Road King(R) CB microphones, have high brand name recognition within their
respective markets. The Company's wireless technology is driven by acoustics and
antenna design capabilities developed over Old Telex's 45-year history in the
military antenna business. The Company distributes wireless communications
products through over 1,100 dealers.
Hearing Aids. Hearing aid devices are generally segmented by ear
positioning and sound enhancement capabilities. Ear positioning takes two forms,
either in the ear or behind the ear. Sound enhancement is based on two types of
technologies, linear amplification, which only amplifies the sound, and
compression technology, which modifies the actual sound received by the user.
The Company believes that its patented compression technology, Adaptive
Compression(R), offers superior signal processing circuitry and provides the
user with superior intelligibility and understanding of speech in the presence
of noise. In October 1996, Old Telex introduced Threshold Compression(TM)
(patent pending), which has unique user volume control and user selectable
frequency abilities which, for example, allow the user to increase the volume of
conversations in the presence of background noise. The Company distributes its
hearing aids through 9,000 hearing instrument dispensers throughout the United
States.
The Company has recently created one of the smallest hearing aids available
in the marketplace, marketed under the Acapella(TM) name. The device fits
completely in the canal, making it essentially undetectable. The Acapella
hearing aids offer not only improved appearance but its compression technology
and advanced design offer superior sound as well. In addition, in October 1996,
Old Telex introduced a significantly improved soft shell hearing aid which has
met with significant success. Sold under the SoftWear(TM) and Sound
Advantage(TM) names, these hearing aids are composed of a new material that, due
to its flexibility, is more comfortable than hard plastic based molds.
Wireless Assistive Listening Systems. The Company also produces and
distributes wireless assistive listening systems, such as auditory trainers and
personal assistive listening devices for the hearing impaired, which help the
user in environments with high levels of background noise and poor building
acoustics. Auditory trainers allow the user to hear directly from a sound
source, such as a teacher, via wireless FM transmitters. Personal assistive
listening devices amplify a certain source, such as a speaker. The Company
serves the educational and consumer marketplaces for wireless assistive
listening systems by providing cost-effective, technologically differentiated,
and functionally superior products maintained by excellent customer
9
<PAGE> 12
service. The Company's principal focus is on the educational market, where many
schools and a number of large city (such as New York and Los Angeles) and county
school systems use the Company's products.
As with hearing aid products, the Company believes that it is able to
differentiate its products from its competitors' products through higher ease of
product use and technologically strong design. Its ClassMate(R) line of auditory
trainers offers state-of-the-art RF/wireless designs, compression technology and
synthesized frequency selection in a wireless FM behind-the-ear device, which is
specially designed for older students who have rejected other models based on
the appearance of body-worn auditory trainers.
INTERNATIONAL OPERATIONS
The Company's products are marketed in over 80 countries worldwide, which
reduces the Company's dependence on any single geographic market. The Company
has substantial assets located outside of the United States and a substantial
portion of the Company's sales and earnings are attributable to operations
conducted abroad and to export sales, predominantly in Western Europe and Asia.
In the nine-month period ending December 31, 1998, approximately 52% of the
Company's net revenues consisted of sales made outside the United States,
predominantly in Western Europe and Asia. Unlike many of its competitors, which
use independent foreign distributors that generally sell a variety of competing
products, the majority of the Company's foreign sales efforts are conducted
through its foreign distribution subsidiaries. Although the Company's
international operations have generally been profitable in the past, the
Company's efforts to increase international sales may be adversely affected by,
among other things, changes in foreign import restrictions and regulations,
taxes, currency exchange rates, currency and monetary transfer restrictions and
regulations and economic and political changes in the foreign nations to which
the Company's products are exported.
During the nine-month period ending December 31, 1998, the Company's total
net sales into each of its principal geographic regions were as follows:
Europe--$71.9 million, Asia Pacific--$31.4 million, Canada--$10.9 million, and
other foreign--$13.2 million. See Note 13 to the Consolidated Financial
Statements.
PRODUCT DEVELOPMENT
The Company believes that it is one of the most active developers of new
products in the industry. The Company has over 121 product development projects
planned or currently in progress. Of these, approximately 64 are designed to
yield new technological developments, including numerous applications of digital
technology, which are intended to exploit the industry-wide transition from
analog to digital processing. Other engineering and development projects
principally are for design maintenance or to achieve product enhancements that
have been requested by customers, both of which are important activities in
sustaining the Company's product lines. Because the Company produces a
comprehensive range of products, management believes the Company has the
capacity to integrate technologies from one product line to another product
line, which ultimately leads to new products that are often less expensive, more
feature rich or otherwise more desirable.
The Company has a history of technological innovation and strong product
development and has introduced numerous technologies that are used throughout
the audio industry, including constant directivity and variable intensity horns,
manifold technology in loudspeaker systems, the application of neodymium in
loudspeaker systems and microphone magnets and titanium in compression driver
diaphragms.
The Company has also recently implemented a number of strategic initiatives
to identify new market opportunities and to reduce its product development cycle
in order to facilitate the timely introduction of new
10
<PAGE> 13
and enhanced products. The Company maintains close relationships with its
institutional customers to develop products that meet their requirements. For
example, the Company's computer audio microphone line was developed with product
specification input from Microsoft and Compaq. In connection with these
initiatives, the Company increased its investment in engineering and technology
and has implemented programs in several core technologies in such areas as
digital signal processing, wireless communications, application specific
integrated circuit design and active noise reduction technologies. This
increased investment in engineering and technology has enabled the Company to
design new products offering enhanced features, quality and reliability and
lower costs.
As of December 31, 1998, the Company's engineering and development
organization consisted of 166 employees located in six locations around the
world, including 147 engineers, each of whom specializes in a certain type of
product and application. In Fiscal 1997 and 1998, engineering expenses were $8.5
million and $17.3 million (including $7.9 million of expenses of Old Telex)
respectively. During the nine-month period ending December 31, 1998, engineering
expenses were $11.2 million.
MANUFACTURING
The Company manufactures most of the products it sells and most of the
active acoustic components that they contain in thirteen facilities located in
the United States, Mexico, Germany and Great Britain. Manufacturing processes
are substantially integrated and, in addition to the assembly processes more
typically found among the Company's competitors, include die casting, fiberglass
plastics molding, transformer and coil winding, sheet metal stamping and
forming, metal machining, cabinet fabrication, painting and plating. The Company
purchases certain electrical components, magnets, lumber and plastics.
Management believes that the Company's integrated manufacturing
capabilities are important factors in maintaining and improving the quality,
performance, availability and cost of its products and decreasing the time to
market of new product introductions. Management also believes that the Company
can respond more effectively to changing customer delivery and product feature
requirements by doing the majority of its own manufacturing and that this gives
it an advantage over many of its competitors. The Company continuously assesses
its manufacturing operations to control or reduce costs.
The Company also sells under its brand names a limited number of finished
products purchased from outside suppliers, including certain electronic products
and loudspeaker systems, where low cost is an essential attribute of the
product. In addition, certain other finished products of non-Company brands are
purchased to supplement the offerings of the Company's distribution operations
in Japan, Hong Kong, Switzerland, Australia and France.
COMPETITION
The markets within the professional sound and entertainment and
multimedia/audio communications segments are both highly competitive and
fragmented and the Company faces meaningful competition in both segments and in
most of its product categories and markets. Management believes that it is one
of a few manufacturers that carry a comprehensive line of professional audio
products and that the key factors for the Company to maintain its position in
its various markets are the recognition of its various brand names, superior
distribution networks, large user base and large number of products, together
with its extensive experience in designing safe and reliable products, dealing
with regulatory agencies and servicing and repairing its products.
While many of the Company's current competitors are generally smaller than
the Company, certain of the Company's competitors are substantially larger than
the Company and have greater financial resources. The
11
<PAGE> 14
Company believes that its major competitor in providing a full line of
professional audio products is Harmon International Industries, Incorporated,
one of whose three segments competes in the professional audio products market.
Eastman Kodak is the major provider in the slide projector market. In the LCD
projection market, In-Focus Systems, Sharp Electronics and Proxima/ASK are the
current market leaders. Sony is the Company's only significant competitor in the
tape duplication market.
The Company believes the principal competitive factors within each of its
two business segments are the factors referred to above, as well as product
quality, product reliability, product features, reputation, distribution,
customer service and support, ability to meet delivery schedules, warranty terms
and price. The Company believes that it currently competes favorably overall
with respect to each of these principal competitive factors.
PATENTS, TRADEMARKS AND LICENSES
Among the Company's significant assets are its intellectual property
rights. The Company relies on a combination of copyright, trademark and patent
laws to protect these assets, and to a significant degree, on trade secrets,
confidentiality procedures and contractual provisions which may afford more
limited legal protections.
The Company owns several trademarks in the United States and various
foreign countries, including Adaptive Compression(R), Altec Lansing(R),
Audiocom(R), Caramate(R), ClassMate(R), Dynacord(R), Electro-Voice(R),
Hy-Gain(R), Klark-Teknik(R), MagnaByte(R), Manifold Technology(R), ProStar(R),
Road King(R), SoundMate(R), Telex(R), University Sound(R) and Vega(R). Prior to
July, 1998, the Company's use of the Telex(R) trademark was subject to a
royalty-free license granted to the Company by Memorex Telex Corporation. On
July 29, 1998, the United States Bankruptcy Court for the District of Delaware
authorized the sale by Memorex Telex Corporation of the Telex(R) trademark and
related trade names, registrations and applications to the Company. This sale
was consummated in August, 1998. A number of the Company's trademarks are
identified with and important to the sale and marketing of the Company's
products in both of its business segments. The Company's operations are not
dependent upon any single trademark other than the Telex and Electro-Voice
trademarks. See "Professional Sound and Entertainment Brands and Products."
The Company has licensed certain of its trademarks, including the Altec
Lansing trademark, for use on products such as consumer audio products not
otherwise manufactured by the Company, pursuant to a perpetual, royalty-bearing
license. From time to time the Company also has granted patent or technology
licenses to, and has licensed technology or patents from, other parties. The
amounts paid to or by the Company on an annual basis in relation to its
licensing activities have not been material.
The Company has not registered many of its significant trademarks in all
foreign jurisdictions in which it does business, although management believes
that the Company's most significant marks generally have been registered in the
jurisdictions where their sales are the strongest. The Company is aware that, in
certain foreign jurisdictions, unaffiliated third parties have applied for and
or obtained registrations for marks identical with or similar to marks owned or
used by the Company. Use or registration of the Company's trademarks by the
Company in such jurisdictions may be prohibited, and the Company's business may
be materially adversely affected thereby. The Company does not believe that any
of its products currently infringe upon the proprietary rights of third parties
in any material respect.
The Company's operations are not dependent to any significant extent on any
single or related group of patents, licenses, franchises or concessions. The
Company believes its most significant patents are four patents relating to high
output compression drivers, manifold technology products, variable intensity
horns and
12
<PAGE> 15
time division multiplex digital matrix intercom system which expire in 2003,
2006, 2009 and 2014, respectively. The Company also owns a number of patents
related to the design and manufacture of several of its products, including
headsets, headphones, boom-mounted microphones, various transducer devices,
multiple-band directional antennas, multimedia projectors, computer audio
microphones, adaptive compression circuitry for hearing aids and certain
intercom-related devices. The Company does not believe that the expiration of
any of its patents will have a material adverse effect on the Company's
financial condition or its results of operations.
SUPPLIERS
The Company's extensive vertical integration enables it to manufacture many
of the parts for its products internally. Management believes this gives the
Company a competitive advantage in controlling quality and ensuring timely
availability of parts. The Company also purchases raw materials, assemblies and
components for its products from a variety of suppliers and also purchases
products from original equipment manufacturers ("OEMs") for resale. Total
purchases of such items were $75.5 million for the nine-month period ending
December 31, 1998.
The Company's five largest suppliers in the nine-month period ended
December 31, 1998 accounted for 16.4% of the total supplies purchased by the
Company. The Company's largest single supplier provides the Company with parts
for its talking book program products as well as components and supplies for
various headsets and microphone products. These supplies comprised 6.7% of the
total cost of supplies purchased by the Company in the nine-month period ended
December 31, 1998. This percentage is expected to decrease in 1999 as the
Company begins to manufacture in its Mexico facility some of the headset
products historically purchased from this supplier. The Company has purchased
products from this supplier for 17 years.
One of the Company's OEMs produces LCD projection products. The Company's
purchases from this supplier constituted 4.2% of the total cost of supplies
purchased by the Company for the nine-month period ended December 31, 1998.
One of the Company's largest suppliers has been a sole source supplier for
parts used in the manufacture of hearing aids for over 30 years. This supplier
provides these components to over 90.0% of all hearing aid manufacturers in the
United States. Although the Company believes that with adequate notice it can
secure, if necessary, alternate sources for these hearing aid parts, its
inability to obtain sufficient parts would have a material adverse effect on the
Company's results of operations. The Company's purchases from this supplier in
the nine-month period ending December 31, 1998 comprised 2.7% of the total
supplies purchased by the Company. The Company believes that it could locate
alternative sources of supply for these components. Doing so, however, could
result in increased development costs and product shipment delays.
BACKLOG
As is the case with other companies in the Company's businesses, backlog is
not necessarily a meaningful indicator of the conditions of the business since
the Company typically receives and ships orders representing a major portion of
its quarterly non-contract revenues in the current quarter. As of December 31,
1998, the Company had a backlog of approximately $39.4 million compared to
approximately $33.4 million as of March 31, 1998.
13
<PAGE> 16
ENVIRONMENTAL MATTERS
The Company and its operations are subject to extensive and changing U.S.
federal, state and local and foreign environmental laws and regulations,
including, but not limited to, laws and regulations that impose liability on
responsible parties to remediate, or contribute to the costs of remediating,
current or formerly owned or leased sites or other sites where solid or
hazardous wastes or substances were disposed of or released into the
environment. These remediation requirements may be imposed without regard to
fault or legality at the time of the disposal or release. Although management
believes that its current manufacturing operations comply in all material
respects with applicable environmental laws and regulations, environmental
legislation has been enacted and may in the future be enacted or interpreted to
create environmental liability with respect to the Company's facilities or
operations. The Company believes that compliance with federal, state and local
environmental protection laws and provisions should have no material adverse
effect on the Company's results of operations or financial condition.
The Company has had Phase I Environmental Site Assessment and Compliance
Reviews conducted by a third-party environmental consultant at a number of its
manufacturing sites and is aware of environmental conditions at such sites that
require or may require remediation or continued monitoring. The Company is
undertaking or is planning to undertake remediation or monitoring at these
sites. In particular, the Company's site in Buchanan, Michigan has been
designated a Superfund site under U.S. environmental laws and the Company has
agreed it is a de minimis responsible party at a number of other currently or
formerly owned or utilized sites which have been designated as Superfund sites.
Mark IV has agreed to fully indemnify the Company for environmental liabilities
resulting from the Buchanan, Michigan Superfund site and certain of the other
sites at which the environmental consultant indicated monitoring or remediation
was necessary. Specifically, Mark IV has agreed to indemnify the Company fully
for environmental liabilities resulting from (i) any operations, assets or
business of Mark IV not related to the business of Old EVI prior to the
Acquisition Closing Date, (ii) certain Old EVI sites at which the Company is
currently conducting remediation, including the Superfund site discussed above,
or is expected to conduct remediation in the near term and (iii) certain sites
not currently owned or related to the business of the Company but at which Old
EVI presently or in the past has incurred environmental liability or for which
third parties have claimed Old EVI has responsibility.
The Company is party to a 1988 consent decree with the predecessor to the
Nebraska Department of Environmental Quality ("NDEQ") relating to the cleanup of
hazardous waste at the Company's Lincoln, Nebraska facility. In connection with
ongoing monitoring and cleanup activities at the site and on adjacent property,
the Company has received from the NDEQ three notices of noncompliance (all of
which related to the same underlying matter). The Company is in discussions with
the NDEQ regarding future actions but does not believe that the costs related to
its responsibilities at the site will result in a material adverse effect on the
Company's results of operations or financial condition. NDEQ and the U.S.
Environmental Protection Agency also have requested the Company to take action
in connection with a post-closure permit and possibly to perform additional
remediation at the site. In December, 1997, the Company entered into an
Administrative Order on Consent with U.S.E.P.A. under the Resource Conservation
and Recovery Act to further investigate and remediate the Lincoln facility and
an adjoining property. The Company is not able at this time to determine the
amount of additional expenses, if any, that may be incurred by the Company as a
result of these actions.
Through December 31, 1998, the Company had accrued approximately $1.7
million over the life of the project for anticipated costs to be incurred for
the Lincoln, Nebraska cleanup activities, of which approximately $1.4 million
had been incurred. See Note 12 to the Consolidated Financial Statements of the
Company included elsewhere herein.
14
<PAGE> 17
The Company estimates that it will incur, in Fiscal 1999, approximately
$150,000 of environmentally related capital expenditures in addition to those
costs associated with the Lincoln, Nebraska cleanup activities described above.
The Company also incurs approximately $30,000 per year of expenses associated
with the disposal of hazardous materials generated in conjunction with its
manufacturing processes.
EMPLOYEES
As of December 31, 1998, the Company employed 2,845 persons worldwide, of
which 2,054 were employed in the United States, 148 were employed in the United
Kingdom, 295 were employed in Germany, 200 were employed in Mexico and 148 were
employed in other countries. On a functional basis, approximately 2,139 were
employed in manufacturing, 166 in engineering and product development, 382 in
sales and marketing and 158 in administration and finance.
As of December 31, 1998, the Company employed approximately 816 unionized
employees, of whom approximately 428 were in the United States, 190 were in
Germany and 198 were in Mexico. In the United States, employees at the Company's
manufacturing facilities in Newport, Tennessee, Sevierville, Tennessee, and
Buchanan, Michigan are covered by collective bargaining agreements that expire
in June 2000, July 2000, and June 2000, respectively. There are no material
grievances pending with respect to any union employees. The Company has not
experienced any work stoppages in recent years and believes that its
relationship with its employees has been good.
ITEM 2. PRODUCTION AND FACILITIES
The Company operates the manufacturing plants and facilities described in
the table below. Management believes that the Company's plants and facilities
are maintained in good condition and are suitable and adequate for its present
needs. Currently, the Company's manufacturing plants are operating at an average
of 75% of capacity based on a single shift.
<TABLE>
<CAPTION>
SIZE
LOCATION OWNED/LEASED (SQUARE-FEET) FACILITY TYPE
-------- ------------ ------------- -------------
<S> <C> <C> <C>
UNITED STATES:
Bloomington, Minnesota Owned 50,000 Corporate Headquarters/
Product Development/Sales Office
Blue Earth, Minnesota Owned 150,000 Manufacturing/Distribution
Buchanan, MI Owned 28,500 Product Development
Buchanan, MI Owned 144,000 Manufacturing/Sales/ Marketing/
Administration/Distribution/Service Center
Burnsville, Minnesota(a) Owned 14 acres Vacant land
Glencoe, Minnesota Owned 100,000 Manufacturing
Lincoln, Nebraska Owned 120,000 Manufacturing/Distribution/Product
Development/Sales Office
Newport, TN Owned 49,000 Manufacturing
Oklahoma City, OK(b) Owned 79,000 Product Development/Distribution/Service Center
Rochester, Minnesota Owned 30,000 Manufacturing/Distribution
Sevierville, TN Owned 44,000 Manufacturing
Austin, TX Leased 95,000 Manufacturing/Distribution
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
SIZE
LOCATION OWNED/LEASED (SQUARE-FEET) FACILITY TYPE
-------- ------------ ------------- -------------
<S> <C> <C> <C>
Burbank, California Leased 2,500 Sales Office
El Monte, CA Leased 23,000 Manufacturing/Sales/Marketing/
Administration/Product
Development/Distribution/Service Center
Newport, TN Leased 40,000 Distribution
INTERNATIONAL:
Straubing, Germany Owned 95,000 Manufacturing/Sales/ Marketing/
Administration/Product Development /
Distribution/Service Center
Guangzhou, China Leased 280 Sales/Marketing
Hermosillo, Sonora, Mexico(c) Leased 32,500 Manufacturing
Hohenwarth, Germany Leased 7,600 Manufacturing
Ipsach, Switzerland Leased 3,400 Sales/Marketing/Administration/
Distribution/Service Center
Kidderminster, England Owned 35,000 Manufacturing/Sales/Marketing/
Administration/Product
Development/Distribution/Service Center
Kowloon, Hong Kong Leased 18,300 Sales/Marketing/Administration/
Distribution/Service Center
London, England Leased 200 Sales Office
Nagoya, Japan Leased 500 Sales/Marketing
Osaka, Japan Leased 1,200 Sales/Marketing
Paris, France Leased 3,500 Sales/Marketing/Administration/
Distribution/Service Center
Singapore Leased 2,300 Sales Office, Distribution and Service
Straubing, Germany Leased 10,700 Warehouse
Sydney, Australia Leased 8,000 Sales/Marketing/Administration/
Distribution/Service Center
Tokyo, Japan Leased 14,800 Sales/Marketing/Administration/
Distribution/Service Center
Toronto, Ontario, Canada Leased 4,000 Sales Office, Distribution
</TABLE>
(a) In February 1999, the Company announced the sale of this land, which is
expected to be completed in the third quarter of 1999.
(b) In March 1999, the Company completed the sale of a 64,000 square foot
portion of this property. Production and operations relating to products
associated with the Altec and University brand names, which were previously
carried out in this facility, have been transferred to the Company's other
facilities. The Company expects to complete the sale of the remaining
portion of this property early in the second quarter of 1999.
(c) Subject to five-year lease, scheduled to expire in 2001 if the Company does
not exercise its renewal option.
In August 1998, the Company sold facilities located in Sun Valley,
California, following the April 1998 sale of its Gauss audio cassette
duplication product line, the principal products manufactured at the site.
16
<PAGE> 19
In March 1999, the Company sold its 21,000 square foot facility located in
Sylmar, California, which had been leased to an unrelated third party under a
five year lease since July, 1994.
The Company is committed to achieving ISO 9000 Certification at all its
principal manufacturing facilities. The Sevierville, Tennessee, Kidderminster,
England and Hermosillo, Sonora, Mexico facilities have been certified under ISO
9002 and the Rochester, Minnesota and the Straubing, Germany facilities have
been certified under ISO 9001.
The city of Bloomington, Minnesota, has declared the Company's current
headquarters location to be an urban development zone. However, the city of
Bloomington has not notified the Company of any near-term need for the Company
to consider moving from its current site. Should the Company be required to move
in the future, the Company believes adequate rental facilities would be readily
available in the area.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is a party to various legal actions in the
normal course of business. Gulton Industries, Inc. ("Gulton"), a predecessor to
the holding company that was merged into and with the Company, was sued by a
company for infringement of a U.S. patent that Gulton was using to produce
products unrelated to the business of the Company for a business line that was
transferred out of Gulton prior to the Acquisition. The plaintiff was awarded
approximately $3.0 million in damages. Mark IV, which is defending the claim on
behalf of Gulton, has paid the judgement and is appealing the award of
approximately $1.1 million in interest expenses. Mark IV has agreed to
indemnify the Company fully for any losses or liabilities arising from this
litigation. The Company believes that it is not currently a party to any
litigation which, if adversely determined, would have a material adverse effect
on the liquidity, results of operations or financial condition of the Company.
For a discussion of certain environmental matters, see "--Environmental
Matters."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of either the
Company or Holdings during the nine months ended December 31, 1998.
17
<PAGE> 20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
100% of the Company's common stock is held by Holdings. There is no
established public trading market for the Common Stock of Holdings. The Common
Stock of Holdings is not listed on any exchange and it is unlikely that an
active trading market will develop in the foreseeable future for such
securities.
Holdings has not paid dividends on its Common Stock and the ability of
Holdings and the Company to pay dividends of their respective common stock is
restricted under the Company's Senior Secured Credit Facility (as defined
herein) and the indentures governing the EVI Notes and the Telex Notes. Holdings
and the Company plan to use any retained earnings for working capital purposes
and to make payments under the agreements governing the Company's long-term
indebtedness.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1998 and for the
nine-month period ended December 31, 1998, the fiscal year ended March 31, 1998,
the period from February 11, 1997 through March 31, 1997, and the period from
March 1, 1996 through February 10, 1997 have been derived from the Company's
consolidated financial statements included elsewhere herein, which have been
audited by Arthur Andersen LLP, independent public accountants, and should be
read in conjunction with such consolidated financial statements and notes
thereto and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The selected financial data with respect to Fiscal
1995 and 1996 are derived from audited consolidated financial statements of the
Company which are not included herein. The Mergers have been accounted for
essentially as a pooling of interests from May 6, 1997, the date on which Old
EVI and Old Telex came under common control, and the selected historical
financial data below for Fiscal 1998 accordingly includes the results of
operations of Old Telex from May 6, 1997. The results of operations and balance
sheet data of Old Telex are not reflected in the data for periods prior to May
6, 1997.
18
<PAGE> 21
<TABLE>
<CAPTION>
PREDECESSOR BASIS OF ACCOUNTING(a)
PERIOD FROM
FISCAL YEAR ENDED THE LAST DAY MARCH 1, 1996,
OF FEBRUARY THROUGH
------------------------------ FEBRUARY 10,
1995 1996 1997
------ ------ --------------
(IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C>
Net sales $185.3 $195.5 $177.1
Cost of sales 115.2 123.9 112.1
------ ------ ------
Gross profit 70.1 71.6 65.0
Engineering 6.6 8.5 8.0
Selling, general and administrative 43.0 44.4 41.6
Restructuring charges -- -- --
Corporate charges -- -- --
Special charges (c) -- -- --
Amortization of goodwill and other intangibles 1.0 1.0 0.9
------ ------ ------
Operating profit 19.5 17.7 14.5
Interest expense -- -- --
Recapitalization expense -- -- --
Other expense -- 0.4 (d) --
------ ------ ------
Income (loss) before income taxes and
extraordinary item 19.5 18.1 14.5
Provision (benefit) for income taxes 7.5 7.1 6.2
------ ------ ------
Income (loss) before extraordinary item 12.0 11.0 8.3
Extraordinary loss from early retirement of debt -- -- --
------ ------ ------
Net income (loss) $ 12.0 $ 11.0 $ 8.3
====== ====== ======
FINANCIAL DATA:
EBITDA (e) $ 24.3 $ 22.8 $ 19.6
EBITDA margin (g) 13.1% 11.7% 11.1%
Capital expenditures $ 4.6 $ 3.7 $ 3.3
Cash interest expense (h) -- -- --
Ratio of EBITDA to cash interest expense -- -- --
Ratio of EBITDA minus capital expenditures to
cash interest expense -- -- --
Ratio of earnings to fixed charges (i) -- -- --
<CAPTION>
NEW BASIS OF ACCOUNTING(j)
PERIOD FROM FISCAL YEAR NINE-MONTH
FEBRUARY 11, ENDED PERIOD ENDED
1997, THROUGH MARCH 31, DECEMBER 31,
MARCH 31, 1997 1998(b) 1998
-------------- ----------- ------
(IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C>
Net sales $ 28.3 $332.9 $246.3
Cost of sales 18.0 205.6 157.2
------ ------ ------
Gross profit 10.3 127.3 89.1
Engineering 1.3 17.3 11.2
Selling, general and administrative 6.4 81.7 53.7
Restructuring charges -- 6.2 --
Corporate charges 0.1 2.2 1.3
Special charges (c) -- 2.2 --
Amortization of goodwill and other intangibles 0.2 3.2 2.1
------ ------ ------
Operating profit 2.3 14.5 20.8
Interest expense 5.0 37.9 27.3
Recapitalization expense -- 6.7 --
Other expense 0.1 0.1 (2.7)
------ ------ ------
Income (loss) before income taxes and
extraordinary item (2.8) (30.2) (3.8)
Provision (benefit) for income taxes (1.1) 0.1 1.2
------ ------ ------
Income (loss) before extraordinary item (1.7) (30.3) (5.1)
Extraordinary loss from early retirement of debt -- 20.6 --
------ ------ ------
Net income (loss) $ (1.7) $(50.9) $ (5.1)
====== ====== ======
FINANCIAL DATA:
EBITDA (e) $ 3.3 $ 26.2(f) $ 32.4(k)
EBITDA margin (g) 11.0% 7.9% 13.2%
Capital expenditures $ 0.4 $ 8.5 $ 5.2
Cash interest expense (h) -- 36.7 26.0
Ratio of EBITDA to cash interest expense -- 0.7 1.2
Ratio of EBITDA minus capital expenditures to
cash interest expense -- 0.5 1.0
Ratio of earnings to fixed charges (i) -- 0.2 .9
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1998
------------
<S> <C>
BALANCE SHEET DATA:
Working capital................................. $ 63.6
Total assets.................................... 273.3
Total debt...................................... 337.7
Shareholder's deficit........................... (130.1)
</TABLE>
NOTES TO SELECTED HISTORICAL FINANCIAL DATA
(a) Certain previously reported amounts have been reclassified to conform to
Fiscal 1998 presentation. These reclassifications had no impact on the
previously reported operating profit, net income, EBITDA or shareholder's
equity. Variable selling costs, such as freight and commissions paid to
sales representatives, previously included in cost of sales, are now
included in expenses.
Additionally, depreciation expense, previously combined with and reported
as a separate line item on the Statement of Operations as "depreciation and
amortization", is now allocated to cost of sales, engineering expense, and
selling, general and administrative expense.
(b) The financial data for Fiscal 1998 consists of the full year results of
operations for Old EVI and the results of operations of Old Telex for the
period from May 6, 1997 (the date on which both entities came under common
control) through March 31, 1998.
(c) Special charges for Fiscal 1998 consist primarily of non-cash write-offs
associated with the impairment of certain intangible assets, recognized in
accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121 "Accounting for Impairment of Long-Lived Assets
and Assets to be Disposed Of." See Management's Discussion and Analysis of
Financial Condition and Results of Operations- "Fiscal 1998 Compared to
Fiscal 1997" and Notes 1 and 3 to the Consolidated Financial Statements
included elsewhere herein.
(d) Represents a one-time gain on the sale of land in Germany.
(e) EBITDA represents earnings before interest expense, other income, income
taxes, depreciation and amortization. EBITDA is included because management
understands that such information is considered by certain investors to be
an additional basis on which to evaluate the Company's ability to pay
interest, repay debt and make capital expenditures. Excluded from EBITDA
are interest, other income, income taxes, depreciation and amortization,
each of which can significantly affect the Company's results of operations
and liquidity and should be considered in evaluating the Company's
financial performance. EBITDA is not intended to represent and should not
be considered more meaningful than, or an alternative to, measures of
operating performance as determined in accordance with generally accepted
accounting principles.
(f) The Fiscal 1998 EBITDA, as presented, includes non-cash compensation
charges for stock options associated with the Recapitalization,
non-recurring charges for management cash bonus, restructuring charges and
the non-cash impairment loss described in note (c) above.
(g) Represents EBITDA as a percentage of net sales.
(h) Represents the interest expense exclusive of bank agency fees and
amortization of deferred financing costs.
(i) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes and fixed charges.
Fixed charges consist of interest expense on all indebtedness, amortization
of deferred financing costs and a portion of the rental expense on
operating leases deemed representative of the interest factor.
(j) The Statement of Operations and Financial Data for the periods after
February 10, 1997 were prepared under the new basis of accounting, which
includes adjustments giving effect to the Acquisition under the purchase
method of accounting.
(k) The nine-month period ended December 31, 1998 EBITDA includes
Mergers-related charges, severance charges for the former CEO and gain on
the sale of the Gauss business.
20
<PAGE> 23
ITEM 7. 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 report, contains
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
<PAGE> 24
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 report, are
representative of those factors that 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.
The following discussion and analysis of the financial condition and
results of operations covers periods both before and after completion of the
Transactions (as defined herein). As a result of the Transactions, the Company
has entered into new financing arrangements and has a different capital
structure than its predecessors, Old EVI and Old Telex. Accordingly, the results
of operations for the nine months ended December 31, 1998 and Fiscal 1998, which
are affected by such changes, are not comparable to the results of operations
for prior fiscal years which do not fully reflect the impact of the
Transactions.
The Company's consolidated financial statements for periods prior to May 6,
1997, the date on which Old EVI and Old Telex came under common control, reflect
the financial position, results of operations and cash flows of Old EVI. The
Mergers have been accounted for essentially as a pooling of interests from May
6, 1997, and the financial statements of the Company for subsequent periods
accordingly include the results of Old Telex. In connection with the Mergers,
the Company previously changed its fiscal year end, effective as of March 31,
1998, from the last day of February to March 31, the year historically used by
Holdings. The results of operations for the resulting one month transition
period of March 1997 are included in the Company's financial statements for
Fiscal 1997. This change in fiscal year end did not have a material impact on
the comparability of the results of operations of Fiscal 1998 with Fiscal 1997.
In addition, the Company's consolidated financial statements for periods after
February 10, 1997 were prepared under a new basis of accounting, which includes
adjustments giving effect to the Acquisition (as defined below) under the
purchase method of accounting. The Company's financial statements for periods
prior to February 10, 1997, reflect the financial position, results of
operations and cash flows of the operations transferred to Old EVI from Mark IV
in the Acquisition and were prepared under the predecessor's basis of
accounting.
Effective December 31, 1998, the Company changed its fiscal year end from
March 31 to December 31. This report contains information concerning the
business, operations and financial results of the Company as of and for the
nine-month period ended December 31, 1998. See "--Change in Fiscal Year". In
connection with the Merger, the Company previously changed its fiscal year end,
effective as of March 31, 1998, from the last day of February to March 31, the
fiscal year historically utilized by Holdings. Unless otherwise indicated, all
references in this Form 10-K to Fiscal 1995 and 1996 are to the fiscal years
ending on the last day of February of each year (e.g., Fiscal 1996 refers to the
fiscal year ended February 28, 1996) and all references to Fiscal 1998 are for
the fiscal year ending March 31, 1998. Fiscal 1997, which fiscal year ended on
the last day of February, 1997, includes the one month transition period of
March 1997, which resulted from the Company's 1998 change in fiscal year end
from the last day of February to March. For further information concerning the
Company's consolidated financial statements and certain changes in the basis of
presentation, see "Selected Financial Data" and the Company's consolidated
financial statements and notes
21
<PAGE> 25
thereto that are included elsewhere herein. The following discussion should be
read in conjunction with the consolidated financial statements and notes thereto
contained elsewhere herein.
THE TRANSACTIONS
The Acquisition. On February 10, 1997 (the "Acquisition Closing Date"), a
subsidiary wholly owned by GSCP and certain affiliated investors acquired from
Mark IV and one of its subsidiaries all of the issued and outstanding capital
stock of the former parent of Old EVI and each of its subsidiaries (the
"Acquisition") for an initial cash purchase price of $151.5 million, plus $4.9
million in estimated adjustments paid on the closing date, which aggregate
amount was subject to further post-closing adjustments based on (i) the audited
working capital and audited cash flow of Old EVI as of and for the 10-month
period ended December 31, 1996 and (ii) the net intercompany transfers of cash
between Mark IV and its affiliates (other than Old EVI and its subsidiaries), on
the one hand, and Old EVI and its subsidiaries, on the other hand, during the
period between December 31, 1996 and the Acquisition Closing Date. Based on
these provisions Mark IV has requested a purchase price increase of
approximately $138,000, which amount the Company is currently disputing pursuant
to the applicable provisions of the purchase agreement.
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 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 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 approximately $253.9 million. In addition, in connection with the
Recapitalization Agreement, certain shares of Holdings Common Stock held by
management of Old Telex (such shares, the "Rollover Shares") and certain options
to acquire additional shares of Holdings Common Stock (the "Rollover Options"),
with an aggregate value of approximately $21.2 million (which represented
approximately 14% of the equity of Holdings on a non-diluted basis and
approximately 20% on a fully diluted basis) were retained by such managers. In
connection with the Recapitalization, Old Telex completed (i) a
22
<PAGE> 26
tender offer (the "Tender Offer") to repurchase all of Old Telex's then
outstanding 12% Senior Notes due 2004, in aggregate principal amount of $100.0
million, for $118.3 million (including premium and consent fees along with
accrued interest), and (ii) a solicitation of consents with respect to certain
amendments to the indenture pursuant to which such notes were issued. The
Recapitalization, the financing thereof (including the issuance by Old Telex of
10 1/2% Senior Subordinated Notes due 2007 (the "Existing Telex Notes") to Chase
Securities, Inc., Morgan Stanley & Co. Incorporated and Smith Barney, Inc.), the
Tender Offer and the payment of the related fees and expenses are herein
referred to as the "Recapitalization Transaction."
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 (as amended, the "Senior Secured Credit Facility") with The
Chase Manhattan Bank, Morgan Stanley Senior Funding, Inc. and certain other
lenders, consisting of (a) a $115.0 million term loan facility (the "Term Loan
Facility"), and (b) a $25.0 million revolving credit facility (the "Revolving
Credit Facility"), (iv) $125.0 million of Existing Telex Notes and (v) $36.5
million of available cash of Old Telex. Of the $108.4 million of new equity
contributed by GSCP and certain other co-investors, $25.2 million consisted of
proceeds from the issuance by GST (a predecessor of Holdings) of Deferred Pay
Subordinated Debentures due 2009 (the "GST Subordinated Debentures").
Pursuant to the Recapitalization of Old Telex on May 6, 1997, the
historical basis of all assets and liabilities was retained for financial
reporting purposes, and the repurchases of existing Holdings Common Stock and
issuance of new Holdings Common Stock have been accounted for as equity
transactions.
In October 1997, Old Telex completed an exchange offer of $125 million
aggregate principal amount of new 10 1/2% Senior Subordinated Notes Due 2007,
Series A (the "New Telex Notes"), which were registered under the Securities
Act, for a like principal amount of the Existing Telex Notes (together with the
New Telex Notes, the "Telex Notes"). All of the Existing Telex Notes were
tendered and accepted for exchange.
The Mergers. On February 2, 1998, Old EVI merged with Old Telex, a wholly
owned subsidiary of Holdings and an affiliate of GSCP, with Old EVI surviving.
In the Merger, Old EVI changed its corporate name to "Telex Communications,
Inc." The Merger was effected pursuant to an agreement and plan of merger, dated
January 29, 1998 under which Greenwich I LLC ("G-I"), a subsidiary wholly owned
by GSCP and certain affiliated investors, exchanged all of the issued and
outstanding common and preferred stock of EVI Holdings, the former parent of Old
EVI, for 1,397,400 shares of Holdings' Common Stock, and 13,000 shares of
Holdings' Series A Pay-in-Kind Preferred Stock, respectively, and EVI Holdings
was merged with and into Holdings, with Holdings continuing as the surviving
corporation. The Mergers have been accounted for essentially as a pooling of
interests from May 6, 1997, the date on which Old EVI and Old Telex came under
common control, and the financial statements of the Company for Fiscal 1998
accordingly include the results of Old Telex from May 6, 1997. Immediately prior
to the Mergers, approximately $12.7 million of indebtedness outstanding under
Old EVI's senior credit facility was paid in full and Old EVI's senior credit
facility was terminated. Such indebtedness, together with $0.4 million of
certain fees and expenses associated with the Mergers, was repaid by utilizing
free cash at closing from Old EVI of $3.8 million and by borrowings under Old
Telex's Revolving Credit Facility of approximately $9.3 million. Total fees and
expenses incurred as a result of the Mergers were $1.7 million, including the
$0.4 million paid at closing. The EVI Notes remain outstanding following the
Mergers.
The Acquisition Transactions, the Recapitalization Transaction, and the
Mergers are referred to herein collectively as the "Transactions."
23
<PAGE> 27
OVERVIEW
The Company, formed as a result of the February 2, 1998 merger of Old Telex
and Old EVI (see "The Mergers"), is a leader in the design, manufacture and
marketing of sophisticated audio, wireless and multimedia communications
equipment to commercial, professional and industrial customers. The Company
provides high value-added communications products designed to meet the specific
needs of customers in commercial, professional and industrial markets, and does
not participate in the competitive retail consumer electronics market. The
Company offers a comprehensive range of products worldwide for professional
audio systems as well as for multimedia and other communications product
markets, including wired and wireless microphones, wired and wireless intercom
systems, mixing consoles, signal processors, amplifiers, loudspeaker systems,
headphones and headsets, tape duplication products, talking book players, LCD
projectors, wireless LAN and SBA 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 greater proportion
of the Company's business.
The Mergers contributed $154.3 million to Fiscal 1998 reported sales,
approximately 28% of which is attributable to the Professional Sound and
Entertainment business segment and approximately 72% of which is attributable to
the Multimedia/Audio Communications business segment.
Over 50% of the Company's sales are made internationally, in over 80
countries. The Company conducts its foreign sales through its foreign
subsidiaries in Germany, Japan, Hong Kong, the United Kingdom, Canada,
Australia, Switzerland, Singapore and France, and exports products from its
manufacturing locations in the U.S., Germany, the United Kingdom and Mexico for
sales through its independent distributors and dealers in other countries.
Overall, the Company's business is not subject to significant seasonal
fluctuations. Management does not believe that inflation has had a material
impact on its financial position or results of operations during the periods
covered by the Consolidated Financial Statements included herein. The Company
has generally been able to effect price increases equal to the inflationary
increase in costs.
The Company maintains assets and/or operations in a number of foreign
jurisdictions, the most significant of which are Germany, the United Kingdom,
Japan, Singapore, and Hong Kong. In addition, the Company conducts business in
local currency in many countries, the most significant of which are Germany, the
United Kingdom, Japan, Singapore, Hong Kong, Canada, Australia, Switzerland and
France. Exposure to U.S. dollar/German mark and U.S. dollar/British pound
exchange rate volatility is mitigated to some extent by the Company's ability to
source its production needs with existing manufacturing capacity in Germany and
Great Britain, and the exposure to U.S. dollar/Japanese yen exchange rate
volatility is to some extent mitigated by sourcing products denominated in yen
from Japan or through contractual provisions in sales agreements with certain
customers. Nevertheless, the Company has a direct and continuing exposure to
both positive and negative foreign currency movements.
24
<PAGE> 28
The Company reports the foreign exchange gains or losses on transactions as
part of other (income) expense. Gains and losses on translation of foreign
currency denominated balance sheets are classified as currency translation
adjustments and are included as part of shareholder's equity (deficit). The
Company's predecessor financial statements (i.e., Old EVI's financial
statements) excluded realized foreign currency transaction gains and losses
since these were viewed as an integral part of Mark IV's consolidated risk
management.
CHANGE IN FISCAL YEAR
Effective December 31, 1998, the Company changed its fiscal year end from
March 31 to December 31. Due to this change, the Company is reporting audited
consolidated financial results for a short fiscal period beginning April 1, 1998
and ending on December 31, 1998. The management discussion and analysis that
follows compares the results for the nine-month period ended December 31, 1998
to the audited results for the twelve month fiscal year ended March 31, 1998 and
the unaudited results of the nine-month period beginning July 1, 1997 and ending
on March 31, 1998, which are not materially affected by seasonal fluctuations.
The results of Old Telex are included for the entire nine months in the
Company's consolidated results for the nine months ended March 31, 1998, while
for the nine months ended December 31, 1997, the results of Old Telex are
included from May 6, 1997, the date on which Old EVI and Old Telex came under
common control. Therefore, the Company believes that for purposes of
management's discussion and analysis, a comparison of the financial results for
the nine-month period ended December 31, 1998 with the results for the nine
months ended March 31, 1998 is more meaningful than a comparison with the
results for the nine months ended December 31, 1997, a similar prior year
calendar period.
RESULTS OF OPERATIONS
NINE-MONTH PERIOD ENDED DECEMBER 31, 1998 COMPARED TO NINE MONTHS AND FISCAL
YEAR ENDED MARCH 31, 1998.
Net Sales. The Company's net sales decreased $86.7 million from $333.0
million for the twelve-month year ended March 31, 1998 to $246.3 million for the
nine-month period ended December 31, 1998. However, the Company's net sales
decreased $13.2 million, or 5.1%, from $259.5 million for the nine months ended
March 31, 1998 to $246.3 million for the nine-month period ended December 31,
1998. The decrease in net sales is attributed primarily to the weakness in North
America and in the Asia/Pacific regions. The decrease in sales in North America
is attributed to declining sales of certain phased-out products, a delay in the
introduction of certain replacement products and slower-than-anticipated sales
of such products, and loss of revenue due to the sale of the Gauss business. The
decrease in sales in the Asia/Pacific region is attributed primarily to the weak
economies in Japan, Korea, and certain other countries in that region.
Net Sales in the Company's Professional Sound and Entertainment segment
decreased $4.1 million, or 2.6%, from $156.9 million for the nine months ended
March 31, 1998 to $152.8 million for the nine-month period ended December 1998.
This decrease is attributed primarily to the declining sales of certain
phased-out products and to the weak economies in the Asia/Pacific region.
Net Sales in the Company's Multimedia/Audio Communications segment
decreased $9.1 million, or 8.9%, from $102.6 million for the nine months ended
March 31, 1998 to $93.5 million for the nine-month period ended December 1998.
This decrease is attributed primarily to declining sales of certain phased-out
products, a delay in the introduction of certain new products and
slower-than-anticipated sales of such products, and lower average prices for
certain computer audio products.
25
<PAGE> 29
Gross Profit. The Company's gross profit decreased $38.2 million from
$127.3 million for the twelve-month year ended March 31, 1998 to $89.1 million
for the nine-month period ended December 31, 1998. However, the Company's gross
profit decreased $10.8 million, or 10.8%, from $99.9 million for the nine months
ended March 31, 1998 to $89.1 million for the nine-month period ended December
1998. As a percentage of sales, the gross margin rate decreased from 38.5% for
the nine months ended March 31, 1998 to 36.2% for the nine-month period ended
December 1998. The decline in gross margin rate is attributed mainly to the
unfavorable movement in exchange rates on sales of U.S.-manufactured products in
certain foreign countries, lower average selling prices on certain products that
are being phased out and a delay in the introduction of certain new products and
slower-than-anticipated sales of such products.
Engineering. The Company's engineering expenses decreased $6.1 million from
$17.3 million for the twelve-month year ended March 31, 1998 to $11.2 million
for the nine-month period ended December 31, 1998. However, the Company's
engineering expenses decreased $2.0 million, or 15.2%, from $13.2 million for
the nine months ended March 31, 1998 to $11.2 million for the nine-month period
ended December 1998. The decrease is attributed primarily to the benefits of
certain Mergers-related restructurings implemented late in Fiscal 1998.
Selling, General and Administrative. The Company's selling, general and
administrative expenses decreased $28.0 million from $81.7 million for the
twelve-month year ended March 31, 1998 to $53.7 million for the nine-month
period ended December 31, 1998. However, selling, general and administrative
expenses decreased $2.3 million, or 4.1%, from $56.0 million for the nine months
ended March 31, 1998 to $53.7 million for the nine-month period ended December
1998. Included in selling, general and administrative expenses for the
nine-month period ended December 1998 are net credits of $0.6 million due
primarily to the reversal of previously accrued Recapitalization Transaction
expenses related to certain employees no longer with the Company, a $1.7 million
charge for severance pay related to the former CEO and an estimated $1.0 million
of charges for legal and audit fees related to the Merger. Included in selling,
general and administrative expenses for the nine months ended March 31, 1998 is
a charge of $3.6 million for management options and bonuses related to the
Recapitalization Transaction.
Corporate Charges: Corporate charges of $1.3 million for the nine-month
period ended December 31, 1998 represent fees to GSCP for consulting and
management services provided under a management and services agreement. These
charges were $2.2 million and $1.8 million, respectively, for the twelve-month
year ended March 31, 1998 and for the nine months ended March 31, 1998.
Other (income) expense: The significant components of other (income)
expense for the nine-month period ended December 31, 1998 were royalty income of
$1.0 million, gain on foreign exchange of $0.1 million, and gain on sale of the
Gauss business of $0.9 million.
Interest (income) expense: Interest expense decreased $10.6 million from
$37.9 million for the twelve-month year ended March 31, 1998 to $27.3 million
for the nine-month period ended December 31, 1998. However, interest expense
decreased from $29.0 million for the nine months ended March 31, 1998 to $27.3
million for the nine-month period ended December 31, 1998 as a result of a
decrease in outstanding debt and because the former period contained certain
Mergers-related bank charges.
Income Taxes: The Company's income tax benefit, excluding the income tax
provision related to the net deferred tax asset valuation allowance, was 34.8%
of the pretax loss for the nine-month period ended December 31, 1998 compared
with 30.8% for the twelve-month year ended March 31, 1998. The increase in
effective tax rate is principally due to the nondeductibility, for the
twelve-month year ended March 31, 1998, of certain costs related to the
Recapitalization Transaction and the Mergers which reduced the effective tax
loss
26
<PAGE> 30
rate, and due to a reduction, for the nine-month period ended December 31, 1998,
in dividends from foreign subsidiaries which increased the effective tax loss
rate.
The Company has established a net deferred tax valuation allowance of $18.3
million due to the uncertainty of the realization of future tax benefits. The
realization of the future tax benefits related to the deferred tax asset is
dependent on many factors, including the Company's ability to generate taxable
income within the net operating loss carryforward period. Management considered
these factors in reaching its conclusion as to the adequacy of the valuation
allowance for financial reporting purposes.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED FEBRUARY 28,
1997
Net Sales. The Company's net sales increased $141.0 million, or 73.4%, from
$192.0 million in Fiscal 1997 to $333.0 million in Fiscal 1998. Of this amount,
Old Telex contributed $154.3 million. Excluding the impact of Old Telex, net
sales decreased $13.4 million, or 7.0%, from $192.0 million in Fiscal 1997 to
$178.6 million in Fiscal 1998, primarily due to a decrease in the Company's net
sales to customers outside of the U.S. Excluding the impact of Old Telex, net
sales to customers in the U.S. remained unchanged at $79.6 million. Excluding
the impact of Old Telex, net sales to customers outside of the United States
decreased $13.4 million, or 11.9%, from $112.5 million in Fiscal 1997 to $99.1
million in Fiscal 1998. The decrease in net sales to customers outside of the
U.S. was due in part to the stronger U.S. dollar, principally against the German
mark and Japanese yen, which reduced the foreign currency denominated translated
sales, and to the weak economies in Japan and in certain other Asian countries.
Excluding the impact of Old Telex, the stronger U.S. dollar reduced foreign
currency denominated translated sales by approximately $8.2 million in Fiscal
1998.
Net sales in the Company's Professional Sound and Entertainment segment
increased $29.7 million, or 16.7%, from $177.9 million in Fiscal 1997 to $207.6
million in Fiscal 1998. Excluding the impact of Old Telex, this segment's net
sales decreased $12.8 million, or 7.2%, from net sales of $177.9 million in
Fiscal 1997 to $165.1 million in Fiscal 1998. This decrease is attributed
primarily to the decrease, as described above, in net sales to customers outside
of the U.S.
Net sales in the Company's Multimedia/Audio Communications segment
increased $111.2 million, or 788.7%, from $14.1 million in Fiscal 1997 to $125.3
million in Fiscal 1998. Excluding the impact of Old Telex, this segment's net
sales decreased $0.5 million, or 4.1%, from $14.1 million in Fiscal 1997 to
$13.6 million in Fiscal 1998.
Gross Profit. The Company's gross profit increased $56.4 million, or 79.5%,
from $70.9 million in Fiscal 1997 to $127.3 million in Fiscal 1998. As a
percentage of sales, the gross margin rate improved from 36.9% in Fiscal 1997 to
38.2% in Fiscal 1998. Excluding the impact of Old Telex, the Company's gross
profit decreased $8.6 million, or 12.2%, and its gross margin rate declined from
36.9% in Fiscal 1997 to 34.8% in Fiscal 1998. The decline in the gross margin
rate is attributed mainly to the unfavorable movement in exchange rates, the
Company's aggressive pricing strategy employed to maintain its foreign market
positions, and a delay in the introduction of certain new products. The
unfavorable movement in exchange rates primarily affected the gross margin rates
on sales made in Japan and Germany due to the higher costs of goods that were
produced in the U.S. and the U.K.
Engineering. The Company's engineering expenses increased $8.8 million, or
103.5%, from $8.5 million, or 4.4% of net sales in Fiscal 1997 to $17.3 million,
or 5.2% of net sales, in Fiscal 1998. Excluding the impact of Old Telex,
engineering expenses increased $0.9 million, or 10.6%, from $8.5 million in
Fiscal
27
<PAGE> 31
1997 to $9.4 million in Fiscal 1998. The increase in expenses is attributable
primarily to the increase in outside development costs incurred to accelerate
new product development.
Selling, General and Administrative. Selling, general and administrative
expenses increased $37.2 million, or 83.6%, from $44.5 million, or 23.2% of net
sales, in Fiscal 1997 to $81.7 million, or 24.5% of net sales, in Fiscal 1998.
Included in the Fiscal 1998 selling, general and administrative expenses, as
described below, are $39.7 million of expenses attributed to Old Telex.
Excluding the impact of Old Telex, selling, general and administrative expenses
decreased $2.6 million, or 5.8%, from $44.5 million in Fiscal 1997 to $41.9
million in Fiscal 1998. The decrease was primarily due to spending restraints in
Fiscal 1998.
Fiscal 1998 selling, general and administrative expenses attributed to Old
Telex were $39.7 million. Included in these expenses were $13.1 million of costs
related to the Recapitalization consisting of charges for changes in the
Rollover Options, new option grants and special management bonus compensation.
Compensation expense of $7.4 million related to the extension of terms on the
Rollover Options was recognized in Fiscal 1998. In addition, as part of the
Recapitalization Transaction, the Company granted options to purchase shares of
Holdings' Common Stock at a discount from fair value to certain management
employees. The total discount of $9.2 million will be recognized as compensation
expense over the vesting or performance period of the options, generally three
to five years. In Fiscal 1998, the Company recognized $3.2 million of
compensation expense related to these option grants.
Restructuring Charges. In the fourth quarter of Fiscal 1998 the Company
recorded a pre-tax restructuring charge of $6.2 million attributable to the
Merger-related consolidation of certain product lines, and the consolidation of
certain of its worldwide manufacturing, engineering, distribution, marketing,
service and administrative operations to reduce costs, to better utilize the
available manufacturing and operating capacity and to enhance competitiveness.
The consolidation will include the closure of some facilities and will also
include the transfer of a portion of the work from certain facilities to the
Company's remaining locations. The Company expects to complete substantially all
of the restructuring of the operations by early Fiscal 2000, and expects to
complete the sale and disposal of the owned facilities and equipment related to
those operations by late Fiscal 2000.
Included in the restructuring charges are $2.5 million associated with
severance pay for terminated employees, most of whom work in the facilities to
be closed or from which work is to be transferred to other locations, $2.8
million associated with the write-down to fair market value of certain assets
(primarily inventories related to the products to be discontinued, and land,
building and equipment to be sold, made obsolete or redundant), and $0.9 million
associated with other costs.
Corporate Charges. Corporate charges of $2.2 million in Fiscal 1998
represent fees for consulting and management services provided by GCSP under a
management and services agreement.
Special Charges. In Fiscal 1998 the Company recognized an impairment loss
of $2.2 million, charged to operating income, in accordance with the provisions
of Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for
Impairment of Long-Lived Assets and Assets to be Disposed Of." SFAS 121 requires
impairment losses to be recorded on long-lived assets used in the operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. The impairment loss is measured by comparing the fair value of the
assets, as determined by discounting the future cash flows at a market rate of
interest, to its carrying value.
28
<PAGE> 32
Other (income) expense. The Company's foreign exchange loss was essentially
offset by license fee income. The foreign exchange loss was primarily due to the
unfavorable exchange rate movement in the German mark, Australian dollar and
Japanese yen against the U.S. dollar.
Recapitalization expense. The Company recorded a $6.7 million
recapitalization expense in Fiscal 1998, attributed to Old Telex. The charge
consists of fees for investment advisory, legal, audit and other professional
services attributed to the Recapitalization Transaction.
Interest (income) expense. Interest expense increased from $0.8 million in
Fiscal 1997 to $37.9 million in Fiscal 1998. The increase is attributed to $1.7
million of bank fees incurred in connection with a bridge loan commitment
related to the Recapitalization Transaction, $1.7 million of bank and other fees
in connection with the Mergers, and an increase in average outstanding
indebtedness resulting from the Transactions.
Income Taxes. The Company's income tax benefit, excluding the $15.7 million
income tax provision related to the net deferred tax asset valuation allowance,
was 30.8% of the pretax loss and includes the extraordinary item for Fiscal
1998. The effective tax rate for Fiscal 1997 was 42.7%. The lower effective tax
benefit rate for Fiscal 1998 is principally due to the nondeductibility of
certain costs related to the Recapitalization Transaction and goodwill
amortization costs.
The Company has established a net deferred tax valuation allowance of $15.7
million, charged to income tax provision for Fiscal 1998, due to the uncertainty
of the realization of future tax benefits. The realization of the future tax
benefits related to the deferred tax asset is dependent on many factors,
including the Company's ability to generate taxable income within the net
operating loss carryforward period. Management has considered these factors in
reaching its conclusion as to the adequacy of the valuation allowance for
financial reporting purposes.
Extraordinary Loss. In connection with the Transactions, the Company
recorded a pre-tax extraordinary loss of $20.6 million on the early retirement
of debt, consisting of bond premium, consent and tender fees, along with the
write-off of deferred financing costs associated with the repurchase and early
retirement in Old Telex's $100.0 million 12% Senior Notes due 2004 and the
termination of Old EVI's senior credit agreement.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998 the Company had cash and cash equivalents of $3.4
million compared to $2.2 million at March 31, 1998. The Company's principal
source of funds for the nine-month period ended December 31, 1998 consisted of
cash generated from operating activities, inclusive of $18.0 million from
reduction in net operating assets, and $2.0 million from the sale of the Gauss
business and its related facility in Sun Valley, California. The Company's
principal uses of funds for the nine-month period ended December 31, 1998
consisted of $15.5 million for retirement of debt and $5.2 million for
capital expenditures.
The Company's investing activities consist mainly of capital expenditures
to maintain facilities, to acquire machines or tooling, to update certain
manufacturing processes and to improve efficiency. Capital expenditures totaled
$5.2 million for the nine-month period ended December 31, 1998 compared with
$8.1 million for the twelve-month year ended March 31, 1998. For the nine months
ended March 31, 1998 capital expenditures were $6.8 million. The Company's
ability to make capital expenditures is subject to certain restrictions under
its Senior Secured Credit Facility.
29
<PAGE> 33
The Company's consolidated indebtedness decreased $15.5 million ($6.1 of
which was mandated by the terms of the Senior Secured Facility) from $353.2
million at March 31, 1998 to $337.7 million at December 31, 1998.
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 liquidity needs arise
primarily from debt service on indebtedness incurred in connection with the
Transactions, working capital needs and capital expenditure requirements. The
Company incurred substantial indebtedness in connection with the Acquisition
Transactions and the Recapitalization Transaction. As a result, debt service
obligations represent significant liquidity requirements for the Company.
The Company's current credit facilities include the Senior Secured Credit
Facility consisting of the Term Loan Facility of $115.0 million and the
Revolving Credit Facility, subject to certain borrowing base limitations, of
$25.0 million, and foreign working capital lines, subject to certain
limitations, of $6.5 million. In certain instances the foreign working capital
lines are secured by a lien on foreign real property, leaseholds, accounts
receivable and inventory or are guaranteed by another subsidiary.
As of December 31, 1998, $8.5 million of the Company's $107.0 million
remaining under the Term Loan Facility is payable in the next 12 months. In
addition, the Company had $1.3 million outstanding under the Revolving Credit
Facility, and $4.4 million outstanding under the foreign working capital lines.
Net availability at December 31, 1998 under the Revolving Credit Facility,
computed by deducting approximately $6.2 million of open letters of credit and
applying applicable borrowing base limitations, totaled $17.5 million. Net
availability at December 31, 1998 under such foreign working capital lines
totaled $2.1 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 Company is in compliance with all covenants related to the indentures
governing the EVI Notes and the Telex Notes and the revised covenants of the
Senior Secured Credit Facility, as recently amended. The effective interest rate
under these credit facilities in the nine-month period ended December 31, 1998
was 8.6%.
In addition, pursuant to the Term Loan Facility, the Company is required to
make scheduled permanent principal payments under (i) the $50.0 million Tranche
A Term Loan Facility ($42.5 million outstanding at December 31, 1998), $8.0
million, $8.5 million, $11.0 million, and $15.0 million of which is payable in
each of 1999, 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
($64.5 million outstanding at December 31, 1998), $0.5 million, $0.5 million,
$0.5 million, $0.5 million, $25.0 million, and $37.5 million of which is payable
in each of 1999, 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 generally is required to make
mandatory prepayments with (i) non-ordinary asset sale proceeds, (ii) any
additional indebtedness and equity proceeds (with certain exceptions) and (iii)
with 75% of the excess cash flow of the Company and its subsidiaries for each
fiscal year commencing on April 1, 1997, and each fiscal year thereafter. In
March 1999 the Company will make a payment of $4.2 million under the excess cash
flow requirements of the Senior Secured Credit Facility. Of this amount, $1.6
million will be applied to the scheduled $8.0 million 1999 Tranche A Term Loan
Facility principal payment, $0.3 million will be applied to the scheduled $0.5
million 1999 Tranche B Term Loan Facility principal payment, and the remaining
$2.3 million will be applied on a pro rata basis to the future scheduled
principal payments of the Tranche B Term Loan Facility. The Company will finance
such $4.2 million payment by drawing on the Revolving Credit Facility.
The Company expects to generate cash flow from operations. In addition, the
Company has arranged a $4.0 million intercompany line of credit with Holdings
and expects to receive approximately $1.9 million in proceeds in March 1999 from
the sale of certain vacant facilities (See Note 18 to the Consolidated Financial
Statements). In addition, the Company is actively implementing plans to reduce
inventory and improve the accounts receivable collection experience.
30
<PAGE> 34
The Company believes that these additional sources of funds, together with
the Company's Revolving Credit Facility and cash from operations will be
adequate to meet its debt service and principal payment requirements, capital
expenditure needs, 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.
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 for 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 micro-processors 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 its non-information
technology and has replaced, modified or upgraded more than 80% of its
information systems in recent years with Year 2000 ready systems. The
replacement, upgrade and changes to the Company's remaining critical non-ready
systems, and the testing of all of the Company's systems are expected to be
completed by July 1999.
In addition to internal remediation activities, the Company is in the
process of initiating communications with key third parties, including key
suppliers and customers, to determine the extent to which their systems, their
products, or their electronic data interchange with the Company, or are
vulnerable to Year 2000 issues. 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 in the event
that the Company or any of its key suppliers is 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 scenario would be
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. The Company is in the process of assessing such risks and its ability
to mitigate them through contingency planning; however, at this time the Company
does not believe that such temporary disruptions, if they were to happen, would
have a material adverse effect on its financial position or results of
operations.
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 flow and
are expensed as incurred or capitalized as appropriate.
31
<PAGE> 35
Although the Company expects its critical systems to be ready by the fourth
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. Special
factors that might cause such material differences include, but are not limited
to, the availability and cost of Year 2000 personnel, the ability to locate and
correct relevant computer source codes and embedded technology, testing results
and the timeliness and effectiveness of third parties' readiness.
CERTAIN RISKS RELATED TO TELEX'S BUSINESS
The statements under this caption are intended to serve as cautionary
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and should be read in conjunction with the forward-looking statements in
this report as well as statements presented elsewhere by management of the
Company. Various factors, including those described in this section and
elsewhere in this report, could cause actual results and events to vary
significantly from those expressed in any forward-looking statement. The
following information is not intended to limit in any way the characterization
of other statements or information in this Report as cautionary statements for
such purpose.
New Products and Changing Technology.
Technological innovation and leadership are among the important factors in
competing successfully in the professional sound and entertainment and
multimedia/communications markets. The Company's future results will depend, in
part, upon its ability to make timely and cost-effective enhancements and
additions to its technology and to introduce new products that meet customer
demands, including products utilizing digital technology, which are increasingly
being introduced in the professional audio industry. The success of current and
new product offerings is dependent on several factors, including proper
identification of customer needs, technological development, cost, timely
completion and introduction, differentiation from offerings of the Company's
competitors and market acceptance. Maintaining flexibility to respond to
technological and market dynamics may require substantial expenditures. There
can be no assurance that the Company will successfully identify and develop new
products in a timely manner, that products or technologies developed by others
will not render the Company's products obsolete or noncompetitive, or that
constraints in the Company's financial resources will not adversely affect its
ability to develop and implement technological advances.
Significant Competition.
The markets within the professional sound and entertainment and
multimedia/communications segments are both highly competitive and fragmented
and the Company faces meaningful competition in both segments and in most of its
product categories and markets. While many of the Company's current competitors
are generally smaller than the Company, certain of the Company's competitors are
substantially larger than the Company and have greater financial resources. As
the Company develops new products and enters new markets it may encounter new
competitors, and other manufacturers and suppliers who currently do not offer
competing products may enter the markets in which the Company currently
operates. Such new competitors may be larger, offer broader product lines and
have substantially greater financial and other resources than the Company. Such
competition could negatively affect pricing and gross margins. Although the
Company has historically competed successfully in its various markets, there can
be no assurance that it will be able to continue to do so or that the Company
will be able to compete successfully in new markets.
Currency and Other Risks Attendant to International Operations.
The Company's efforts to increase international sales may be adversely
affected by, among other things, changes in foreign import restrictions and
regulations, taxes, currency exchange rates, currency and
32
<PAGE> 36
monetary transfer restrictions and regulations and economic and political
changes in the foreign nations to which the Company's products are exported.
Although the Company's international operations have generally been profitable
in the past, there can be no assurance that one or more of these factors will
not have a material adverse effect on the Company's financial position or
results of operations in the future. In addition, the Company has not registered
its significant trademarks in all foreign jurisdictions in which it does
business and there can be no assurance that attempts at registration in such
foreign jurisdictions would be successful.
The Company has substantial assets located outside of the United States,
and a substantial portion of the Company's sales and earnings are attributable
to operations conducted abroad and to export sales, predominantly in Western
Europe and Asia Pacific. The Company's international operations subject the
Company to certain risks, including increased exposure to currency exchange rate
fluctuations. The Company intends to hedge a portion of its foreign currency
exposure by incurring liabilities, including bank debt, denominated in the local
currencies of those countries where its subsidiaries are located, and plans to
develop systems to manage and control its currency risk exposure. The Company's
international operations also subject it to certain other risks, including
adverse political or economic developments in the foreign countries in which it
conducts business, foreign governmental regulation, dividend restrictions,
tariffs and potential adverse tax consequences, including payment of taxes in
jurisdictions that have higher tax rates than does the United States.
Substantial Leverage and Debt Service Obligations.
The Company is highly leveraged. The Company's high degree of leverage
could have important consequences, including but not limited to the following:
(i) the Company's ability to obtain additional financing for working capital,
capital expenditures, acquisition, general corporate purposes or other purposes
may be impaired in the future; (ii) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of principal and interest
on its indebtedness, thereby reducing the funds available to the Company for
other purposes; and (iii) the Company's flexibility to adjust to changing market
conditions and the ability to withstand competitive pressures could be limited,
and the Company may be more vulnerable to a downturn in general economic
conditions or its business, or may be unable to carry out capital spending that
is important to its growth strategy. The Company's ability to repay or to
refinance its obligations with respect to its indebtedness will depend on its
financial and operating performance, which, in turn, is subject to prevailing
economic and competitive conditions and to certain financial, business and other
factors, many of which are beyond the Company's control. These factors could
include operating difficulties, increased operating costs, product prices, the
response of competitors, regulatory developments, and delays in implementing
strategic projects.
Restrictive Financing Covenants.
The Senior Secured Credit Facility and indentures governing the EVI Notes
and the Telex Notes contain a number of significant covenants that will restrict
the operations of the Company and its subsidiaries. Under the Senior Secured
Credit Facility, the Company is required to comply with specified financial
ratios and tests, including minimum fixed charge coverage ratios, maximum
leverage ratios and minimum EBITDA requirements. There can be no assurance that
the Company will be able to comply with such covenants or restrictions in the
future. The Company's ability to comply with such covenants and other
restrictions may be affected by events beyond its control, including prevailing
economic, financial and industry conditions. The breach of any such covenants or
restrictions could result in a default under the Senior Secured Credit Facility
that would permit the lenders thereto to declare all amounts outstanding
thereunder to be immediately due and payable, together with accrued and unpaid
interest, and the commitments of the lenders under the Revolving Credit Facility
to make further extensions of credit thereunder could be terminated.
33
<PAGE> 37
Control of the Company.
G-I and G-II, which are wholly-owned subsidiaries of GSCP and certain
co-investors, own approximately 93% of the issued and outstanding common stock
of Holdings (after giving effect to the repurchase by Holdings of certain shares
and vested options held by former management pursuant to the terms of the
Stockholders' Agreement) on a fully diluted basis (giving effect to the Rollover
Options), which in turn owns all of the common stock of the Company.
Accordingly, GSCP controls the Company and has the power to elect all of the
Company's directors, appoint new management and approve any action requiring the
approval of the holders of the Company's common stock, including adopting
amendments to the Company's certificate of incorporation and approving mergers
or sales of substantially all of the Company's assets. GSCP is an affiliate of
CitiGroup, Inc., which wholly owns the general partner of GSCP's general
partner. From time to time, GSCP considers possible combinations or dispositions
of its portfolio companies as a means of optimizing investment value.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
currency exchange and interest rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
The counterparties 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 1998, 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 income statement.
At December 31, 1998, the Company had $2.9 million outstanding forward
exchange contracts, with a weighted average maturity of 75 days.
At December 31, 1998, 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 $0.3 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 transaction being hedged.
Interest Rate and Debt Sensitivity 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 December 31, 1998, the Company had fixed rate debt of $225.0 million and
floating rate debt of $112.7 million. Holding all other variables constant (such
as foreign exchange rates and debt levels), a one
34
<PAGE> 38
percentage point decrease in interest rates would increase the unrealized fair
market value of the $225.0 million fixed rate debt by approximately $9.5
million. The earnings and cash flow impact for the next year resulting from a
one percentage point increase in interest rates on the $112.7 million floating
rate debt would be approximately $1.1 million, holding all other variables
constant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Reports of Independent Public Accountants, Report of Independent
Accountants, Consolidated Financial Statements and Supplementary Data required
by Item 8 are set forth immediately following the signature page of this report
and are hereby incorporated herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with the Company's independent
public accountants on accounting or financial disclosure.
35
<PAGE> 39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position, as of March 31,
1999, of each of the executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- - --------------------------- --- -----------------------------------------------------
<S> <C> <C>
Ned C. Jackson* 63 Director, Chief Executive Officer and President
Mahedi Jiwani 50 Vice President, Acting Chief Financial Officer, Chief
Accounting Officer, Controller
John A. Palleschi 48 Group Vice President and President, Speakers and
Microphones Group and Corporate Secretary
Joseph P. Winebarger 50 Vice President and Chief Technical and Environmental
Officer
Dan M. Dantzler 50 Group Vice President and President, Electronics Group
Glen E. Cavanaugh 55 Group Vice President and President, Multimedia/Audio
Communications Group
Paul A. McGuire 57 Vice President and President, Electro-Voice
Roger H. Gaines 56 Vice President, Manufacturing
F. Davis Merrey, Jr 58 Vice President, UK operations
Scott Myers 52 Vice President, Planning and Supply Chain, Chief
Information Officer
Alfred C. Eckert III 51 Director, Chairman of the Board
Jeffrey J. Rosen 49 Director
Edgar S. Woolard, Jr 64 Director
Evan M. Marks 41 Director
Christopher P. Forester 48 Director
Keith W. Abell 42 Director
Christine K. Vanden Beukel* 28 Director, Assistant Secretary and Assistant Treasurer
</TABLE>
- - ----------
* Executive is also an executive officer of Holdings.
Mr. Jackson became a director of the Company and was appointed as Chief
Executive Officer and President in 1998. Prior to joining the company, Mr.
Jackson was with DuPont for 37 years, most recently as Vice President and
General Manager of DuPont's DACRON(R) and Specialty Chemicals units.
36
<PAGE> 40
Mr. Jiwani has been Vice President, Acting Chief Financial Officer, Chief
Accounting Officer and Controller since December, 1998. Mr. Jiwani joined Old
Telex as Vice President, Controller in September 1997. Prior to joining Old
Telex, Mr. Jiwani was the Corporate Controller with Tennant from December 1993
to August 1997.
Mr. Palleschi is Group Vice President, President of the Speakers and
Microphones Group, and Secretary of the Company. Prior to his December 1998
appointment as Group Vice President and President of the Company's Speakers and
Microphones Group, Mr. Palleschi was Vice President, Corporate Development,
General Counsel and Secretary of the Company, having served Old Telex in such
capacity since January 1995. Prior to January 1995, Mr. Palleschi was Vice
President, Administration, General Counsel and Secretary of Old Telex and served
in such capacity since June 1989. Prior to joining Old Telex, Mr. Palleschi was
Director of Corporate Development for Memorex from March 1988 to June 1989. From
June 1984 to March 1988, Mr. Palleschi was International Counsel, Telex Computer
Products, Inc., a subsidiary of Telex Corp. From 1981 to 1984, Mr. Palleschi
also served as an attorney with Digital Equipment Corporation and Raytheon
Corporation.
Mr. Winebarger is Vice President and Chief Technical and Environmental
Officer responsible for developing strategic technology plans and product
development processes and corporate oversight on environmental matters. Prior to
his January 1999 appointment as Vice President and Chief Technical and
Environmental Officer, Mr. Winebarger was responsible for Old Telex's
Information Systems since January 1995 and for Old Telex's Engineering Services,
Quality Assurance and Sales Administration operations since April 1993. Prior to
April 1993, Mr. Winebarger was Vice President, Engineering of Telex and served
in such capacity with Old Telex since September 1987. From January to September
1987, he was corporate Director of Advanced Development, Telex Computer
Products, Inc. Prior to 1987, Mr. Winebarger was Acting Vice President,
Engineering, then Vice President, Engineering for Telex Data Systems, a division
of Telex Computer Products, Inc.
Mr. Dantzler is Group Vice President and President of the Electronics Group
of the Company. Prior to his December 1998 appointment as Group Vice President
and President of the Electronics Group, Mr. Dantzler served as Vice President
and President of Telex's Professional Sound and Entertainment Group since
February 1998. From September 1997 to February 1998, Mr. Dantzler served as
Acting President and Chief Executive Officer of Old EVI and from May 1994 to
September 1997 served as Vice President and President of Old Telex's
RF/Communications Group. Prior to May 1994, Mr. Dantzler was Vice President and
General Manager of Old Telex's Professional Sound and Entertainment Group. From
February 1992 to April 1993, he served as Staff Vice President. Prior to
February 1992, Mr. Dantzler was Vice President, Sales for Old Telex. From 1983
to 1989, Mr. Dantzler served as General Manager of the Hy-Gain Division of Old
Telex where he was responsible for the design and production of antennas and
wireless microphones. From 1967 to 1982, Mr. Dantzler held various engineering
positions with Old Telex and Hy-Gain.
Mr. Cavanaugh is Group Vice President and President of the Multimedia/Audio
Communications Group of the Company. Mr. Cavanaugh joined Telex in April 1993 as
Vice President and General Manager of Old Telex's Multimedia/Audio
Communications Group and was appointed president of the Group in May 1994. Prior
to joining Old Telex, Mr. Cavanaugh was Senior Vice President, Sales and
Marketing of Applied Voice Technology, Inc., which he joined in 1990. From 1988
to 1990, he was a principal at Columbia Management Consulting. Mr. Cavanaugh
also served as Senior Vice President, Marketing for Applied Communications, Inc.
from 1987 to 1988, and, from 1983 to 1987, as Vice President, Marketing at ISC
Systems Corporation. From 1981 to 1983, he served as Vice President and General
Manager of Evans and Sutherland Computer Corporation. From 1976 to 1981, Mr.
Cavanaugh was Vice President, Marketing for Datapoint Corporation.
37
<PAGE> 41
Mr. McGuire is Vice President and President of the Electro-Voice unit of
the Speakers and Microphones Group of the Company. Prior to his December 1998
appointment to this role, Mr. McGuire was Vice President, Sales and Marketing of
Telex's Professional Sound and Entertainment Group since February 1998. From May
1997 to February 1998, Mr. McGuire served as Acting Co-Chief Executive Officer
of Old EVI prior to which he was Vice President of Old EVI with responsibility
for sales and marketing. He joined Electro-Voice, Incorporated, a predecessor of
EVI, in 1972. He held positions in sales and marketing at Electro-Voice,
Incorporated and in 1990 was appointed President. In 1994, he was appointed
President of Mark IV Audio, Inc., with responsibility for the Americas. In 1995,
Mr. McGuire assumed the additional responsibility for Europe.
Mr. Gaines is Vice President, Manufacturing of the Company, having served
in such capacity since 1991. From May 1997 to February 1998, Mr. Gaines also
served as Acting Co-Chief Executive Officer of EVI. He joined Electro-Voice,
Incorporated, a predecessor of EVI, in 1981. In 1991, he was appointed Vice
President of Manufacturing of Mark IV Audio, Inc.
Mr. Merrey has served as Vice President, UK Operations since August 1997.
From April 1994 to August 1997, Mr. Merrey served as Vice President of Research
and Development of Electro-Voice, Incorporated, a predecessor of EVI. He joined
Electro-Voice, Incorporated in 1976. In 1985, he was appointed President of
Altec Lansing Corporation, a subsidiary of Gulton Industries, Inc.
Mr. Myers joined the Company in January 1999 as Chief Information Officer
and Vice President, Planning and Supply Chain. Prior to joining the Company, he
was Vice President of Operations Services for Viasystems Group, Inc., the
world's largest printed circuit board manufacturer. Prior to joining Viasystems
Mr. Myers was Director of Information Systems for Mills & Partners, Inc. and
Director of Information Systems for Berg Electronics Inc., a Mills & Partners
Company. Prior to joining Mills & Partners in 1993, Mr. Myers held a number of
management positions during 20 years with the DuPont Company in corporate
planning, acquisitions and joint ventures, business management, purchasing and
transportation, information systems and manufacturing.
Mr. Eckert is Chairman of the Board, having served in such capacity since
October 1998. He became a director of the Company on the Recapitalization
Closing Date. Mr. Eckert has been the President of GSCP since January 1994 and
the President of GSCP, Inc. since June 1998. Since 1991, Mr. Eckert has been a
general partner of Greycliff Partners. From 1984 to 1991, Mr. Eckert was a
general partner of Goldman, Sachs & Co. He is a director of Day International
Group, Inc., Eastgate Group Limited, IPC Magazines and McKesson HBOC, Inc.
Mr. Rosen became a director of the Company in January 1998. He also served
as Director of Old Telex from December 1993 to May 6, 1997. He is a partner of
the law firm O'Melveny & Myers. Mr. Rosen has been a partner of O'Melveny &
Myers since 1987.
Mr. Woolard became a director of the Company in January 1998. Mr. Woolard
is the former Chairman of the Board of Directors of DuPont. He joined DuPont in
1957 and held a variety of engineering, manufacturing and management positions
before being elected President and Chief Operating Officer in 1987, and Chairman
and Chief Executive Officer in 1989. He retired from the company in 1995. Mr.
Woolard is also a director of CitiGroup, Inc. and Apple Computer, Inc.
Mr. Marks became a director in December 1997. He is the managing principal
of Alben Asset Management, L.L.C., a private investment company based in New
York. Prior to forming Alben, Mr. Marks was in partnership with George Soros
from 1992 to 1998 as the president of G. Soros Realty, Inc., which
38
<PAGE> 42
invested in real estate globally. Prior to his association with Soros, Mr. Marks
was a principal in the real estate investment group of Lazard Freres & Co.
Mr. Forester became a director in December 1997. Mr. Forester has been
retired since 1995. From 1993 to 1995, Mr. Forester was Managing Director of the
technology industry group of Merrill Lynch & Co. From 1977 to 1993, Mr. Forester
worked in the Corporate Finance Department, Investment Banking Division of
Goldman, Sachs & Co. where he was a General Partner from 1988 to 1993.
Mr. Abell became a director of the Company in December 1997. Mr. Abell
joined GSCP at its inception in 1994 and has been an officer of GSCP, Inc. since
June 1998. From 1990 to 1994, Mr. Abell was with the Blackstone Group, most
recently as a Managing Director.
Ms. Vanden Beukel became a director of the Company in December 1997. Ms.
Vanden Beukel joined GSCP at its inception in 1994. Ms. Vanden Beukel previously
worked in the investment banking division of Smith Barney Inc. Ms. Vanden Beukel
is also a director of Day International Group, Inc. and a Managing Director of
GSCP, Inc.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Directors who are not employees of the Company or GSCP are paid $1,500 for
each Board meeting attended. In addition, the Company has granted Messrs. Marks,
Forester, Woolard and Rosen warrants representing the right to purchase 5,484,
5,484, 10,783, and 5,484 shares, respectively, of Common Stock of Holdings,
subject to certain anti-dilution provisions, at an exercise price of $31.93 per
share. A portion of these warrants became exercisable on grant; the remainder
will become exercisable over time through 2001, provided in each case that the
holder of the warrant is a director of the Company on the date of exercise.
Directors who are employees of the Company or GSCP receive no separate
compensation for their services as directors. All of the Company's directors are
entitled to reimbursement of their reasonable out-of-pocket expenses in
connection with their travel to and attendance at meetings of the Board.
Currently three of the Company's directors are employees of GSCP, to which the
Company pays fees for management and financial consulting services. See Item 13,
"Certain Relationships and Related Transactions."
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation with
respect to all compensation paid or accrued by the Company for services rendered
in all capacities by its Chief Executive Officer and each of the other named
executive officers for the nine months ended December 31, 1998 and for Fiscal
1998, 1997 and 1996.
39
<PAGE> 43
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION (a) NUMBER OF
SHARES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(b) ($)(c) OPTIONS(d) $(e)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ned C. Jackson....................... Transition Period 70,385 75,000 -- --
Chief Executive Officer
John L. Hale(f)...................... Transition Period 380,240 0 -- 1,121,673(f)
Chairman of the Board, President and Fiscal 1998 325,250 1,015,317 299,320 --
Chief Executive Officer Fiscal 1997 312,006 212,456 -- --
Fiscal 1996 297,115 175,407 160,000 --
Glen E. Cavanaugh.................... Transition Period 121,962 0 -- --
Group Vice President and President Fiscal 1998 150,601 81,351 22,120 --
Multimedia/Audio Communications Fiscal 1997 142,846 86,478 -- --
Group Fiscal 1996 133,237 72,385 -- --
Dan M. Dantzler...................... Transition Period 106,450 48,990 -- --
Group Vice President and President, Fiscal 1998 129,808 120,632 24,100 --
Electronics Group Fiscal 1997 124,950 80,065 -- --
Fiscal 1996 118,058 62,948 -- --
Roger H. Gaines...................... Transition Period 115,875 20,000 -- --
Vice President, Manufacturing Fiscal 1998 155,365 9,000 -- --
Fiscal 1997 112,800 9,242 -- --
Fiscal 1996(g) -- -- -- --
Paul A. McGuire...................... Transition Period 138,750 0 -- --
Vice President and President, Electro- Fiscal 1998 185,000 9,000 -- --
Voice Fiscal 1997 170,577 16,696 -- --
Fiscal 1996(g) -- -- -- --
</TABLE>
- - ----------
(a) In connection with the change in the Company's fiscal year from March 31 to
December 31, executive compensation is presented for the nine-month period
from April 1, 1998 to December 31, 1998 (the "Transition Period"). Amounts
reported for Fiscal 1998 are for the fiscal year ended March 31, 1998.
Amounts reported for Fiscal 1997 are for the fiscal year ended on the last
day of February, 1997 and include the one-month transition period of March
1997. Amounts reported for Fiscal 1996 are for the fiscal year ended on the
last day of February.
(b) Amounts shown include cash compensation earned and received, amounts earned
but deferred, and amounts earned but deferred and paid in the subsequent
fiscal year.
(c) Amounts shown for each period represent awards earned in such period and
paid in the subsequent fiscal year under applicable bonus plans.
Distributions under the plans are made within 30 days following the
completion of the audit for the fiscal year in which such compensation is
earned. Except with respect to Mr. Jackson, amounts shown for the
Transition Period and Fiscal 1998 represent the special bonuses paid under
the annual bonus programs, adopted effective as of May 6, 1997. See "The
Annual Bonus Programs." Amounts reported for Mr. Jackson include bonuses
payable pursuant to Mr. Jackson's employment agreement. See "Employment
Agreements". Except with respect to Mr. Jackson, bonuses reported by the
Company for Fiscal 1998 were earned during the twelve month period ending
March 31, 1998 and paid in the nine-month period ended December 31, 1998.
Amounts shown for Fiscal 1997 represent bonuses under the Fiscal 1997
management incentive plan.
(d) No options were granted to the named executive officers during the
nine-month period ended December 31, 1998. All Options for Fiscal 1998 were
granted under the 1997 Stock Option Plan on the Recapitalization Closing
Date and include Initial Option Grants, which vest over a three year period
beginning on the date of grant, and Performance Option Grants, which vest
over a five year period upon achievement of certain annual performance
objectives, and, notwithstanding the achievement of such performance
objectives, upon the seventh anniversary of the date of grant. Options
granted in Fiscal 1996 are fully vested and exercisable and are governed by
the terms of the 1997 Stock Option Plan. See "Proposed New Option Plans."
(e) For the nine months ended December 31, 1998, the only type of Other Annual
Compensation for each of the named executive officers other than Mr. Hale
were in the form of perquisites and was less than the level required for
reporting. See note (f) below.
(f) Mr. Hale's employment as Chairman of the Board, President and Chief
Executive Officer was terminated effective as of December 5, 1998. Amounts
reported as "Salary" for Mr. Hale include $143,437 in earned and unused
vacation. "All Other Compensation" includes $1,099,044 and $15,829
attributable to severance payments, incentive bonus compensation and
certain pension benefits which the Company has determined are payable upon
termination of Mr. Hale's employment pursuant to Mr. Hale's employment
agreement and related agreements, as well as $2,800 and $4,000 attributable
to car allowance and office space benefits. The Company has agreed to make
certain additional future payments provided for in Mr. Hale's employment
agreement, which payments may include special bonus installments of
$160,406, payable on June 6 of 1999, 2000 and 2001, provided in each case
that GSCP or its affiliates control 50% or more of the voting power of the
Company's outstanding securities and no initial public offering of Holdings
Common Stock has occurred.
40
<PAGE> 44
(g) No compensation is reported because reliable reports with respect to
amounts earned by Messrs. Gaines and McGuire in Fiscal 1996 as compensation
for services rendered to a predecessor of Old EVI are not readily available
to the Company.
OPTION GRANTS DURING THE TRANSITION PERIOD
No options were granted to the named executive officers during the
nine-month period ended December 31, 1998.
STOCK OPTION EXERCISES AND VALUE AT DECEMBER 31, 1998
The following table provides information with respect to the executive
officers of the Company listed in the Summary Compensation Table above
concerning options to acquire Common Stock of Holdings held by the named
executive officers as of December 31, 1998. No stock options were exercised by
the named executive officers during the nine-month period ended December 31,
1998 and no stock appreciation rights were granted under any incentive plan.
<TABLE>
AGGREGATED OPTION EXERCISES DURING THE TRANSITION PERIOD
AND OPTION VALUES AT DECEMBER 31, 1998
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING-UNEXERCISE IN-THE-MONEY
SHARES VALUE OPTIONS OPTIONS
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE ($) UNEXERCISABLE UNEXERCISABLE($)(a)
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ned C. Jackson............ -- $-- 0/0 $ 0/0
John L. Hale(b)........... -- $-- 0/0 $ 0/0
Glen E. Cavanaugh......... -- $-- 29,316/17,544 $ 0/0
Dan M. Dantzler........... -- $-- 21,076/17,444 $ 0/0
Roger H. Gaines........... -- $-- 0/0 $ 0/0
Paul A. McGuire........... -- $-- 0/0 $ 0/0
</TABLE>
- - ----------
(a) Value of unexercised in-the-money options is based on per share value
determined as of December 31, 1998 in accordance with a formula set forth
in the Stockholders' Agreement (as defined below).
(b) Mr. Hale's employment as Chairman of Board, President and Chief Executive
Officer was terminated effective as of December 5, 1998. Upon termination
of his employment, Mr. Hale held 86,080 Rollover Options and 56,525 Initial
Options, which options were subject in each case to the terms of the
Amended and Restated Stockholders' and Registration Rights Agreement, dated
May 6, 1997, among Holdings and certain management employees (the
"Stockholders' Agreement") and the 1997 Stock Option Plan. Pursuant to
applicable provisions of the Stockholders' Agreement, Holdings has notified
Mr. Hale of its intent to repurchase all such vested options and all shares
of Holdings Common Stock held by him. In correspondence with the Company,
Mr. Hale is disputing the repurchase.
THE ANNUAL BONUS PROGRAMS
The Company has an annual bonus plan for management employees that provides
that participants in such plan are entitled to an annual bonus based on
achieving certain annual projected earnings performance targets. Under the terms
of the plan, participants are eligible to receive an annual bonus of between 25%
and 100% of base salary depending on the level of achievement of the performance
targets. The Company has also adopted an additional annual cash bonus plan
whereby Messrs. Cavanaugh and Dantzler may receive additional annual incentive
awards in each of the first five years following the Recapitalization Closing
Date up to a maximum award of $71,000 and $124,000, respectively, if certain
annual performance targets are achieved. In total, the Company may incur
aggregate total cash compensation charges in connection with this additional
cash bonus plan for the executive officers named above as well as all other
covered executives and employees of
41
<PAGE> 45
approximately $0.27 million in Fiscal 1999, 2000, and 2001. For a description of
bonuses payable to Mr. Jackson, see "Employment Agreements".
SEVERANCE PROGRAM
The Company has approved a severance program which will provide that a
severance benefit equal to the sum of (i) one times base salary plus the most
recent annual bonus and (ii) a pro rata portion of the highest bonus payable
over the three most recent fiscal years, will be payable to certain management
employees, including Messrs. Cavanaugh and Dantzler, if such employee's
employment is terminated without cause or for good reason within 24 months
following the Recapitalization Closing Date or the employee is required to
relocate within 12 months following the Recapitalization Closing Date. Payment
of any severance amounts will be made in equal biweekly installments. The amount
of any severance payments will be reduced to avoid the payment being deemed an
"excess parachute payment" within the meaning of Section 280G of the Code.
Outplacement services and continued health benefits will also be available under
the program. The employees will be subject to non compete agreements for the 12
month period following termination of employment and non disclosure of trade
secrets restrictions.
PENSION PLAN
The Company maintains a defined benefit pension plan (the "Pension Plan")
qualified under the Code that provides a defined benefit upon retirement to the
Company's eligible employees. Under the terms of the Pension Plan, benefits are
determined by the average earnings during the highest five consecutive years of
the final ten consecutive years of service with the total remuneration covered
by the plan consisting of base salary, commission, overtime and bonuses paid to
each participant. The formula provides benefits in the form of a straight-life
annuity equal to a percentage of such average annual earnings times years of
benefit service plus a percentage of the excess of the average annual earnings
over the social security wage base (as determined at age 65) times years of
benefit service.
The following table lists annual benefits under the Pension Plan for the
average annual earnings and years of credited service shown for a participant
retiring at the normal retirement age of 65. A participant does not accrue
additional benefits under the Pension Plan after 35 years of credited service.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
YEARS OF SERVICE
-------------------------------------------------------
REMUNERATION 15 20 25 30 35
- - ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$125,000 $25,790 $34,387 $42,984 $51,581 $60,178
150,000 31,415 41,887 52,359 62,831 73,303
175,000 32,315 43,087 53,859 64,631 75,403
200,000 32,315 43,087 53,859 64,631 75,403
225,000 32,315 43,087 53,859 64,631 75,403
250,000 32,315 43,087 53,859 64,631 75,403
300,000 32,315 43,087 53,859 64,631 75,403
400,000 32,315 43,087 53,859 64,631 75,403
500,000 32,315 43,087 53,087 64,631 75,403
</TABLE>
The full years of credited service as of December 31, 1998 for the
executive officers named in the Summary Compensation Table above are as follows:
Mr. Jackson, less than 1; Mr. Hale, 7; Mr. Dantzler, 21; and Mr. Cavanaugh, 5.
Messrs. McGuire and Gaines are not currently eligible to receive benefits under
the Pension Plan. Upon termination of his employment, Mr. Hale was also entitled
to an additional benefit of $15,829 based upon the formula for benefits under
the Pension Plan.
42
<PAGE> 46
Benefits shown on the table are not subject to reduction for social
security benefits or other offset amounts. For plan years beginning in 1995 and
thereafter, annual compensation taken into account for purposes of calculating
benefits is limited to $160,000 (as adjusted in future years to reflect
inflation); however, prior years' compensation taken into account may exceed
that amount. The examples of benefits payable in the above table are supplied
for illustration only.
CHANGES IN MANAGEMENT
Mr. Hale's employment as Chairman of the Board, President and Chief
Executive Officer was terminated effective as of December 5, 1998. The Company
is currently conducting a search for a senior executive officer to carry out the
Chief Financial Officer function previously performed by Mr. Hislop, the
Company's Chief Financial Officer, Treasurer and Assistant Secretary, who died
on December 8, 1998. In the meantime, Mahedi Jiwani, the Company's Chief
Accounting Officer and Controller, was appointed Acting Chief Financial Officer.
EMPLOYMENT AGREEMENTS
Ned C. Jackson entered into an employment agreement with Holdings (an
"Employment Agreement", and together with other Employment Agreements described
herein, the "Employment Agreements"), for the period ended December 31, 1999,
which is automatically renewed for successive annual periods thereafter.
Pursuant to such Employment Agreement, Mr. Jackson will receive (i) a base
annual salary of $300,000, (ii) annual bonuses of $300,000 (prorated for any
partial year of employment) for each of calendar 1998 and 1999, and thereafter
an aggregate annual incentive award of up to approximately $ 300,000 if certain
performance objectives are achieved, and (iii) a special one-time bonus of $1
million upon achievement of specified performance objectives, with additional
incremental bonuses payable upon achievement of certain increases in specified
performance measures thereafter. In addition, Mr. Jackson is entitled to receive
certain perquisites and to participate in any new option plan which the Company
may adopt, pursuant to which he will receive options to purchase 250,000 shares
of Holdings Common Stock. Mr. Jackson's employment is terminable by the Company
on 30 days' written notice (or immediately for cause) or by Mr. Jackson on 60
days' written notice. Upon termination, including due to Mr. Jackson's death or
disability, Mr. Jackson will be entitled to receive all compensation, benefits
and perquisites accrued under his Employment Agreement through the effective
date of his termination of employment.
The Company has determined that, in addition to certain perquisites and
benefits, upon termination of Mr. Hale's employment, Mr. Hale was entitled under
the terms of his employment agreement to receive (i) $143,347 for earned and
unused vacation accrued through December 5, 1998, (ii) $1,099,044 in severance
and incentive bonus compensation payments, and (iii) a $15,829 lump sum pension
benefit payment. In addition, the Company has agreed to make certain additional
future payments pursuant to the terms of Mr. Hale's employment agreement, which
may include special bonuses of $160,406, payable June 6, 1999 and on June 6 of
2000 and 2001, provided that on each such date, GSCP or its affiliates control
50% or more of the voting power of the Company's outstanding voting securities
and there has not occurred an initial public offering of Holdings Common Stock.
Upon termination of his employment, Mr. Hale held 243,680 Rollover Shares,
86,080 Rollover Options and 56,525 Initial Options, which shares and options
were subject in each case to the terms of the Stockholders' Agreement and the
1997 Stock Option Plan. Pursuant to applicable provisions of the Stockholders'
Agreement, Holdings has notified Mr. Hale of its intent to repurchase all such
shares of Common Stock and vested options. In correspondence with the Company,
Mr. Hale is disputing the repurchase.
43
<PAGE> 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF CAPITAL STOCK
The authorized common stock of the Company as of February 28, 1999 consists
of 1,000 shares of common stock, par value $.01 per share, of which 110 shares
are issued and outstanding and all of which are owned by Holdings. The
authorized Common Stock of Holdings as of February 28, 1999 consists of
7,000,000 shares of Common Stock, par value $.0005 per share, of which 4,438,140
shares are issued and outstanding and 200,000 shares of Series A Pay-in-Kind
Preferred Stock, par value $0.01 per share, (the "Preferred Stock") of which
13,000 shares are issued and outstanding. Except for 172,080 Rollover Shares (as
defined herein), which are owned by current and former management, shares held
by former management which Holdings is repurchasing pursuant to the
Stockholders' Agreement, and certain shares held by a former director of
Holdings and Telex, all of the issued and outstanding Common Stock of Holdings
is owned by Greenwich I, LLC and Greenwich II, LLC and all of the issued and
outstanding Preferred Stock is owned by Greenwich I, LLC.
The following table sets forth the beneficial ownership of the limited
liability company interests, as a percentage, of each of Greenwich I, LLC and
Greenwich II, LLC, each of which is affiliated with GSCP.
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS INTERESTS
- - ------------------------------------------------------------------ -----------
<S> <C>
GSCP(a)(b) ....................................................... 72.4%
TRV Employees Fund, L.P.(c)(b) ................................... 17.7%
Greenwich Street Capital Offshore Fund, Ltd.(d)(b) ............... 4.4%
The Travelers Insurance Company(e)(b) ............................ 3.7%
The Travelers Life and Annuity Company(e)(b) ..................... 1.8%
-----
100.0%
=====
</TABLE>
- - ----------
(a) The address for this person is 388 Greenwich Street, 36th Fl., New York,
N.Y. 10013. The general partner of this person is Greenwich Street
Investments, L.P., the general partner of which is a wholly-owned
subsidiary of CitiGroup, Inc. ("CitiGroup"). The manager of this person is
Greenwich Street Capital Partners, Inc. ("Greenwich") , which is also a
wholly-owned subsidiary of Citigroup.
(b) By virtue of the relationships set forth in notes (a), (c) and (d),
CitiGroup may be deemed to share beneficial ownership of the securities
held of record by this person and may be deemed to share power to vote, or
to direct the voting of, and power to dispose of, or direct the disposition
of, the securities held of record by such person.
(c) The address for this person is 388 Greenwich Street, 36th Fl., New York,
N.Y. 10013. The general partner of this person and Greenwich, the manager
of this person, are both wholly owned subsidiaries of CitiGroup.
(d) The address for this person is c/o Rawlinson & Hunter, Woodbourne Hall,
P.O. Box 3162, Road Town Tortola, British Virgin Islands. This person is
managed by Greenwich and all the voting securities of this person are owned
by the general partner of GSCP, whose managing general partner is a wholly
owned subsidiary of CitiGroup.
(e) The address for this person is 1 Tower Square, Hartford, Connecticut
06183-2030. The person is an indirect wholly owned subsidiary of CitiGroup.
44
<PAGE> 48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of Holdings Common Stock and options to purchase such stock as of
February 28, 1999 by (i) each person who is known by the Company to beneficially
own more than 5% of Holdings Common Stock, (ii) each director of the Company,
(iii) each officer of the Company listed in the Summary Compensation Table above
and (iv) by all directors and executive officers as a group. Except as otherwise
indicated, beneficial ownership includes both voting and investment power with
respect to the Holdings Common Stock shown.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING
OPTIONS
NUMBER OF SHARES BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER(a) BENEFICIALLY-OWNED OWNED(a) CLASS
- - ----------------------------------------------------- ------------------ ---------------- ----------
<S> <C> <C> <C>
Greenwich II, LLC(b)................................ 2,605,060 -- 60.2%
Greenwich I, LLC(b)................................. 1,397,400 -- 32.3%
Ned C. Jackson...................................... -- -- --
John L. Hale (c).................................... -- -- --
Glen E. Cavanaugh................................... 21,480 30,232 1.2%
Dan M. Dantzler..................................... 37,740 22,412 1.4%
Roger H. Gaines..................................... -- -- --
Paul A. McGuire..................................... -- -- --
Alfred C. Eckert III(d)............................. -- -- --
Jeffrey J. Rosen.................................... -- 2,611 *
Edgar S. Woolard, Jr................................ -- 7,189 *
Evan M. Marks....................................... -- 3,656 *
Christopher P. Forester............................. -- 3,656 *
Keith W. Abell(d)................................... -- -- --
Christine K. Vanden Beukel(d)....................... -- -- --
All directors and officers as a group (15)
persons(b)(c)(d)................................. 154,640 128,632 6.6%
</TABLE>
* Indicates amount less than 1.0%
(a) The shares listed include shares of Holdings Common Stock that may be
acquired upon exercise of presently exercisable options to acquire Holdings
Common Stock, and all such options that will become exercisable within 60
days from the date on which such information is given.
(b) See "Ownership of Capital Stock" for information concerning the ownership
of limited liability company interests of Greenwich I, LLC and Greenwich
II, LLC.
(c) Does not include 243,680 shares of Holdings Common Stock and options to
purchase an additional 142,605 shares of Holdings Common Stock that were
beneficially owned by Mr. Hale at the time of the termination of Mr. Hale's
employment. Pursuant to applicable provisions of the Stockholders'
Agreement, Holdings has notified Mr. Hale of its intent to repurchase all
of the shares of Holdings Common Stock and vested options to purchase
shares of Holdings Common Stock held by him. In correspondence with the
Company, Mr. Hale is disputing the repurchase.
(d) Does not include any of the 4,002,460 shares of Holdings Common Stock
beneficially owned by Greenwich I, LLC and Greenwich II, LLC, which Messrs.
Eckert and Abell and Ms. Vanden Beukel may be deemed to beneficially own by
virtue of their affiliation with GSCP. Mr. Eckert, Mr. Abell and Ms. Vanden
Beukel disclaim any such beneficial ownership.
45
<PAGE> 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GSCP is a private direct equity investment fund organized in 1994 to
provide long-term capital for and make acquisitions in companies in a variety of
industries. GSCP invests in management buyouts, leveraged acquisitions,
international investment opportunities and minority investments. The general
partner of GSCP is Greenwich Street Investments, L.P., the general partner of
which is a wholly-owned subsidiary of CitiGroup, Inc. ("CitiGroup"). Mr. Eckert
is the President of GSCP and a director of Holdings and the Company. Mr. Abell
and Ms. Vanden Beukel are principals of GSCP and directors of Holdings and of
the Company. See Item 10. Directors and Officers of the Registrant.
The Company has engaged Greenwich Street Capital Partners, Inc.
("Greenwich"), the manager of GSCP, to provide it with certain business,
financial and managerial advisory services, including developing and
implementing corporate and business strategy and providing other consulting and
advisory services. In exchange for such services, the Company has agreed to pay
Greenwich an aggregate annual fee of $1,715,000, payable quarterly in arrears,
plus Greenwich's reasonable out-of-pocket costs and expenses. This engagement
will be in effect until the earlier to occur of the fifth anniversary of the
Acquisition Closing Date or the date on which GSCP no longer owns, directly or
indirectly, any shares of the capital stock of G-II, and may be earlier
terminated by Greenwich in its discretion.
In addition, Holdings, the Company and their subsidiaries have agreed to
indemnify Greenwich, GSCP, and their respective directors, officers, partners,
employees, agents, representatives and control persons against certain
liabilities arising under the federal securities laws, liabilities arising out
of the performance of the consulting agreement and certain other claims and
liabilities.
GSCP and Salomon Smith Barney, Inc. are both affiliated companies of
CitiGroup. An affiliate of Chase Securities Inc. is a limited partner in GSCP.
Chase Securities Inc. is an affiliate of The Chase Manhattan Bank ("Chase"),
which is the administrative agent and a lender to the Company under the Senior
Secured Credit Facility. Chase has received and will receive customary fees in
connection with the Senior Secured Credit Facility. Chase Securities Inc. and
Chase or their affiliates participate from time to time in various financing and
banking transactions for GSCP and its affiliates.
PROPOSED NEW OPTION PLANS
Key employees of the Company, including the executive officers named in the
Summary Compensation Table, participate in the 1997 Stock Option Plan (the
"Option Plan"). The Company expects to adopt a new option plan and to amend the
existing Option Plan in the next fiscal year. While the precise terms of the
proposed new option plan and amendments have not been finalized, and will, in
any event, be subject to a number of conditions, including approval by the
Company's Board of Directors, the Company currently expects that if and when
such plan and amendments are adopted, all of the previously granted Performance
Grant Options and Super Performance Grant Options would be terminated and
replaced with new options, a portion of which may be fully vested and
immediately exercisable upon grant.
46
<PAGE> 50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report: Page
1. Financial Statements:
<TABLE>
<CAPTION>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS (NEW BASIS OF ACCOUNTING)
Report of Independent Public Accountants............................................................ 53
Consolidated Balance Sheets as of December 31, 1998 and March 31, 1998.............................. 54
Consolidated Statements of Operations for the nine-month period ended December 31, 1998;
the fiscal year ended March 31, 1998 and the period from February 11, 1997 through
March 31, 1997................................................................................... 55
Consolidated Statements of Shareholder's Equity (Deficit) for the nine-month period ended
December 31, 1998; the fiscal year ended March 31, 1998 and the period from
February 11, 1997 through March 31, 1997......................................................... 56
Consolidated Statements of Cash Flows for the nine-month period ended December 31, 1998;
the fiscal year ended March 31, 1998 and the period from February 11, 1997 through
March 31, 1997................................................................................... 57
Notes to Consolidated Financial Statements.......................................................... 58
CONSOLIDATED FINANCIAL STATEMENTS (PREDECESSOR BASIS OF
ACCOUNTING)
Report of Independent Public Accountants............................................................ 87
Consolidated Statement of Income and Retained Earnings for the period from March 1, 1996
through February 10, 1997................................................................... 88
Consolidated Statement of Cash Flow for the period from March 1, 1996 through
February 10, 1997........................................................................... 89
Notes to Consolidated Financial Statements.......................................................... 90
</TABLE>
2. Financial Statement Schedules:
All schedules have been omitted because they are inapplicable, not
required, or the information is included elsewhere in the financial
statements or notes thereto.
3. The Exhibits are listed in the Exhibit Index required by Item 601 of
the Regulation S-K at Item (c) below and included immediately
following the Consolidated Financial Statements. The Exhibit Index is
incorporated herein by reference.
(b) On January 15, 1999 the Company filed a current report on Form 8-K with the
SEC reporting Amendment No. 2, dated as of December 23, 1998 (the
"Amendment") to the Credit Agreement, dated as of May 6,
47
<PAGE> 51
1997 (as previously amended, the "Credit Agreement"), among the Company,
Chase, as Administrative Agent, Morgan Stanley Senior Funding, Inc., as
Documentation Agent, and the several banks and other financial institutions
party to the Credit Agreement, which, among other things, amended certain
financial covenants and related definitions, and increased the Applicable
Margins (as defined in the Credit Agreement) for the Revolving Credit
Loans, the Tranche A Term Loans and the Tranche B Term Loans (each as
defined in the Credit Agreement).
On October 13, 1998, the Company filed a Form 8-K reporting the resignation
of John L. Hale as Chairman of Board, President and CEO and the appointment
of Ned C. Jackson as CEO and Alfred C. Eckert III as Chairman of the Board.
(c) The Exhibit Index and required Exhibits are included following the
Consolidated Financial Statements. The Company will furnish to any security
holder, upon written request, any exhibit listed in the accompanying
Exhibit Index upon payment by such security holder of the Company's
reasonable expenses in furnishing any such exhibit.
(d) The Index to Consolidated Financial Statements is included following the
signature page of this report.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT:
The Company has not sent to its security holders an annual report covering
the nine months ended December 31, 1998 nor any proxy material relating to any
annual or other meeting of security holders. The indentures governing the EVI
Notes and the Telex Notes require the Company to provide the holders of such
notes with such annual reports and such information, documents and other reports
as are specified in Sections 13 and 15(d) of the Securities Exchange Act of
1934, as amended.
48
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 31st day of
March, 1999.
TELEX COMMUNICATIONS, INC.
By: /s/ Ned C. Jackson
-----------------------
Ned C. Jackson
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Transition Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - ------------------------------ ---------------------------------- --------------
<S> <C> <C>
/s/ Ned C. Jackson Director and Chief Executive Officer March 31, 1999
- - ------------------------------
Ned C. Jackson
/s/ Mahedi Jiwani Acting Chief Financial Officer March 31, 1999
- - ------------------------------
Mahedi Jiwani
/s/ Alfred C. Eckert III Chairman of the Board and Director March 31, 1999
- - ------------------------------
Alfred C. Eckert III
/s/ Jeffrey J. Rosen Director March 31, 1999
- - ------------------------------
Jeffrey J. Rosen
/s/ Edgar S. Woolard, Jr. Director March 31, 1999
- - ------------------------------
Edgar S. Woolard, Jr.
/s/ Evan M. Marks Director March 31, 1999
- - ------------------------------
Evan M. Marks
Director March --, 1999
- - ------------------------------
Christopher P. Forester
/s/ Keith W. Abell Director March 31, 1999
- - ------------------------------
Keith W. Abell
/s/ Christine K. Vanden Beukel Director March 31, 1999
- - ------------------------------
Christine K. Vanden Beukel
</TABLE>
49
<PAGE> 53
TELEX COMMUNICATIONS, INC.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
Consolidated Financial Statements (New Basis of Accounting):
<S> <C>
Report of Independent Public Accountants........................................................ 53
Consolidated Balance Sheets as of December 31, 1998 and March 31, 1998.......................... 54
Consolidated Statements of Operations for the nine-month period ended
December 31, 1998; the fiscal year ended March 31, 1998 and the period from
February 11, 1997 through March 31, 1997........................................................ 55
Consolidated Statements of Shareholder's Equity (Deficit) for the nine-month
period ended December 31, 1998; the fiscal year ended March 31, 1998 and
the period from February 11, 1997 through March 31, 1997........................................ 56
Consolidated Statements of Cash Flows for the nine-month period ended
December 31, 1998; the fiscal year ended March 31, 1998 and the period from
February 11, 1997 through March 31, 1997........................................................ 57
Notes to Consolidated Financial Statements...................................................... 58
Consolidated Financial Statements (Predecessor Basis of Accounting):
Report of Independent Public Accountants....................................................... 87
Consolidated Statement of Income and Retained Earnings for the period from
March 1, 1996 through February 10, 1997......................................................... 88
Consolidated Statement of Cash Flow for the period from March 1, 1996
through February 10, 1997....................................................................... 89
Notes to Consolidated Financial Statements...................................................... 90
</TABLE>
50
<PAGE> 54
Telex Communications, Inc.
and Subsidiaries
Consolidated Financial Statements as of
December 31, 1998 and March 31, 1998
Together With Report of
Independent Public Accountants
<PAGE> 55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Telex Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Telex
Communications, Inc. (a Delaware corporation formerly known as EV International,
Inc.) and Subsidiaries as of December 31, 1998 and March 31, 1998, and the
related consolidated statements of operations, shareholder's equity (deficit)
and cash flows for the nine-month period ended December 31, 1998, for the year
ended March 31, 1998 and for the period from February 11, 1997 through March 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Telex Communications, Inc. and
Subsidiaries as of December 31, 1998 and March 31, 1998, and the results of
their operations and their cash flows for the nine-month period ended December
31, 1998, for the year ended March 31, 1998 and for the period from February
11, 1997 through March 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 19, 1999
<PAGE> 56
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
December 31, March 31,
------------ ----------
1998 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,431 $ 2,224
Accounts receivable, net of allowance for doubtful accounts of
$2,925 and $3,983 53,926 62,085
Inventories, net 67,758 78,711
Other current assets 10,822 16,088
--------- ---------
Total current assets 135,937 159,108
PROPERTY, PLANT AND EQUIPMENT, net 48,275 50,777
DEFERRED FINANCING COSTS, net 11,586 11,303
INTANGIBLE ASSETS, net 77,478 79,064
--------- ---------
$ 273,276 $ 300,252
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Revolving lines of credit $ 5,703 $ 15,119
Current maturities of long-term debt 10,811 8,250
Accounts payable 20,920 20,165
Accrued wages and benefits 9,156 11,739
Accrued interest 6,416 8,133
Other accrued liabilities 14,158 20,786
Income taxes payable 5,200 5,048
--------- ---------
Total current liabilities 72,364 89,240
LONG-TERM DEBT 321,189 329,875
OTHER LONG-TERM LIABILITIES 9,810 6,985
--------- ---------
Total liabilities 403,363 426,100
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 3 and 12)
SHAREHOLDER'S EQUITY (DEFICIT):
Common stock, $.01 par value, 1,000 shares authorized; 110
shares issued and outstanding -- --
Capital in excess of par 2,980 3,156
Accumulated deficit (131,667) (126,615)
Accumulated other comprehensive income (1,400) (2,389)
--------- ---------
Total shareholder's equity (deficit) (130,087) (125,848)
--------- ---------
$ 273,276 $ 300,252
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
<PAGE> 57
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands)
<TABLE>
<CAPTION>
Nine-Month Period From
Period Year February 11,
Ended Ended 1997 Through
December 31, March 31, March 31,
1998 1998 1997
------------- --------- ------------
<S> <C> <C> <C>
NET SALES $ 246,342 $ 332,964 $ 28,314
COST OF SALES 157,266 205,624 18,055
--------- --------- ---------
Gross profit 89,076 127,340 10,259
--------- --------- ---------
OPERATING EXPENSES:
Engineering 11,214 17,278 1,320
Selling, general and administrative 53,678 81,695 6,365
Corporate charges 1,287 2,203 100
Amortization of goodwill and other
intangibles 2,118 3,207 180
Restructuring charges -- 6,232 --
Special charges -- 2,231 --
--------- --------- ---------
68,297 112,846 7,965
--------- --------- ---------
OPERATING PROFIT 20,779 14,494 2,294
INTEREST EXPENSE 27,328 37,938 5,032
RECAPITALIZATION EXPENSE -- 6,710 --
OTHER (INCOME) EXPENSE (2,719) 43 56
--------- --------- ---------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (3,830) (30,197) (2,794)
PROVISION (BENEFIT) FOR INCOME TAXES 1,222 103 (1,057)
--------- --------- ---------
LOSS BEFORE EXTRAORDINARY ITEM (5,052) (30,300) (1,737)
EXTRAORDINARY LOSS FROM EARLY
RETIREMENT OF DEBT -- 20,579 --
--------- --------- ---------
Net loss $ (5,052) $ (50,879) $ (1,737)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 58
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholder's Equity (Deficit)
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Capital in Other Shareholder's
------------------- Excess of Accumulated Comprehensive Equity
Shares Amount Par Deficit Income (loss) (Deficit)
------ ------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, February 10, 1997 -- $-- $ -- $ -- $ -- $ --
Initial capitalization 110 57,600 -- -- 57,600
Net loss -- -- -- (1,737)
Other comprehensive loss,
net of tax-
Foreign currency
translation adjustments -- -- -- -- (804)
Comprehensive net loss -- -- -- -- (2,541)
---- ------ -------- ----------- ------------- -------------
BALANCE, March 31, 1997 110 -- 57,600 (1,737) (804) 55,059
Equity from Merger (Note 2) -- -- 20,001 (13,156) 6,845
Equity contribution -- -- 108,353 -- -- 108,353
Change in terms of
Rollover Options -- -- 7,410 (309) 7,101
Repurchase of common stock
and outstanding options -- -- (193,364) (60,534) -- (253,898)
Vesting of new options -- -- 3,156 -- 3,156
Net loss -- -- -- (50,879) --
Other comprehensive loss,
net of tax-
Foreign currency
translation adjustments -- -- -- -- (1,493)
Minimum pension
liability adjustment -- -- -- -- (92)
Comprehensive net loss -- -- -- -- (52,464)
---- ------ -------- ----------- ------------- -------------
BALANCE, March 31, 1998 110 -- 3,156 (126,615) (2,389) (125,848)
Vesting of new options -- -- (176) -- (176)
Net loss -- -- -- (5,052)
Other comprehensive loss,
net of tax-
Foreign currency
translation adjustments -- -- -- -- 1,120
Minimum pension
liability adjustment -- -- -- -- (131)
Comprehensive net loss -- -- -- -- (4,063)
---- ------ -------- ----------- ------------- -------------
BALANCE, December 31, 1998 110 $-- $ 2,980 $(131,667) $ (1,400) $(130,087
==== ====== ======== =========== ============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 59
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Nine Month Period From
Period Year February 11,
Ended Ended 1997 Through
December 31, March 31, March 31,
1998 1998 1997
------------ --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (5,052) $ (50,879) $ (1,737)
Adjustments to reconcile net loss to cash flows from
operations-
Depreciation 6,784 8,585 723
Amortization of intangibles and deferred financing costs 2,619 4,856 523
Provision for bad debts 382 980 50
Gain on sale of business (946) -- --
Write-off of deferred financing costs -- 1,674 3,164
Recapitalization costs incurred -- 6,710 --
Restructuring and special charges -- 8,463 --
Extraordinary loss on early retirement of debt -- 20,579 --
Stock option compensation expense (176) 10,566 --
Deferred income taxes 794 5,609 --
Change in operating assets and liabilities:
Income taxes 7,442 (5,621) (762)
Accounts receivable 9,694 4,769 (2,953)
Inventories 12,383 (5,832) 3,042
Other current assets 742 2,260 (3,499)
Accounts payable and accrued liabilities (11,606) 1,572 (2,169)
Other long-term liabilities (637) (1,502) 938
-------- -------- --------
Net cash provided by (used in) operating activities 22,423 12,789 (2,680)
-------- -------- --------
INVESTING ACTIVITIES:
Cash paid for acquisition, net of cash acquired (255) -- (154,615)
Additions to property, plant and equipment (5,060) (8,096) (441)
Other (126) (372) --
-------- -------- --------
Net cash used in investing activities (5,441) (8,468) (155,056)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt -- 240,000 210,000
Borrowings under revolving line of credit, net (9,964) 14,414 733
Repayment of long-term debt and payment of fees (6,125) (134,968) (92,000)
Proceeds from equity contribution -- 108,353 57,600
Cash balance of Old Telex at date of Merger -- 34,753 --
Repurchase of common stock and outstanding options -- (253,898) --
Payments for deferred financing costs (784) (12,312) (7,659)
Recapitalization costs incurred -- (6,710) --
Proceeds from sale of business 1,990 -- --
Other -- (309) --
-------- -------- --------
Net cash provided by (used in) financing activities (14,883) (10,677) 168,674
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (892) (1,686) (672)
-------- -------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) 1,207 (8,042) 10,266
Beginning of period 2,224 10,266 --
-------- -------- --------
End of period $ 3,431 $ 2,224 $ 10,266
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for --
Interest $ 27,896 $ 26,167 $ 1,414
-------- -------- --------
Income taxes, net $ (7,017) $ 866 $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE> 60
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and March 31, 1998
1. Summary Of Significant Accounting Policies:
Organization
Telex Communications, Inc., formerly known as EV International, Inc. ("Telex" or
the "Company"), a Delaware corporation, is a wholly owned subsidiary of Telex
Communications Group, Inc. ("Holdings"). As used in these consolidated financial
statements, unless otherwise indicated or the context otherwise requires,
references to (i) "Holdings" shall mean Telex Communications Group, Inc., a
Delaware corporation and the corporate parent of the Company; (ii) "Old Telex"
shall refer to the Delaware corporation formerly named Telex Communications,
Inc., a wholly owned subsidiary of Holdings, and its subsidiaries with respect
to periods prior to the Mergers (as defined in Note 2); (iii) the "Company"
shall mean Telex Communications, Inc., a Delaware corporation formerly named EV
International, Inc. (EVI) and successor by merger to Old Telex, and its
subsidiaries and includes, as the context may require, predecessor and successor
companies; (iv) "Old EVI" shall mean EV International, Inc. and its subsidiaries
with respect to periods prior to the Mergers and includes any predecessor
companies; and (v) "EV Holdings" shall refer to EVI Audio Holding, Inc., the
direct parent company of EVI prior to the Mergers.
The Company, formed as a result of the February 2, 1998 merger of Old Telex and
Old EVI, is a leader in the design, manufacture and marketing of sophisticated
audio, wireless and multimedia communications equipment to commercial,
professional and industrial customers. The Company provides high value-added
communications products designed to meet the specific needs of customers and
does not participate in the retail consumer electronics market. The Company
offers a comprehensive range of products worldwide for professional audio
systems as well as for multimedia and other communications product markets,
including wired and wireless microphones, wired and wireless intercom systems,
mixing consoles, signal processors, amplifiers, loudspeaker systems, headphones
and headsets, tape duplication products, talking book players, LCD projectors,
wireless LAN and PCS antennas, hearing aids and wireless assistive listening
devices. Its products are used in airports, theaters, sports arenas, concert
halls, cinemas, stadiums, convention centers, television and radio broadcast
studios, houses of worship and other venues where music or speech is amplified
or transmitted, and by professional entertainers, television and radio on-air
talent, presenters, airline pilots and the hearing impaired in order to
facilitate speech or communications.
Principles of Consolidation
The Company's financial statements are prepared on a consolidated basis in
accordance with generally accepted accounting principles. All significant
intercompany balances and transactions have been eliminated in the accompanying
consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the
<PAGE> 61
-2-
financial statements and the reported amounts of revenues and expenses during
the reporting period. Ultimate results could differ from those estimates.
Cash and Cash Equivalents
All temporary investments with original maturities of three months or less at
the time of purchase are considered cash equivalents. These investments are
considered available for sale and are carried at cost, which approximates fair
value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
include amounts for materials, labor and overhead.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, net of accumulated
depreciation. The cost of property, plant and equipment retired or otherwise
disposed of, and the accumulated depreciation thereon, are eliminated from the
asset and related accumulated depreciation accounts, and any resulting gain or
loss is reflected in operations. Depreciation of property, plant and equipment
is computed principally by the straight-line method over the estimated useful
lives of the assets as follows:
<TABLE>
<S> <C>
Buildings and improvements 5 - 31 years
Machinery and equipment 1.5 - 12 years
</TABLE>
Beginning in the fiscal year ended March 31, 1998 (Fiscal 1998), the Company
capitalized certain software implementation costs, in accordance with SOP 98-1.
Prior to Fiscal 1998, such costs were not significant. Direct internal and all
external implementation costs and purchased software have been capitalized and
depreciated using the straight-line method over the estimated useful lives,
ranging from two to five years. As of December 31, 1998, software implementation
costs of $7.6 million have been capitalized and are included in equipment and
construction in progress. The Company expenses reengineering costs as incurred.
Deferred Financing Costs
Deferred financing costs represent costs incurred by Old EVI and Old Telex to
issue the EVI Notes, the Telex Notes (together, the Senior Subordinated Notes)
and the Senior Secured Credit Facility (see Note 7) and are being amortized over
the terms of the related debt.
Intangible Assets
Intangible assets are amortized on a straight-line basis over their estimated
useful lives, as follows:
<TABLE>
<S> <C>
Patents and engineering drawings 5-10 years
Dealer and distributor lists 15 years
Goodwill 40 years
Other intangibles 3-5 years
</TABLE>
<PAGE> 62
-3-
Long-Lived Assets
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and For Long-Lived Assets to Be Disposed Of," which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Impairment losses are
measured by comparing the fair value of the assets, as determined by discounting
the future cash flows at a market rate of interest, to their carrying amount.
Revenue Recognition
Revenues from product sales are recognized at the time of shipment. Revenues
from the sale of hearing instrument extended warranty contracts are recognized
ratably over the lives of the contracts.
Warranty Costs
The Company warrants certain of its products for workmanship and performance for
periods of generally up to one year. The accrual for warranty costs is based on
expected average repair costs and return rates developed by the Company using
historical data.
Product Development Costs
Engineering costs associated with the development of new products and changes to
existing products are charged to operations as incurred.
Advertising Costs
Advertising costs are expensed when incurred. Advertising costs for the
nine-month period ended December 31, 1998, the year ended March 31, 1998 and for
the period from February 11, 1997 through March 31, 1997 were $5.3 million, $8.9
million and $0.6 million, respectively.
Income Taxes
The Company accounts for income taxes utilizing the liability method. Deferred
income taxes are primarily recorded to reflect the tax consequences of
differences between the tax and the financial reporting bases of assets and
liabilities. The Company's tax provision is calculated on a separate company
basis, and the Company's taxable income is included in the consolidated federal
income tax return of Holdings.
Foreign Currency
Foreign subsidiaries' operations accounts are translated at the average exchange
rates in effect during the period while assets and liabilities are translated at
the rates of exchange at the balance sheet date. The resulting balance sheet
translation adjustments are charged or credited directly to shareholder's
equity. Foreign exchange transaction gains and losses realized during the
nine-month period ended December 31, 1998, the year ended March 31, 1998 and the
period from February 11, 1997 through March 31, 1997, and those attributable to
exchange rate movements on intercompany receivables and payables not deemed to
be of a long-term investment nature are recorded in other expense.
<PAGE> 63
-4-
Concentrations, Risks and Uncertainties
The Company is highly leveraged. The Company's high degree of leverage could
have important consequences, including but not limited to the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisition, general corporate purposes or other purposes may be
impaired in the future; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness, thereby reducing the funds available to the Company for other
purposes; and (iii) the Company's flexibility to adjust to changing market
conditions and the ability to withstand competitive pressures could be limited,
and the Company may be more vulnerable to a downturn in general economic
conditions or its business, or may be unable to carry out capital spending that
is important to its growth strategy.
Technological innovation and leadership are among the important factors in
competing successfully in the professional sound and entertainment market. The
Company's future results in this segment will depend, in part, upon its ability
to make timely and cost-effective enhancements and additions to its technology
and to introduce new products that meet customer demands, including products
utilizing digital technology, which are increasingly being introduced in the
professional audio industry. The success of current and new product offerings is
dependent on several factors, including proper identification of customer needs,
technological development, cost, timely completion and introduction,
differentiation from offerings of the Company's competitors and market
acceptance. Maintaining flexibility to respond to technological and market
dynamics may require substantial expenditures. There can be no assurance that
the Company will successfully identify and develop new products in a timely
manner, that products or technologies developed by others will not render the
Company's products obsolete or noncompetitive, or that constraints in the
Company's financial resources will not adversely affect its ability to develop
and implement technological advances.
The Company has substantial assets located outside of the United States, and a
substantial portion of the Company's sales and earnings are attributable to
operations conducted abroad and to export sales, predominantly in Western Europe
and Asia Pacific. The Company's international operations subject the Company to
certain risks, including increased exposure to currency exchange rate
fluctuations. The Company intends to hedge a portion of its foreign currency
exposure by incurring liabilities, including bank debt, denominated in the local
currencies of those countries where its subsidiaries are located, and plans to
develop systems to manage and control its currency risk exposure. The Company's
international operations also subject it to certain other risks, including
adverse political or economic developments in the foreign countries in which it
conducts business, foreign governmental regulation, dividend restrictions,
tariffs and potential adverse tax consequences, including payment of taxes in
jurisdictions that have higher tax rates than does the United States.
From time to time, the Company enters into forward exchange contracts primarily
to hedge intercompany balances attributed to intercompany sales. It does not
engage in currency speculation. The Company's foreign exchange contracts do not
subject the Company to risk due to exchange rate movements because gains and
losses on these contracts offset losses and gains on the inventory purchase
commitments. These foreign exchange contracts typically have maturity dates
which do not exceed one year and require the Company to exchange U.S. dollars
for foreign currencies at maturity, at rates agreed to at the inception of the
contracts. As of December 31, 1998, the Company had $2.9 million of outstanding
foreign currency forward exchange contracts, with an average maturity of 75
days.
<PAGE> 64
-5-
The Company offers a range of audio products to a diverse customer base
throughout the world. Terms typically require payment within a short period of
time; however, the Company periodically offers extended payment terms to certain
qualified customers. As of December 31, 1998, the Company believes it has no
significant customer or geographic concentration of accounts receivable that
could expose the Company to an adverse, near-term severe financial impact.
Unaudited Results for the Nine Months ended December 31, 1997 (comparable prior
year calendar period)
The selected comparable calendar period results for the nine months ended
December 31, 1997, which include the results of Old EVI for the entire nine
months and the results of Old Telex from May 6, 1997, the date on which Old EVI
and Old Telex came under common control, are: net sales- $249.0 million, gross
profit- $96.8 million, benefit for income taxes- $5.3 million, and net loss-
$25.3 million.
New Accounting Standards
During June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
effective for fiscal years beginning after December 14, 1997. SFAS No. 131
requires disclosure of business and geographic segments in the consolidated
financial statements of the Company. The Company adopted SFAS No. 131 in the
nine-month period ended December 31, 1998.
During February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," effective for fiscal years
beginning after December 31, 1997. SFAS No. 132 revised certain of the
disclosure requirements but does not change the measurement or recognition of
those plans. SFAS No. 132 superseded SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The Company adopted SFAS No. 132
in the nine-month period ended December 31, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 1999. 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 accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and 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.
2. Transactions:
Acquisition
On February 10, 1997 (the "Acquisition Closing Date"), pursuant to a purchase
agreement dated December 12, 1996 (the "Purchase Agreement"), an acquisition
subsidiary wholly owned by Greenwich Street Capital Partners, L.P. ("GSCP") and
certain affiliated investors acquired from Mark IV Industries, Inc. ("Mark IV")
and one of its subsidiaries all of the issued and
<PAGE> 65
-6-
outstanding capital stock of Gulton Industries, Inc. ("Gulton"), the former
parent of Old EVI, and each of its subsidiaries for an initial cash purchase
price of $151.5 million, plus $4.9 million in estimated adjustments paid on the
closing date, which aggregate amount was subject to further postclosing
adjustments as described herein. The acquisition subsidiary subsequently merged
with and into the parent of Old EVI, and the parent then merged with and into
Old EVI, with Old EVI ultimately surviving (the "Acquisition").
Financing for the Acquisition and the related fees and expenses consisted of (i)
$57.6 million of equity capital provided by GSCP and certain affiliated
investors, (ii) a $60.0 million senior credit facility (consisting of a term
loan and a revolving credit facility), and (iii) a $75.0 million senior
subordinated credit facility issued as interim financing by Chase Securities
Inc. and Smith Barney Inc., the initial purchasers of the EVI Existing Notes (as
defined herein), and certain other lenders. Of these amounts, $156.4 million was
used for the purchase price for the Acquisition and $10.4 million was used for
financing and transaction fees and expenses. Under the Purchase Agreement, the
purchase price was subject to adjustment on the basis of (i) the audited working
capital and audited cash flow of the Company as of and for the ten-month period
ended December 31, 1996, and (ii) the net intercompany transfers of cash between
Mark IV, and its affiliates (other than the Company and its subsidiaries), on
the one hand, and the Company and its subsidiaries, on the other hand, during
the period between December 31, 1996 and the Acquisition Closing Date. Based on
these provisions, Mark IV has requested a purchase price increase of
approximately $138,000, which the Company is currently disputing pursuant to the
applicable provisions of the Purchase Agreement.
On March 24, 1997, Old EVI issued 11% Senior Subordinated Notes due in 2007 in
an aggregate principal amount of $100 million (the "EVI Existing Notes"), all of
which were subsequently exchanged in September 1997 for a like principal amount
of new 11% Senior Subordinated Notes due 2007, Series A (together with the EVI
Existing Notes, the "EVI Notes"), in an offering registered under the Securities
Act of 1933, as amended (the "Securities Act"). The proceeds from the EVI Notes
were used to repay the $75.0 million of indebtedness under the interim financing
in its entirety and a portion of EVI's term loan. The foregoing transactions,
including the issuance of the EVI Notes, are referred to herein as the
"Acquisition Transactions." The Acquisition was accounted for using the purchase
method of accounting, which established a new basis of accounting pursuant to
which the purchase price was allocated among the acquired assets and liabilities
in accordance with estimates of fair market value on February 10, 1997.
<PAGE> 66
-7-
Recapitalization
On May 6, 1997 (the "Recapitalization Closing Date"), Old Telex completed a
recapitalization (the "Recapitalization") pursuant to an agreement (the
"Recapitalization Agreement") among Old Telex, Greenwich II, LLC ("G-II"), a
Delaware limited liability company formed by GSCP and certain other investors,
and GST Acquisition Corp. ("GST"), a Delaware corporation and a wholly owned
subsidiary of G-II. In connection with the Recapitalization, all of the shares
of common stock of Holdings ("Holdings Common Stock") and all options and
warrants to acquire Holdings Common Stock (other than certain shares of Holdings
Common Stock and certain options to acquire Holdings Common Stock owned by
certain members of management of Old Telex) were converted into the right to
receive an aggregate amount of cash (the "Recapitalization Consideration") equal
to approximately $253.9 million. In addition, in connection with the
Recapitalization Agreement, certain shares of Holdings Common Stock held by
management of Old Telex (the "Rollover Shares") and certain options to acquire
additional shares of Holdings Common Stock (the "Rollover Options"), with an
aggregate value of approximately $21.2 million (which represented approximately
14% of the equity of Holdings on a nondiluted basis and approximately 20% on a
fully diluted basis) were retained by such managers. In connection with the
Recapitalization, Old Telex completed (i) a tender offer (the "Tender Offer") to
repurchase all of Old Telex's then outstanding 12% Senior Notes due 2004, in
aggregate principal amount of $100.0 million, for $118.3 million (including
premium and consent fees along with accrued interest), and (ii) a solicitation
of consents with respect to certain amendments to the indenture pursuant to
which such notes were issued. The Recapitalization, the financing thereof
(including the issuance by Old Telex of 10.5% Senior Subordinated Notes due 2007
(the "Existing Telex Notes") to Chase Securities, Inc., Morgan Stanley & Co.
Incorporated and Smith Barney, Inc.), the Tender Offer and the payment of the
related fees and expenses are herein referred to as the "Recapitalization
Transaction."
Costs associated with terminating Old Telex's 12% Senior Notes, including
write-off of deferred financing costs of $2.5 million, bond premium fees of
$13.6 million, bond tender fees of $0.5 million and consent fees of $1.0
million, are included in extraordinary loss from early retirement of debt in the
consolidated statement of operations.
The Recapitalization was financed by (i) $108.4 million of new equity provided
by GSCP and certain other coinvestors, (ii) the Rollover Shares and Rollover
Options valued at $21.2 million, (iii) a $140.0 million senior secured credit
facility (the "Senior Secured Credit Facility") with The Chase Manhattan Bank,
Morgan Stanley Senior Funding, Inc. and certain other lenders, consisting of (a)
a $115.0 million term loan facility (the "Term Loan Facility"), and (b) a $25.0
million revolving credit facility (the "Revolving Credit Facility"), (iv) $125.0
million of Existing Telex Notes and (v) $36.5 million of available cash of Old
Telex. Of the $108.4 million of new equity contributed by GSCP and certain other
coinvestors, $25.2 million consisted of proceeds from the issuance by GST (a
predessor of Holdings) of Deferred Pay Subordinated Debentures due 2009 (the
"GST Subordinated Debentures").
<PAGE> 67
-8-
Pursuant to the Recapitalization, the historical basis of all assets and
liabilities was retained for financial reporting purposes, and the repurchases
of existing Holdings Common Stock and issuance of new Holdings Common Stock have
been accounted for as equity transactions.
In October 1997, Old Telex completed an exchange offer of a $125 million
aggregate principal amount of new 10.5% Senior Subordinated Notes due 2007,
Series A (the "New Telex Notes"), which were registered under the Securities
Act, for a like principal amount of the Existing Telex Notes (together with the
New Telex Notes, the "Telex Notes"). All of the Existing Telex Notes were
tendered and accepted for exchange.
The Mergers
On February 2, 1998, Old EVI merged with Old Telex, a wholly owned subsidiary of
Holdings and an affiliate of GSCP, with Old EVI surviving (the "Merger"). In the
Merger, Old EVI changed its corporate name to "Telex Communications, Inc." The
Merger was effected pursuant to an agreement and plan of merger dated January
29, 1998, under which Greenwich I LLC ("G-I"), a subsidiary wholly owned by GSCP
and certain affiliated investors, exchanged all of the issued and outstanding
common and preferred stock of EVI Holdings, the former parent of Old EVI, for
1,397,400 shares of Holdings' Common Stock, and 13,000 shares of Holdings'
Series A pay-in-kind preferred stock, respectively, and EVI Holdings was merged
with and into Holdings, with Holdings continuing as the surviving corporation.
The mergers referred to above (the "Mergers") have been accounted for
essentially as a pooling of interests from May 6, 1997, the date on which Old
EVI and Old Telex came under common control, and the consolidated financial
statements of the Company for Fiscal 1998 include the results of Old Telex from
May 6, 1997. Immediately prior to the Mergers, approximately $12.7 million of
indebtedness outstanding under Old EVI's senior credit facility was paid in full
and Old EVI's senior credit facility was terminated. Such indebtedness, together
with $0.4 million of certain fees and expenses associated with the Mergers, was
repaid by utilizing free cash at closing from Old EVI of $3.8 million and by
borrowings under the Company's Revolving Credit Facility of approximately $9.3
million. Total fees and expenses incurred as a result of the Mergers were $1.7
million, including the $0.4 million paid at closing. The EVI Notes remain
outstanding following the Mergers.
As a result of the Mergers, deferred financing costs of $2.9 million associated
with Old EVI's senior credit facility were written off and are included in
extraordinary loss from early retirement of debt in the consolidated statement
of operations.
Sale of Business
During the nine-month period ended December 31, 1998 the Company sold the Gauss
business and facility for $2.0 million on which the Company recorded a gain of
$0.9 million.
<PAGE> 68
-9-
Pro Forma Results of Transactions (Unaudited)
Pro forma information is presented below for the periods ended March 31, 1998
and 1997, as if the Acquisition of Old EVI, the offering by Old EVI of the EVI
Notes, the Recapitalization of Old Telex (including the offering by Old Telex of
the Telex Notes) and the Merger of Old Telex with and into Old EVI had occurred
at the beginning of Fiscal 1997. The pro forma results are for illustrative
purposes only and do not purport to be indicative of the actual results which
occurred, nor are they indicative of future results of operations (as adjusted,
in thousands):
<TABLE>
<CAPTION>
Year Ended March 31
----------------------
1998 1997
---------- --------
<S> <C> <C>
Net sales $345,775 $362,145
Operating income(a) 24,088 43,136
Net income (loss)(a) (14,145) 3,925
</TABLE>
(a) Included in the year ended March 31, 1998 operating income and net income
(loss), as presented, are noncash compensation charges for stock options
associated with the Recapitalization, nonrecurring charges for management
cash bonus, restructuring charges and a noncash impairment loss described
in Note 3 below.
3. Restructuring and Special Charges:
Restructuring Charges
During the 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. The consolidation will
include the closure of some facilities and will also include the transfer of a
portion of the work from certain facilities to the Company's remaining
locations. The Company expects to complete substantially all of the
restructuring of the operations, and the sale and disposal of the owned
facilities and equipment related to those operations in 1999.
Included in the restructuring charges are $2.5 million associated with severance
pay for terminated employees, most of whom work in the facilities to be closed,
or from work to be transferred to other locations; $2.8 million associated with
reserves established for the write-down to fair market value of certain assets
and $0.9 million associated with other costs. At December 31, 1998, the Company
had a restructuring reserve balance of $3.0 million. As of December 31, 1998,
the Company has charged to the reserve $3.2 million, consisting of $1.5 million
of cash expenditures and $1.7 million of noncash charges.
Special Charges
For the year ended March 31, 1998, the Company recognized an impairment loss of
$2.2 million against operating income for certain intangible assets, including
dealer and distributor lists, patents and engineering drawings and goodwill as a
result of changed business conditions for certain product lines within the
Company's two business segments. Considerable management
<PAGE> 69
-10-
judgment is necessary to estimate future cash flows. Accordingly, it is
reasonably possible that the estimated discounted future cash flows may change
in the near term, resulting in the need to write these or other long-lived
assets down further. No such impairment loss was recognized in the nine-month
period ended December 31, 1998.
4. Inventories:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
------------ ---------
1998 1998
------------ ---------
<S> <C> <C>
Raw materials $32,667 $35,740
Work in progress 10,690 9,812
Finished goods 24,401 33,159
------- -------
$67,758 $78,711
======= =======
</TABLE>
5. Property, Plant and Equipment:
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
------------ ---------
1998 1998
------------ ---------
<S> <C> <C>
Land $ 2,841 $ 3,050
Buildings and improvements 23,777 23,145
Machinery and equipment 88,570 84,417
Construction in progress 1,821 4,976
--------- ---------
117,009 115,588
Less accumulated depreciation (68,734) (64,811)
--------- ---------
$ 48,275 $ 50,777
========= =========
</TABLE>
<PAGE> 70
-11-
6. Intangible Assets:
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
------------ ---------
1998 1998
------------ ---------
<S> <C> <C>
Goodwill $ 83,300 $ 82,938
Dealer and distributor lists 5,626 5,626
Patents and engineering drawings 5,888 5,762
Other intangibles 3,540 3,496
-------- --------
98,354 97,822
Less accumulated amortization (20,876) (18,758)
-------- --------
$ 77,478 $ 79,064
======== ========
</TABLE>
7. Debt:
Revolving Lines of Credit
In May 1997, the Company entered into the Revolving Credit Facility (the
"Facility"), as part of the Senior Secured Credit Facility. Under the Facility,
the Company may borrow up to $25.0 million, subject to a borrowing base
calculation. Interest on outstanding borrowings is calculated, at the Company's
option, using the bank's prime rate or LIBOR plus specified margins. The
revolving line of credit expires November 6, 2002. The Facility requires an
annual commitment fee of 0.5% of the unused portion of the commitment.
Borrowings are secured by accounts receivable and inventories. The Company had
borrowings of $1.3 million and letters of credit outstanding in the amount of
$6.2 million as of December 31, 1998, reducing the availability under the
Facility to $17.5 million.
Certain foreign subsidiaries of the Company have entered into agreements with
banks to provide for local working capital needs. Under these agreements, the
Company may make aggregate borrowings of up to $6.5 million. At December 31,
1998, the Company had borrowings of $4.4 million under these facilities,
reducing the amount available to $2.1 million. The rates of interest in effect
on these facilities as of December 31, 1998, ranged from 2.1% to 8.0%, and are
generally subject to change based upon prevailing local prime rates. In certain
instances, the facilities are secured by a lien on foreign real property,
leaseholds or accounts receivables and inventories, or guaranteed by another
subsidiary of the Company.
<PAGE> 71
-12-
Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
<S> <C> <C>
Senior Subordinated Notes, due May 1, 2007, bearing
interest of 10.5% payable semiannually, unsecured $ 125,000 $ 125,000
Senior Subordinated Notes, due March 15, 2007, bearing
interest of 11% payable semiannually, unsecured 100,000 100,000
Senior Secured Credit Facility (Term Loan Facility):
Term Loan A, due in quarterly installments through
November 6, 2002, bearing interest at LIBOR plus 3.0%
(8.07% at December 31, 1998) payable semiannually,
secured by substantially all assets
of the Company 42,500 48,250
Term Loan B, due in quarterly installments through
November 6, 2004, bearing interest at LIBOR plus
3.5% (8.57% at December 31, 1998) payable
semiannually, secured by substantially all assets
of the Company 64,500 64,875
--------- ---------
332,000 338,125
Less current portion 10,811 (8,250)
--------- ---------
$ 321,189 $ 329,875
========= =========
</TABLE>
The Senior Subordinated Notes and the Senior Secured Credit Facility contain
certain financial and nonfinancial restrictive covenants, including limitations
on additional indebtedness, payment of dividends, certain investments, sale of
assets, consolidations, mergers and transfers of all or substantially all of the
Company's assets and capital expenditures, subject to certain qualifications and
exceptions. Certain financial covenants related to the Senior Secured Credit
Facility were renegotiated in December 1998. As of the issuance of this report,
the Company is in compliance with all covenants related to the Senior
Subordinated Notes and Senior Secured Credit Facility.
Aggregate annual maturities of long-term debt are as follows for the year ended
December 31 (in thousands):
<TABLE>
<S> <C>
1999 $ 10,811
2000 8,982
2001 11,482
2002 15,482
2003 24,097
Thereafter 261,146
--------
$332,000
========
</TABLE>
<PAGE> 72
-13-
8. Income Taxes:
Significant components of the provision (benefit) for income taxes attributable
to income (loss) including the extraordinary item are as follows (in thousands):
<TABLE>
<CAPTION>
Nine-Month Period From
Period February 11,
Ended Year Ended 1997 Through
December 31, March 31, March 31,
1998 1998 1997
----------- ---------- ------------
<S> <C> <C> <C>
Current:
Federal $ 37 $(5,709) $(1,330)
State 125 -- (141)
Foreign 342 203 414
------ ------ -------
504 (5,506) (1,057)
Deferred 718 5,609 --
------ ------ -------
$ 1,222 $ 103 $(1,057)
====== ====== =======
</TABLE>
A reconciliation of the income taxes computed at the federal statutory rate to
the Company's income tax provision (benefit) including the extraordinary item is
as follows (in thousands):
<TABLE>
<CAPTION>
Period
From
Nine-Month February 11,
Period 1997
Ended Year Ended Through
December 31, March 31, March 31,
1998 1998 1997
----------- --------- -----------
<S> <C> <C> <C>
Federal benefit at statutory rate $ (1,341) $(17,262) $ (1,237)
State benefit, net of federal tax 27 (1,668) (141)
Amortization and write-off of goodwill 200 1,450 61
Change in deferred tax asset valuation
allowance and other income tax accruals 2,597 15,739 --
Recapitalization costs -- 2,522 --
Foreign tax rate differences (171) (741) 122
Other (90) 63 138
-------- -------- --------
$ 1,222 $ 103 $ (1,057)
======== ======== ========
</TABLE>
<PAGE> 73
-14-
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 6,876 $ 6,791
-------- --------
Deferred tax assets:
Compensation accruals 3,957 3,997
Book over tax amortization 2,656 3,250
Pension accrual 920 1,206
Inventory reserves 3,034 2,496
Foreign tax credits 2,440 1,992
Vacation accrual 1,029 1,216
Warranty reserves 1,020 1,019
Restructuring reserves 1,650 2,197
Tax loss carryforward 5,643 3,676
Other 2,791 2,127
-------- --------
Total deferred tax assets 25,140 23,176
Valuation allowance (18,336) (15,739)
-------- --------
Net deferred tax assets 6,804 7,437
-------- --------
Net deferred tax assets (liabilities) $ (72) $ 646
======== ========
</TABLE>
The Company has established a net deferred tax valuation allowance of $18.3
million, due to the uncertainty of the realization of future tax benefits. The
realization of the future tax benefits related to the deferred tax asset is
dependent on many factors, including the Company's ability to generate taxable
income within the net operating loss carryforward period. Management has
considered these factors in reaching its conclusion as to the adequacy of the
valuation allowance for financial reporting purposes.
In addition, the Company has not recognized any income tax benefit related to
the excess of the market price over the exercise price of the exercised stock
options of $27.6 million for financial reporting purposes. The income tax
benefit, once realized, will be credited to shareholder's equity (deficit).
Prior to the merger of Old Telex and Old EVI, Old Telex received a settlement
offer from the Internal Revenue Service (the "IRS") with respect to the
amortization of certain intangibles for the taxable years 1990, 1991 and 1992.
Old Telex reviewed the IRS settlement offer and determined not to accept it. Any
adjustment imposed by the IRS relating to this matter would not likely result in
a material adjustment to the Company's operations, because it would be recorded
principally as an adjustment to goodwill.
Accumulated and current unremitted earnings of the Company's foreign
subsidiaries are deemed to be reinvested in each country and are not expected to
be remitted.
<PAGE> 74
-15-
9. Related-Party Transactions:
Holdings' principal asset is its investment in the Company and, therefore,
Holdings is dependent on the operations of the Company for its cash flow needs;
however, there are no agreements between the Company and Holdings requiring the
transfer of funds from the Company to Holdings. The Senior Subordinated Notes
and the provisions of the indenture agreements pursuant to which the Senior
Subordinated Notes were issued restrict Telex's payment of dividends, loans or
advances to its affiliates.
The Company pays fees to Holdings' majority shareholder for management services
in the amount of $1.7 million annually. For the nine-month period ended December
31, 1998 and the year ended March 31, 1998, the Company recorded a charge to
operations for corporate charges of $1.3 million and $2.2 million, respectively,
for such fees.
Income taxes payable and receivable include tax benefits related to Holdings as
the Company makes all tax payments for the consolidated group and amounts
recorded are included within other long-term liabilities on the consolidated
balance sheets.
10. Retirement Plans:
The Company has two noncontributory defined benefit pension plans covering
substantially all employees of Old Telex and certain employees of Old EVI.
Eligibility, vesting and benefit formula provisions of the plan are based on
years of service and average final compensation. Pension costs are funded
annually subject to limitations.
<PAGE> 75
-16-
The following table presents the funded status of the above plans as recognized
in the consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
Period
From
Nine-Month February 11,
Period Year 1997
Ended Ended Through
December 31, March 31, March 31,
1998 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period $ 27,931 $ 19 $ --
Service cost 1,350 520 19
Interest cost 1,494 187 --
Merger -- 27,212 --
Actuarial loss 2,750 277 --
Benefits paid (1,338) (292) --
Effects of curtailment -- 8 --
-------- -------- --------
Benefit obligation at end of period 32,187 27,931 19
-------- -------- --------
Change in plan assets:
Fair value of plan assets at beginning of
period 23,155 -- --
Merger -- 22,414 --
Actual return on plan assets 3,680 866 --
Employer contribution 1,263 212 --
Noninvestment related expenses (65) (45) --
Benefits paid (1,338) (292) --
-------- -------- --------
Fair value of plan assets at end of period 26,695 23,155 --
-------- -------- --------
Funded status (5,492) (4,776) (19)
Unrecognized actuarial loss 1,102 570 --
Unrecognized net transition obligation 89 119 --
Unrecognized prior service cost 5 8 --
-------- -------- --------
Net amount recognized $ (4,296) $ (4,079) $ (19)
======== ======== ========
Amounts recognized in the consolidated
balance sheet consist of:
Accrued benefit liability $ (4,519) $ (4,171) $ (19)
Accumulated other comprehensive income 223 92 --
-------- -------- --------
Net amount recognized $ (4,296) $ (4,079) $ (19)
======== ======== ========
Weighted-average assumptions:
Discount rate 6.5% 7.0% 7.0%
Expected return on plan assets 9.0 9.0 N/A
Rate of compensation increase 4.5 4.5 --
</TABLE>
<PAGE> 76
-17-
<TABLE>
<CAPTION>
Period
From
Nine-Month February 11,
Period Year 1997
Ended Ended Through
December 31, March 31, March 31,
1998 1998 1997
------------ --------- ---------
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 1,350 $ 187 $ 19
Interest cost 1,494 520 --
Expected return on plan assets (1,416) (147) --
Amortization of unrecognized net
transition obligation 30 3 --
Amortization of prior service cost 3 -- --
Recognized actuarial loss 18 14 --
------- ------- -------
Net periodic benefit cost $ 1,479 $ 577 $ 19
======= ======= =======
</TABLE>
Plan assets consist primarily of equity and debt securities and cash
equivalents.
As of the Acquisition Closing Date, the Company ceased withholding 401(k)
contributions from employees' payroll until the time the Company could establish
its own defined contribution plan. Pursuant to the Purchase Agreement, the
assets of the Sellers' defined contribution plan that relate to the Company's
employees will be transferred into the Company's plan, and, at such time,
employee payroll withholding for 401(k) contributions into the Company's defined
contribution plan will resume.
The Company's Japanese subsidiary also has a retirement and termination plan
(the "Retirement Plan"), which provides benefits to employees in Japan upon
their termination of employment. The benefits are based upon a multiple of the
employee's monthly salary, with the multiple determined based upon the
employee's years of service. The multiple paid to employees who retire or are
involuntarily terminated is greater than the multiple paid to those who
voluntarily terminate their services. The Retirement Plan is unfunded, and the
accompanying consolidated balance sheet includes a liability of approximately
$1.1 million at December 31, 1998, which represents the actuarially determined
estimated present value of the Company's liability as of this date. In
developing this estimate, the actuary used discount and compensation growth
rates prevailing in Japan of 2.4% and 1.1%, respectively. For the nine-month
period ended December 31, 1998, the year ended March 31, 1998 and the period
from February 10, 1997 through March 31, 1997, the Company charged $0.1 million,
$0.3 million and $0.0 million, respectively, to expense for this plan.
11. Postretirement Benefits:
The Company is obligated to provide health and life insurance benefits to
certain employees of its U.S. operations upon retirement. Contributions required
to be paid by the employees towards the cost of such plans are a flat dollar
amount per month in certain instances, or a range from 25% to 100% of the cost
of such plans in other instances.
<PAGE> 77
-18-
The following table presents the status of the above plans as recognized in the
consolidated financial statements (in thousands):
<TABLE>
<CAPTION>
Period
From
Nine-Month February 11,
Period Year 1997
Ended Ended Through
December 31, March 31, March 31,
1998 1998 1997
----------- --------- -----------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 513 $ 415 $ 343
Service cost 18 23 1
Interest cost 28 36 1
Actuarial loss 29 39 70
Benefits paid (3) -- --
----- ----- -----
Benefit obligation at end of year 585 513 415
----- ----- -----
Fair value of plan assets at end of year -- --
----- ----- -----
Funded status (585) (513) (415)
Unrecognized actuarial loss 132 106 70
Unrecognized prior service cost -- -- --
----- ----- -----
Net amount recognized $(453) $(407) $(345)
===== ===== =====
Amounts recognized in the consolidated
balance sheet consist of:
Prepaid benefit cost $ -- $ -- $ --
Accrued benefit liability (453) (407) (345)
Intangible asset -- -- --
Accumulated other comprehensive income -- -- --
----- ----- -----
Net amount recognized $(453) $(407) $(345)
===== ===== =====
Weighted-average assumptions:
Discount rate 6.5% 7.0% 7.8%
</TABLE>
<PAGE> 78
-19-
The assumed health care cost trend rate used in measuring the benefit obligation
is 8% for the year ended March 31, 1998, declining at a rate of 1.5% per year to
an ultimate rate of 5.0% in 2000.
<TABLE>
<CAPTION>
Net periodic benefit cost included the following components (in thousands):
Period
From
Nine-Month February 11,
Period Year 1997
Ended Ended Through
December 31, March 31, March 31,
1998 1998 1997
------------ --------- ---------
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $18 $24 $ 1
Interest cost 28 36 1
Amortization of unrecognized net actuarial
loss 3 2 --
--- --- ---
Net periodic benefit cost $49 $62 $ 2
=== === ===
</TABLE>
A one-percentage point change in assumed healthcare cost trend rates would have
an immaterial effect on service and interest cost components.
The Company does not provide any postemployment benefits which would require
accrual under SFAS No. 112, "Employers' Accounting for Postemployement
Benefits."
12. Commitments and Contingencies:
Litigation
The Company is a party to various legal actions in the normal course of
business. The Company believes that it is not currently party to any litigation
which, if adversely determined, would have a material adverse effect on the
consolidated financial position or results of operations of the Company.
Environmental Matters
The Company and its operations are subject to extensive and changing U.S.
federal, state and local and foreign environmental laws and regulations,
including, but not limited to, laws and regulations that impose liability on
responsible parties to remediate, or contribute to the costs of remediating,
current or formerly owned or leased sites or other sites where solid or
hazardous wastes or substances were disposed of or released into the
environment. These remediation requirements may be imposed without regard to
fault or legality at the time of the disposal or release. The Company believes
that it currently conducts its operations, and in the past has operated its
business, in substantial compliance with applicable environmental laws and
regulations. From time to time, however, operations of the Company have
resulted, and may result in the future, in noncompliance or liability with
respect to such laws and regulations.
The Company (or, for certain sites, Mark IV Industries, Inc. and Mark IV PLC
(the "Sellers"), on behalf of the Company) has undertaken or is currently
undertaking remediation of contamination at certain of its currently or formerly
owned sites (some of which are unrelated to the audio business), and the Company
has agreed that it is a de minimis responsible party at a number of other such
sites, which have been designated as Superfund sites under U.S.
<PAGE> 79
-20-
environmental laws. The Company had Phase I Environmental Site Assessments and
Compliance Reviews conducted by a third-party environmental consultant at all of
its manufacturing sites and is aware of environmental conditions at certain of
such sites that require or may require remediation or continued monitoring. In
particular, the Company's site in Buchanan, Michigan, has been designated a
Superfund site under U.S. environmental laws. The Sellers have agreed to
indemnify the Company fully for environmental liabilities resulting from the
Buchanan, Michigan, Superfund site and certain of the other sites at which the
environmental consultant indicated monitoring or remediation was necessary.
The Company's environmentally related expenditures for the nine-month period
ended December 31, 1998, the year ended March 31, 1998 and the period from
February 11, 1997, through March 31, 1997, were not material. The Company does
not believe that the costs to the Company of environmental compliance under
current laws and regulations will have a material adverse effect on the
financial position or results of operations of the Company.
The Company is party to a 1988 consent decree with the predecessor to the
Nebraska Department of Environmental Quality (NDEQ) relating to the cleanup of
hazardous waste at the Company's Lincoln, Nebraska facility. In connection with
ongoing monitoring and cleanup activities at the site and on adjacent property,
the Company has received from the NDEQ three notices of noncompliance (all of
which related to the same underlying matter). The Company is in discussions with
the NDEQ regarding future actions but does not believe that the costs related to
its responsibilities at the site will result in material adverse effect on the
Company's results of operations or financial condition. NDEQ and the U.S
Environmental Protection Agency (USEPA) also have requested the Company to take
action in connection with a postclosure permit and possibly to perform
additional remediation at the site. In December 1997, the Company entered into
an Administrative Order on Consent with USEPA under the Resource Conservation
and Recovery Act to further investigate and remediate the Lincoln facility and
an adjoining property. The Company is not able at this time to determine the
amount of additional expenses, if any, that may be incurred by the Company as a
result of these actions.
Through December 31, 1998, the Company had accrued approximately $1.7 million
over the life of the project for anticipated costs to be incurred for the
Lincoln, Nebraska cleanup activities, of which approximately $1.4 million had
been incurred.
The Company estimates that it will incur in 1999 approximately $150,000 of
environmentally related capital expenditures in addition to those costs
associated with the Lincoln, Nebraska cleanup activities described above. The
Company also incurs approximately $30,000 per year of expenses associated with
the disposal of hazardous materials generated in connection with its
manufacturing processes.
There can be no assurance that the Company's estimated environmental
expenditures, which the Company believes to be reasonable, will cover in full
the actual amounts of environmental obligations the Company does incur, that the
Sellers will pay in full the indemnified environmental liabilities when they are
incurred, that new or existing environmental laws will not affect the Company in
currently unforeseen ways, or that present or future activities undertaken by
the Company will not result in additional environmentally related expenditures.
However, the Company does not believe that the costs to the Company of the
environmental
<PAGE> 80
-21-
compliance under current laws and regulations will have a material adverse
effect on the financial position or results of operations of the Company.
Employment Contracts
The Company has employment contracts with certain key executives that require
the Company to pay severance or salary continuance pay equal to amounts ranging
from nine to twelve months' salary in the event such executives are terminated
without cause.
The Chief Executive Officer (CEO) entered into an employment agreement with
Holdings (an Employment Agreement, and together with other Employment Agreements
described herein, the Employment Agreements), for the period ended December 31,
1999, which is automatically renewed for successive annual periods thereafter.
Pursuant to such Employment Agreement, the CEO will receive (i) a base annual
salary of $300,000, (ii) annual bonuses of $300,000 (prorated for any partial
year of employment) for each of calendar years 1998 and 1999, and thereafter an
aggregate annual incentive award of up to approximately $300,000 if certain
performance objectives are achieved, and (iii) a special one-time bonus of $1
million upon achievement of specified performance objectives, with additional
incremental bonuses payable upon achievement of certain increases in specified
performance measures thereafter. In addition, the CEO is entitled to receive
certain perquisites and to participate in any new option plan which the Company
may adopt, pursuant to which he will receive options to purchase 250,000 shares
of Holdings Common Stock. The CEO's employment is terminable by the Company on
30 days' written notice (or immediately for cause) or by the CEO on 60 days'
written notice. Upon termination, including due to the CEO's death or
disability, the CEO will be entitled to receive all compensation, benefits and
perquisites accrued under his Employment Agreement through the effective date of
his termination of employment.
Lease Commitments
At December 31, 1998, the Company had various noncancelable operating leases for
manufacturing, distribution and office buildings, warehouse space and equipment.
Approximate future minimum rental commitments under all noncancelable operating
leases are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31:
<S> <C>
1999 $2,365
2000 1,889
2001 713
2002 378
2003 282
2004 and thereafter 1,867
------
Total minimum lease commitments $7,494
======
</TABLE>
<PAGE> 81
-22-
13. Segment Information:
Subsequent to the Mergers, the Company reorganized what had been classified as
Old Telex's four strategic business units and Old EVI's four principal lines of
business into the following two business segments:
Professional Sound and Entertainment
Professional Sound and Entertainment includes Old EVI's three principal lines of
business within the overall professional audio market: (i) Fixed Installation;
(ii) Professional Music Retail; and (iii) Concert/Recording/Broadcast, and Old
Telex's Broadcast Communications Systems and Sound Reinforcement product groups
(these businesses were previously part of Old Telex's Professional Sound and
Entertainment Group).
Multimedia/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.
<PAGE> 82
-23-
As of and For the Nine-Month Period Ended December 31, 1998
<TABLE>
<CAPTION>
Professional Multimedia/
Sound and Audio
Entertain- Communi- Corporate Total
ment cations
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 152,822 $ 93,520 $ -- $ 246,342
Cost of sales 97,711 59,555 -- 157,266
--------- --------- --------- ---------
Gross profit 55,111 33,965 -- 89,076
Operating expenses:
Engineering -- -- 11,214 11,214
Selling, general and administrative -- -- 53,678 53,678
Corporate charges -- -- 1,287 1,287
Amortization of intangibles -- -- 2,118 2,118
--------- --------- --------- ---------
-- -- 68,297 68,297
--------- --------- --------- ---------
Operating profit (loss) 55,111 33,965 (68,297) 20,779
Interest expense -- -- 27,328 27,328
Other (income) expense -- -- (2,719) (2,719)
Provision (benefit) for income taxes -- -- 1,222 1,222
--------- --------- --------- ---------
Net income (loss) $ 55,111 $ 33,965 $ (94,128) $ (5,052)
========= ========= ========= =========
Depreciation expenses $ 2,346 $ 1,788 $ 2,650 $ 6,784
========= ========= ========= =========
Capital expenditures $ 1,734 $ 892 $ 2,560 $ 5,186
========= ========= ========= =========
Total assets $ 180,998 $ 57,495 $ 34,783 $ 273,276
========= ========= ========= =========
</TABLE>
<TABLE>
United
States Germany Japan Canada China Others Total
------ ------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $119,004 $ 46,036 $ 12,244 $ 10,888 $ 9,970 $ 48,200 $246,342
======== ======== ======== ======== ======== ======== ========
Long-lived assets by country $126,277 $ 5,564 $ 1,533 $ -- $ 42 $ 3,923 $137,339
======== ======== ======== ====== ======== ======== ========
</TABLE>
<PAGE> 83
-24-
As of and For the Year Ended March 31, 1998
<TABLE>
<CAPTION>
Professional Multimedia/
Sound and Audio
Entertain- Communi-
ment cations Corporate Total
----------- ------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 207,618 $ 125,346 $ -- $ 332,964
Cost of sales 125,593 80,031 -- 205,624
Gross profit 82,025 45,315 -- 127,340
--------- --------- --------- ---------
Operating expenses:
Engineering -- -- 17,278 17,278
Selling, general and administrative -- -- 81,695 81,695
Restructuring charges -- -- 6,232 6,232
Corporate charges -- -- 2,203 2,203
Special charges -- -- 2,231 2,231
Amortization of intangibles -- -- 3,207 3,207
--------- --------- --------- ---------
-- -- 112,846 112,846
--------- --------- --------- ---------
Operating profit (loss) 82,025 45,315 (112,846) 14,494
Interest expense -- -- 37,938 37,938
Recapitalization expense -- -- 6,710 6,710
Other (income) expense -- -- 43 43
Provision (benefit) for income taxes -- -- 103 103
Extraordinary loss -- -- 20,579 20,579
Net income (loss) $ 82,025 $ 45,315 $(178,219) $ (50,879)
========= ========= ========= =========
Depreciation expenses $ 4,281 $ 2,366 $ 1,938 $ 8,585
========= ========= ========= =========
Capital expenditures $ 4,028 $ 1,720 $ 2,720 $ 8,468
========= ========= ========= =========
Total assets $ 141,709 $ 47,598 $ 110,945 $ 300,252
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
United
States Germany Japan Canada China Others Total
------ ------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $188,211 $ 22,904 $ 19,397 $ 12,033 $ 849 $ 89,570 $332,964
======== ======== ======== ======== ======== ======== ========
Long-lived assets by country $131,185 $ 5,186 $ 690 $ 142 $ 614 $ 3,327 $141,144
======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE> 84
-25-
As of and For the Period From February 11, 1997 Through March 31, 1997
<TABLE>
<CAPTION>
Professional Multimedia/
Sound and Audio
Entertain- Communi- Corporate Total
ment cations
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 26,587 $ 1,727 $ -- $ 28,314
Cost of sales 16,803 1,252 -- 18,055
------- ------- ------- -------
Gross profit 9,784 475 -- 10,259
Operating expenses:
Engineering -- -- 1,320 1,320
Selling, general and administrative -- -- 6,365 6,365
Corporate charges -- -- 100 100
Amortization of intangibles -- -- 180 180
------- ------- ------- -------
-- -- 7,965 7,965
------- ------- ------- -------
Operating profit (loss) 9,784 475 (7,965) 2,294
Interest expense -- -- 5,032 5,032
Other (income) expense -- -- 56 56
Provision (benefit) for income taxes -- -- (1,057) (1,057)
Extraordinary loss -- -- -- --
------- ------- ------- -------
Net income (loss) $ 9,784 $ 475 $(11,996) $ (1,737)
======= ======= ======= =======
Depreciation expenses $ 470 $ 57 $ 190 $ 717
======= ======= ======= =======
Capital expenditures $ 26 $ 67 $ -- $ 93
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
United
States Germany Japan Canada China Others Total
------ ------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $12,112 $3,213 $3,129 $390 $1,943 $ 7,527 $ 28,314
======= ====== ====== ==== ====== ======== ========
</TABLE>
<PAGE> 85
-26-
The net sales to unaffiliated customers reflect the sales from the Company's
operating units located in each geographic area. The net sales to unaffiliated
customers into each of its geographic regions for the nine-month period ended
December 31, 1998 were as follows: North America--$129.9 million, Europe--$71.1
million, and Asia and other foreign--$44.5 million. The net sales to
unaffiliated customers into each of its principal geographic regions for the
year ended March 31, 1998 were as follows: North America--$205.3 millions;
Europe--$67.2 million and Asia and other foreign--$60.5 million. Export sales
from the United States to unaffiliated customers were approximately $52.4
million, $44.3 million and $1.1 million for the nine-month period ended December
31, 1998 the year ended March 31, 1998 and the period from February 11, 1997
through March 31, 1997, respectively. Sales from the Company's subsidiaries in
Canada, Singapore, United Kingdom, Hong Kong, Germany, France, Switzerland,
Japan and Australia accounted for approximately 60%, 75% and 50% of the total
international sales for the nine-month period ended December 31, 1998, the year
ended March 31, 1998 and the period from February 11, 1997 through March 31,
1997, respectively. Substantially all of the Company's sales from these
subsidiaries are transacted in the respective subsidiaries' local currency. The
Company's operating profits on export sales are comparable to those realized on
domestic sales.
Corporate identifiable assets relate principally to the Company's investment in
information systems and corporate facilities, as well as cost in excess of net
assets acquired included in intangible assets and deferred financing costs.
14. Equity:
Stock Split
On June 25, 1997, Holdings' board of directors approved a 20-for-1 stock split
of all Holdings' outstanding Common Stock. All common stock options for the
purchase of Holdings Common Stock described below have been restated for the
period presented to reflect the common stock split.
Stock Compensation Plans
The 1997 Stock Option Plan authorizes the issuance of up to 769,460 shares of
Holdings Common Stock, of which 267,300 have been granted and 300,195 have been
canceled. The exercise price of these options ranges from $7.98 to $31.93. The
nonqualified options may be granted to certain key employees, directors and
independent contractors of the Company or Holdings.
<PAGE> 86
-27-
A summary of the Company's stock option activity and related information for the
period from May 6, 1997 (the date on which both entities came under common
control) through December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Nine-Month Period
Ended Year Ended
December 31, 1998 March 31, 1998
------------------------ -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
<S> <C> <C> <C> <C>
Beginning of period 780,560 $ 10.61 242,000 $ 1.27
Granted 1,700 12.91 557,020 14.80
Exercised -- -- (873) 7.98
Canceled (300,195) 16.55 (17,587) 17.63
------- -------
End of period 482,065 6.91 780,560 10.61
======= =======
Exercisable at end
of period 353,735 3.39 289,500 2.37
======= =======
Available for future
grants 510,935 212,440
======= =======
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 range from
$0.075 to $31.93. The weighted average remaining contractual life of those
options is 8.3 years as of December 31, 1998. Compensation expense has been
recognized for options granted below fair market value as of the date of grant
over their respective vesting periods.
The Company accounts for its stock-based compensation plans under APB Opinion
No. 25 under which compensation cost of $1,353,774 and $3,156,000 was recorded
in the nine-month period ended December 31, 1998 and the year ended March 31,
1998, respectively. Had compensation expense been recorded at fair value
consistent with the methodology prescribed by SFAS No. 123 "Accounting for
Stock-Based Compensation," Telex' net loss and net loss per share would have
been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Nine-Month
Period Year
Ended Ended
December 31, March 31,
1998 1998
------------ ---------
<S> <C> <C>
Net loss (in thousands)
As reported $5,052 $50,879
Pro forma 5,052 54,035
</TABLE>
<PAGE> 87
-28-
The fair value of each award under the Option Plan is estimated on the date of
grant using the Black-Scholes options pricing model. The following assumptions
were used to estimate the fair value of options:
<TABLE>
<CAPTION>
Nine-Month Year
Period Ended Ended
December 31, March 31,
1998 1998
------------ ---------
<S> <C> <C>
Risk free interest rate 6.75% 4.50%
Expected life 5.00 5.00
Expected volatility -- --
Expected dividend yield -- --
</TABLE>
The weighted average fair values at the grant dates are as follows:
<TABLE>
<S> <C> <C> <C>
December 31, 1998 $31.98
March 31, 1998 31.98
</TABLE>
The effects of applying the fair value method of measuring compensation expense
for the periods presented is not likely to be representative of the effects of
future years in part because the fair value method was applied only to stock
options granted after March 31, 1995.
Warrants
Certain directors of the Company have been granted warrants representing the
right to purchase up to 27,235 shares of Holdings Common Stock at an exercise
price of $31.93 per share. A portion of these warrants became exercisable on the
date of grant, whereas the remainder will become exercisable through 2001,
provided in each case that the holder of the warrant is a director of the
Company on the date of exercise.
15. Fair Value of Financial Instruments:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practical to estimate fair
value.
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Revolving
Line of Credit
The carrying amount approximates fair value because of the short maturity of
these instruments.
Long-Term Debt
The fair value of the Company's long-term debt approximates fair value because
of the variability of the interest cost associated with these instruments. The
fair value of the Company's Senior Subordinated Notes is estimated based on
quoted market values for the notes.
<PAGE> 88
-29-
The estimated fair values of the Company's financial instruments are as follows
as of December 31, 1998 and March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1998
------------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 3,431 $ 3,431 $ 2,224 $ 2,224
Accounts receivable 53,926 53,926 62,085 62,085
Accounts payable 20,837 20,837 20,165 20,165
Revolving line of credit 5,703 5,703 15,119 15,119
Long-term debt, excluding Senior
Subordinated Notes 107,000 107,000 113,125 113,125
Senior Subordinated Notes 225,000 200,000 225,000 207,000
</TABLE>
16. Quarterly Financial Data:
The following table shows the unaudited quarterly financial data (in thousands):
<TABLE>
<CAPTION>
June 30, September 30, December 31,
1998 1998 1998
-------- ------------- ------------
<S> <C> <C> <C>
Net sales $ 78,888 $ 87,392 $ 80,062
Operating profit 6,319 9,089 5,371
Net income (loss) (3,162) 1,280 (3,170)
</TABLE>
17. Supplemental Disclosures to the Consolidated Statement of Cash Flows:
The cash paid for the acquisition of Old EVI, net of cash acquired, was
allocated as follows:
<TABLE>
<S> <C>
Working capital $ 63,878
Plant and equipment 31,649
Purchase price in excess of the net tangible assets acquired 60,588
Deferred financing costs 6,450
Other assets 1,358
Noncurrent liabilities (9,308)
--------
Net cash used for Acquisition $154,615
========
</TABLE>
18. Subsequent Event:
Sale of Facilities
In March 1999, in separate transactions, the Company sold certain of its
facilities vacated in 1998 due to merger-related restructuring for cash proceeds
of $1.9 million. Included in the transaction were its Slymar, California and a
portion of its Oklahoma City, Oklahoma facilities.
<PAGE> 89
-30-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EV International, Inc:
We have audited the accompanying consolidated statements of income and retained
earnings and cash flows of EV International, Inc. (a Delaware corporation) for
the period from March 1, 1996 through February 10, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of EV
International, Inc. for the period from March 1, 1996 through February 10, 1997,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York,
May 9, 1997
<PAGE> 90
EV INTERNATIONAL, INC.
Consolidated Statement of Income and Retained Earnings
For the Period From March 1, 1996 Through February 10, 1997
(In Thousands)
<TABLE>
<S> <C>
NET SALES $ 177,100
COST OF SALES 112,100
---------
Gross profit 65,000
---------
OPERATING EXPENSES:
Engineering 8,000
Selling, general and administrative 41,600
Amortization of goodwill 900
---------
50,500
---------
OPERATING PROFIT 14,500
GAIN ON SALE OF ASSETS --
---------
Income before income taxes 14,500
PROVISION FOR INCOME TAXES 6,200
---------
Net income 8,300
RETAINED EARNINGS, beginning of period 133,000
Cash transfers (to) from Parent, net and adjustments resulting
from the acquisition (Note 1) (2,000)
---------
RETAINED EARNINGS, end of period $ 139,300
=========
</TABLE>
The accompanying notes to financial statements are
an integral part of this statement.
<PAGE> 91
EV INTERNATIONAL, INC.
Consolidated Statement of Cash Flows
For the Period From March 1, 1996 Through February 10, 1997
(In Thousands)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,300
Items not affecting cash-
Depreciation and amortization 5,100
Deferred income tax 700
Changes in assets and liabilities-
Accounts receivable (500)
Inventories (2,100)
Other assets (2,500)
Accounts payable (800)
Other liabilities (2,900)
-------
Net cash provided by operating activities 5,300
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (3,300)
-------
NET CASH TRANSFERRED FROM (TO) PARENT AND ADJUSTMENTS RESULTING FROM
THE ACQUISITION (Note 1) $(2,000)
=======
</TABLE>
The accompanying notes are an integral
part of this financial statement.
<PAGE> 92
-1-
EV INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
For the Period From March 1, 1996 Through February 10, 1997
(Amounts in Thousands)
1. Background Information and Significant Accounting Policies:
Prior to the date of their disposition on February 10, 1997, Mark IV Industries,
Inc. (Mark IV) was the owner of a number of operating divisions and subsidiaries
which made up its professional audio business, referred to as the Mark VI Audio
Group (the Group). Effective February 10, 1997, Mark IV completed a
reorganization of the Group in which certain assets and liabilities not relating
to the business of the Group were transferred out of the parent company of the
Group, Gulton Industries, Inc. (Gulton). On the same date, (i) all the issued
and outstanding stock of Gulton was then sold to an indirect acquisition
subsidiary of Greenwich Street Capital Partners, L.P. (Sub); (ii) Sub merged
with and into Gulton, with Gulton surviving; and (iii) Gulton merged with and
into Electro-Voice, Incorporated (EV), Mark IV Audio, Inc.; Mark IV Audio
Magnetic, Inc. and LFE Corporation, with EV surviving, and (iv) EV changed its
name to EV International, Inc. (the Company). The accompanying financial
statements have been restated to reflect the foregoing steps and include the
accounts of Gulton. All references to the Company relate to the business of the
Mark IV Audio Group, and exclude any activities which may have been a part of
the Company during the reporting periods, but which were transferred out as part
of the foregoing steps. There were no adjustments to the net assets or net
income of the Group as a result of this reorganization. The operating
subsidiaries and divisions of the Company are as follows:
Audio Consultants Co., Limited Mark IV Audio (Europe) AG
Altec Lansing International Mark IV Audio (Aust.) Pty Ltd.
Cetec International Limited Mark IV Audio Canada, Inc.
Dearden Davies Associates Limited Mark IV Audio France S.A.
Dynacord France Mark IV Audio Hong Kong Limited
Dynacord Audio GmbH Mark IV Audio Japan Ltd.
Klark-Teknik PLC Nivenfield (1992) Limited
Rebis Audio Limited
Mark IV Audio Japan had a certain minority ownership interest as of February 29,
1996. As part of the reorganization described above, the minority interest was
acquired by Mark IV, and Mark IV Audio Japan became a 100%-owned subsidiary.
The financial statements reflect all of the operations making up the Company and
no recognition has been made to reflect the minority interests that existed as
of the various financial statement dates. All significant intergroup
transactions have been eliminated. These consolidated financial statements have
been prepared in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that
<PAGE> 93
-2-
affect the reported amounts of assets and liabilities as of the date of such
financial statements, and the reported amounts of revenues and expenses during
the reporting periods. It should be recognized that the actual results could
differ from those estimates. The Company's significant accounting policies are
as follows:
Property, Plant and Equipment
The Company provides for depreciation of plant and equipment primarily on the
straight-line method to amortize the cost of such plant and equipment over their
useful lives. Depreciation expense was approximately $4,200 for the period from
March 1, 1996 through February 10, 1997.
Cost in Excess of Net Assets Acquired (Goodwill)
Management continually evaluates the existence of goodwill impairment on the
basis of whether the goodwill is fully recoverable from projected, undiscounted
net cash flows of the business. Goodwill is amortized on the straight-line
method over a 40-year period. Amortization expense was approximately $900 for
the period from March 1, 1996 through February 10, 1997.
Income Taxes
Mark IV adopted Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," in fiscal year 1994. The adoption of this
standard retroactively changed Mark IV's method of accounting for income taxes
from the deferred method to the liability method. The Company's provisions for
income taxes have been calculated on the separate return basis.
Postretirement Benefits
Mark IV adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," effective as of February 28, 1993. SFAS No. 106 required
the estimated present value of the Company's liability for its commitments to
provide health and life insurance benefits to its retirees to be included in the
balance sheet. The related expense is required to be recognized on the accrual
method over the remaining years of the employees' active service, up to the
dates of the individual's eligibility to retire and begin receiving the benefit.
Research and Development Costs
Research and development costs are expensed as incurred and amounted to
approximately $7,700 for the period from March 1, 1996 through February 10,
1997.
Foreign Currency
The assets and liabilities of the Company's foreign operations are translated at
year-end exchange rates, and resulting gains and losses are included as a part
of net equity. Realized foreign currency transactions recognized at the Company
level have been eliminated from the accompanying consolidated statements of
income, since such transactions are an integral part of Mark IV's consolidated
currency exposure, including operations other than those of the Company.
<PAGE> 94
-3-
2. Income Taxes:
Income before taxes and the related provision for income taxes for the period
from March 1, 1996 through February 10, 1997 consist of the following:
<TABLE>
<S> <C>
Income before taxes:
United States $10,700
Foreign 3,800
-------
Total income before taxes $14,500
=======
Provision for income taxes:
Currently payable-
United States $ 4,700
Foreign 800
-------
Total currently payable 5,500
-------
Deferred-
United States 200
Foreign 500
-------
Total deferred income tax 700
-------
Total provision for income taxes $ 6,200
=======
</TABLE>
The provision for income taxes for the period from March 1, 1996 through
February 10, 1997 differs from the amount computed using the U.S. statutory
income tax rate as follows:
<TABLE>
<S> <C>
Expected tax at U.S. statutory income tax rate $5,100
Permanent differences 600
State and local income taxes 600
Foreign tax rate differences (100)
------
Total provision for income taxes $6,200
======
</TABLE>
For purposes of these financial statements, the undistributed earnings of
Gulton's foreign subsidiaries were considered to have been reinvested in each
country, and were not expected to be remitted back to Mark IV.
3. Pension and Retirement Savings Plans:
Prior to the consummation of the steps set forth in Note 1, the Company's U.S.
employees participated in one of a number of defined-benefit pension plans which
were funded and administered by Mark IV. Such plans provide retirement benefits
based upon the employees' age, earnings and years of service, or based upon
years of service multiplied by stated monthly benefit amounts. The Company
recognized an expense for the estimated service cost of such plans of
approximately $350 for the period from March 1, 1996 through February 10, 1997.
The plans are a part of Mark IV's Master Defined Benefit Plan, and the funded
position and responsibility for benefit payments were managed by Mark IV.
<PAGE> 95
-4-
Certain of the Company's U.S. employees also participated in defined
contribution plans which were also funded and administered by Mark IV. The
Company recognized an expense of approximately $170 for the period from March 1,
1996 through February 10, 1997.
The Company's Japanese subsidiary also had a retirement and termination plan
(the Retirement Plan) which provided benefits to employees in Japan upon their
termination of employment. The benefits were based upon a multiple of the
employee's monthly salary, with the multiple determined based upon the
employee's years of service. The multiple paid to employees who retired or are
involuntarily terminated is greater than the multiple paid to those who
voluntarily terminate their services. The Company recognized an expense of
approximately $100 for these plans for the period from March 1, 1996 through
February 10, 1997.
4. Postretirement Benefits:
The Company provided health and life insurance benefits to a number of existing
retirees from its U.S. operations. Contributions required to be paid by the
retirees towards the cost of such plans are a flat dollar amount per month in
certain instances, or a range from 25% to 100% in other instances. The Company
also had a number of active employees who will receive such benefits upon their
retirement.
The Company's postretirement benefit expense on the accrual method for the
period from March 1, 1996 through February 10, 1997 includes the following
components:
<TABLE>
<S> <C>
Service cost-benefits earned during the period $ 5
Interest cost on the APBO 15
---
Total expense $20
===
</TABLE>
The APBO was calculated using a discount rate of 7.50% at February 10, 1997. The
rate used in the prior year was 8.75%. The change in the discount rate did not
have a significant effect on the expense determination for fiscal 1996. The APBO
determinations assume an initial health care cost trend rate of approximately
8.0%, trending down ratably to an ultimate rate of 4.5%. A one-percentage-point
increase in such trend rate would not have a significant effect on the Company's
obligations or annual expense.
5. Legal and Environmental Matters:
The Company has historically been involved in various legal and environmental
matters. In the opinion of management, the ultimate cost to resolve these
matters will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
<PAGE> 96
-5-
6. Foreign Operations:
The Company's foreign operations are located in Europe and the Far East.
Information concerning the Company's operations by geographic area for the
period from March 1, 1996 through February 10, 1997 is as follows:
<TABLE>
<S> <C>
Net sales to customers:
United States $111,000
Foreign 96,300
Eliminations (30,200)
--------
Total net sales to customers $177,100
========
Operating income:
United States $ 12,700
Foreign 3,800
Eliminations (2,000)
--------
$ 14,500
========
</TABLE>
The net sales to customers reflect the sales of the Company's operating units in
each geographic area to unaffiliated customers. Export sales from the United
States to unaffiliated customers were approximately $8,160 for the period from
March 1, 1996 through February 10, 1997.
7. Related Party Transactions:
Through February 10, 1997, Mark IV provided and coordinated treasury, tax,
audit, legal, medical and risk insurance, and benefits administration services
to the various operating units of the Company. Insurance, legal, audit and
direct employee benefits-related costs have been allocated directly to the
Company. An allocation of Mark IV's costs for tax, treasury and other
administrative work performed has not been made as Mark IV management did not
believe such costs to be significant. All intercompany accounts with Mark IV and
its affiliates other than the Company and its subsidiaries have been included as
a part of net equity.
Certain bank indebtedness existed in certain of the Company's foreign
subsidiaries. The amount of such indebtedness was controlled by Mark IV and is
based on Mark IV's financing plans on a consolidated country-by-country basis.
As a result, the accompanying consolidated financial statements exclude all such
indebtedness and related interest expense for the periods presented.
Mark IV also provided letters of credit for the Company's operating needs.
The Company has an informal lease arrangement with Mark IV for a facility which
it uses for its cabinet assembly requirements. The Company recognized an expense
for this lease of approximately $450 for the period from March 1, 1996 through
February 10, 1997.
<PAGE> 97
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
TELEX COMMUNICATIONS, INC.
(Commission File Number: 333-27341)
EXHIBIT INDEX
for
Form 10-K
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
2(a) - Exchange Agreement and Plan of Merger, dated as of January 29, 1998,
among Greenwich I LLC, Greenwich II LLC, EVI Audio Holdings, Inc.,
Telex Communications Group, Inc. ("Holdings"), Telex Communications,
Inc. ("Old Telex") and EV International, Inc. (incorporated by
reference to Exhibit 2 to Old Telex's Quarterly Report on Form 10-Q
for nine months ended December 31, 1997, filed with the Commission on
February 17, 1998, File No. 333- 30679).
2(b) - Recapitalization Agreement and Plan of Merger, dated March 4, 1997,
among Greenwich II LLC ("G-II"), GST Acquisition Corp. ("GST") and Old
Telex (incorporated by reference to Exhibit 2(a) to the Old Telex's
Registration Statement on Form S-4, filed with the Commission on
September 5, 1997, Registration No. 333-30679).
2(c) - Amendment No. 1 to the Recapitalization Agreement and Plan of Merger,
dated as of April 17, 1997 (incorporated by reference to Exhibit 2(b)
to Old Telex's Registration Statement on Form S-4, Registration No.
333-30679).
2(d) - Amendment No. 2 to the Recapitalization Agreement and Plan of Merger,
dated as of April 25, 1997 (incorporated by reference to Exhibit 2(c)
to Old Telex's Registration Statement on Form S-4, Registration No.
333-30679).
2(e) - Purchase Agreement, dated December 12, 1996, among Gulton Acquisition
Corp., Mark IV Industries, Inc., and Mark IV PLC, and Gulton
Industries, Inc. (incorporated by reference to Exhibit 2(a) to the
Registrant's Registration statement on Form S-4, filed with the
Commission on July 30, 1997, Registration No. 333-27341).
<PAGE> 98
3(a) - Amended and Restated Certificate of Incorporation of Telex
Communications, Inc., dated February 2, 1998 (incorporated by
reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K
for the fiscal year ended February 28, 1998, filed with the Commission
on May 29, 1998, File No. 333-27341).
3(b) - By-laws of the Company, as amended (incorporated by reference to
Exhibit 3(b) to Old Telex's Registration Statement on Form S-4,
Registration No. 333-30679).
4(a) - Indenture, dated March 24, 1997, between Old EVI and The Bank of New
York, as Trustee (incorporated by reference to Exhibit 4(a) to the
Registrant's Registration Statement on Form S-4, filed with the
Commission on July 30, 1997, Registration No. 333-27341).
4(b) - Indenture (the "Telex Indenture"), dated as of May 6, 1997, among Old
Telex and Manufacturers and Traders Trust Company (incorporated by
reference to Exhibit 4(a) to Old Telex's Registration Statement on
Form S-4, Registration No. 333-30679).
4(c) - The First Supplemental Indenture, dated May 6, 1997, to the Telex
Indenture (incorporated by reference to Exhibit 4(b) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
4(d) - Second Supplemental Indenture, dated as of February 2, 1998, made by
Old EVI in favor of Manufacturers and Traders Trust Company, as
trustee (incorporated by reference to Exhibit 2 to Old Telex's
Quarterly Report on Form 10-Q for nine months ended December 31, 1997,
filed with the Commission on February 17, 1998, File No. 333- 30679).
4(e) - Credit Agreement, dated May 6, 1997 (as amended, the "Credit
Agreement"), among Old Telex, the lenders named on the signature pages
thereof (the "Senior Lenders") and The Chase Manhattan Bank, a New
York banking corporation ("Chase"), as administrative agent for such
Senior Lenders (the "Administrative Agent") (incorporated by reference
to Exhibit 4(d) to Old Telex's Registration Statement on Form S-4,
Registration No. 333-30679).
<PAGE> 99
4(f) - The Assignment and Assumption Agreement, dated May 6, 1997, made by
Old Telex, and Telex Communications Group, Inc. in favor of the
Administrative Agent for the benefit of the Senior Lenders
(incorporated by reference to Exhibit 4(e) to Old Telex's Registration
Statement on Form S-4, Registration No. 333-30679).
4(g) - Guarantee and Collateral Agreement, dated May 6, 1997, made by Old
Telex and Telex Communications Group, Inc. in favor of the
Administrative Agent for the benefit of the Senior Lenders and certain
other secured parties (incorporated by reference to Exhibit 4(f) to
Old Telex's Registration Statement on Form S-4, Registration No. 333-
30679).
4(h) - Patent and Trademark Security Agreement, dated March 6, 1997, made by
Old Telex in favor of the Administrative Agent for the benefit of the
Senior Lenders under the Credit Agreement (incorporated by reference
to Exhibit 4(g) to Old Telex's Registration Statement on Form S-4,
Registration No. 333-30679).
4(i) - Amendment No. 1, dated as of January 29, 1998, to the Credit
Agreement, among Telex Communications, Inc., The Chase Manhattan Bank,
as Administrative Agent, Morgan Stanley Senior Funding, Inc. and the
several banks and other financial institutions from time to time party
thereto (incorporated by reference to Exhibit 2 to Old Telex's
Quarterly Report on Form 10-Q for nine months ended December 31, 1997,
filed with the Commission on February 17, 1998, File No. 333-30679).
4(j) - Amendment No. 2, dated as of December 23, 1998, to the Credit
Agreement, among the Company, The Chase Manhattan Bank, as
Administrative Agent, Morgan Stanley Senior Funding, Inc., as
Documentation Agent, and the several banks and other financial
institutions from time to time party thereto (incorporated by
reference to Exhibit 10(a) to the Company's Current Report on Form
8-K, filed with the Commission on January 15, 1999, File No. 333-
27341).
10(a) - Amended and Restated Stockholders Agreement, dated March 4, 1997,
among Old Telex, G-II and the Stockholders set forth on Schedule A
thereto (incorporated by reference to Exhibit 10(a) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
<PAGE> 100
10(b) - Consulting Agreement, dated May 6, 1997, between Greenwich Street
Capital Partners, Inc. ("GSCP Inc."), Holdings and G-II (incorporated
by reference to Exhibit 10(c) to Old Telex's Registration Statement on
Form S-4, Registration No. 333-30679).
10(c) - Form of Amendment, dated May 1, 1998, to the Consulting Agreement,
dated May 6, 1997, between GSCP Inc., Holdings and G-II (incorporated
by reference to Exhibit 10(e) to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1998, filed with the
Commission on May 29, 1998, File No. 333-27341).
10(d) - Indemnification Agreement, dated May 6, 1997, between GSCP Inc.,
Holdings and G-II (incorporated by reference to Exhibit 10(d) to Old
Telex's Registration Statement on Form S-4, Registration No.
333-30679).
*10(e) - Fee Agreement, dated May 6, 1997, between GSCP Inc. and Holdings
(incorporated by reference to Exhibit 10(e) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
*10(f) - Employment Agreement, dated March 4, 1997, between Holdings, Old Telex
and John L. Hale (incorporated by reference to Exhibit 10(f) to Old
Telex's Registration Statement on Form S-4, Registration No.
333-30679).
*10(g) - Employment Agreement, dated as of August 26, 1998 between Ned C.
Jackson and Telex Communications Group, Inc. (filed as an exhibit
hereto).
*10(h) - 1997 Telex Communications Group, Inc. Stock Option Plan (incorporated
by reference to Exhibits 10(h), 10(i) and 10(j) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
*10(i) - Telex Communications Group, Inc. Cash Bonus Plan (incorporated by
reference to Exhibits 10(h), 10(i) and 10(j) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679.)
*10(j) - Telex Communications Group, Inc. Management Cash Compensation Plan
(incorporated by reference to Exhibits 10(f), 10(g) and 10(h) to Old
Telex's Registration Statement on Form S-4, Registration No.
333-30679).
<PAGE> 101
*10(k) - Warrant, dated April 7, 1998, issued by Holdings to Jeffrey Rosen, and
form of amendment thereto (incorporated by reference to Exhibit 10(q)
to the Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 1998, filed with the Commission on May 29, 1998, File No.
333- 27341).
*10(l) - Warrant, dated April 7, 1998, issued by Holdings to Christopher
Forester, and form of amendment thereto (incorporated by reference to
Exhibit 10(r) to the Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 1998, filed with the Commission on May
29, 1998, File No. 333-27341).
*10(m) - Warrant, dated April 7, 1998, issued by Holdings to Edgar S. Woolard,
Jr., and form of amendment thereto (incorporated by reference to
Exhibit 10(s) to the Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 1998, filed with the Commission on May
29, 1998, File No. 333-27341).
*10(n) - Warrant, dated April 7, 1998, issued by Holdings to Evan Marks, and
form of amendment thereto (incorporated by reference to Exhibit 10(t)
to the Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 1998, filed with the Commission on May 29, 1998, File No.
333- 27341).
10(o) - Tradename and Trademark License Agreement, dated February 10, 1997,
between Gulton Industries, Inc. and Mark IV Industries, Inc.
(incorporated by reference to Exhibit 10 (e) to the Registrant's
Registration Statement on Form S-4, filed with the Commission on July
30, 1997, Registration No. 333-27341).
10(p) - Software License Agreement, dated February 10, 1997, between Gulton
Industries, Inc. and Mark IV Industries, Inc. (incorporated by
reference to Exhibit 10(g) to the Registrant's Registration Statement
on Form S-4, filed with the Commission on July 30, 1997, Registration
No. 333- 27341).
*10(q) - Collective Bargaining Agreement, dated May 15, 1995, between
Electro-Voice, Inc. and the International Union of Electronic,
Electrical, Salaried, Machine and Furniture Workers, AFL-CIO, and its
Local 662, relating to the Company's manufacturing facility in
Newport, Tennessee (incorporated by reference to Exhibit 10(h) to the
Registrant's Registration Statement on Form S-4, filed with the
Commission on July 30, 1997, Registration No. 333- 27341).
<PAGE> 102
*10(r) - Collective Bargaining Agreement, dated June 1, 1992, between
Electro-Voice, Inc. and the International Union of Electronic,
Electrical, Technical, Salaried and Machine and Furniture Workers,
AFL-CIO, and its Local 663, relating to the Company's manufacturing
facility in Sevierville, Tennessee (incorporated by reference to
Exhibit 10(i) to the Registrant's Registration Statement on Form S-4,
filed with the Commission on July 30, 1997, Registration No. 333-
27341).
*10(s) - Collective Bargaining Agreement, dated March 18, 1993, between
Electro-Voice, Inc. and the International Union of Electronic,
Electrical, Technical, Salaried and Machine and Furniture Workers,
AFL-CIO, and its Local 900, relating to the Company's manufacturing
facility in Buchanan, Michigan (incorporated by reference to Exhibit
10(j) to the Registrant's Registration Statement on Form S-4, filed
with the Commission on July 30, 1997, Registration No. 333- 27341).
10(t) - Mortgage (or deed of trust), dated May 6, 1997, from Old Telex, as
Mortgagor, to the Administrative Agent, with respect to Bloomington,
Minnesota (incorporated by reference to Exhibit 10(i) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
10(u) - Mortgage (or deed of trust), dated May 6, 1997, from Old Telex, as
Mortgagor, to the Administrative Agent, with respect to Blue Earth,
Minnesota (incorporated by reference to Exhibit 10(j) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
10(v) - Mortgage (or deed of trust), dated May 6, 1997, from Old Telex, as
Mortgagor, to the Administrative Agent, with respect to Glen Cove,
Minnesota (incorporated by reference to Exhibit 10(k) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
10(w) - Mortgage (or deed of trust), dated May 6, 1997, from Old Telex, as
Mortgagor, to the Administrative Agent, with respect to Rochester,
Minnesota (incorporated by reference to Exhibit 10(l) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
10(x) - Mortgage (or deed of trust), dated May 6, 1997, from Old Telex, as
Mortgagor, to the Administrative Agent, with respect to Lincoln,
Nebraska (incorporated by reference to Exhibit 10(m) to Old Telex's
Registration Statement on Form S-4, Registration No. 333-30679).
<PAGE> 103
10(y) - Mortgage (or deed of trust), dated February 2, 1998, from Telex
Communications, Inc., as Mortgagor, to the Administrative Agent, with
respect to Sylmar, CA (incorporated by reference to Exhibit 10(hh) to
the Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 1998, filed with the Commission on May 29, 1998, File No.
333-27341).
10(z) - Mortgage (or deed of trust), dated February 2, 1998, from Telex
Communications, Inc., as Mortgagor, to the Administrative Agent, with
respect to Buchanan, MI (Cecil Street) (incorporated by reference to
Exhibit 10(ii) to the Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 1998, filed with the Commission on May
29, 1998, File No. 333-27341).
10(aa) - Mortgage (or deed of trust), dated February 2, 1998, from Telex
Communications, Inc., as Mortgagor, to the Administrative Agent, with
respect to Buchanan, MI (Front Street) (incorporated by reference to
Exhibit 10(jj) to the Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 1998, filed with the Commission on May
29, 1998, File No. 333-27341).
10(bb) - Mortgage (or deed of trust), dated February 2, 1998, from Telex
Communications, Inc., as Mortgagor, to the Administrative Agent, with
respect to Oklahoma City, OK (incorporated by reference to Exhibit
10(kk) to the Company's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998, filed with the Commission on May 29, 1998,
File No. 333-27341).
10(cc) - Mortgage (or deed of trust), dated February 2, 1998, from Telex
Communications, Inc., as Mortgagor, to the Administrative Agent, with
respect to Newport, TN (incorporated by reference to Exhibit 10(ll) to
the Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 1998, filed with the Commission on May 29, 1998, File No.
333-27341).
10(dd) - Mortgage (or deed of trust), dated February 2, 1998, from Telex
Communications, Inc., as Mortgagor, to the Administrative Agent, with
respect to Sevierville, TN (incorporated by reference to Exhibit
10(mm) to the Company's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998, filed with the Commission on May 29, 1998,
File No. 333-27341).
12(a) - Computation of Ratio of Earnings to Fixed Charges (filed as an exhibit
hereto).
<PAGE> 104
12(b) - Computation of EBITDA to Interest Expense (filed as an exhibit
hereto).
21 - List of Subsidiaries (incorporated by reference to Exhibit 21 to the
Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 1998, filed with the Commission on May 29, 1998, File No.
333-27341).
23 - Consent of Independent Public Accountants (filed as an exhibit hereto)
24 - Power of Attorney (included on signature pages to this Form 10-K).
27 - Financial Data Schedules (filed as an exhibit hereto).
- - ----------
* Denotes management contract, executive compensation plan, or arrangement.
<PAGE> 1
(TELEX COMMUNICATIONS INC.)
Exhibit 10(g)
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into
this 26 day of August, 1998 by and between Ned C. Jackson ("Executive") and
TELEX COMMUNICATIONS GROUP, INC., a Delaware corporation ("Group"). For purposes
of this Agreement, and TELEX COMMUNICATIONS, INC., a Delaware corporation shall
be referred to herein as the "Company" and, Group and the Company together shall
be referred to as the "Employer".
1. Employment.
Subject to the Group's Board of Directors (the "Board") approval of
this Agreement, for the period set forth in paragraph 2 below (the "Period of
Employment"), and upon the other terms and conditions set forth in this
Agreement: (i) Group hereby employs Executive, and Executive hereby accepts
employment with Group, as Group's Chief Executive Officer; (ii) the Company
hereby employs Executive, and Executive hereby accepts employment with the
Company, as the Company's Chief Executive Officer; and (iii) Executive shall be
elected to Group's Board of Directors and Group shall cause Executive to be
elected to the Company's Board of Directors.
Executive hereby represents, warrants and covenants that (i) his
performance of the terms of this Agreement and as an employee of the Company
does not and will not breach any agreement to which he is a party or by which,
he may be bound, (ii) he has not and will not enter into any agreement that
conflicts with the terms and conditions of this Agreement, (iii) he is not
restricted from being employed by the Company or entering into this Agreement,
(iv) he has not brought and will not bring to the Company or use in the
performance of his responsibilities at the Company any materials or documents of
a former employer which are not generally available to the public, unless
Executive has obtained written consent from the former employer for his
possession and use, and (v) he is not subject to any order, judgment or decree
of any kind which would prevent him from entering into this Agreement or
performing fully the Executive's obligations hereunder.
2. Period of Employment.
The Period of Employment shall commence on the earlier of the date
that is 30 days after the date the Board approves this Agreement or the date
that Group's current
<PAGE> 2
Chief Executive Officer terminates employment with the Group (the "Commencement
Date") and, subject only to the provisions of Paragraphs 9, 10 and 11 below,
shall continue until year-end 1999, after which time it will be renewed
annually, unless terminated by the Group or the Executive by written notice of
the decision not to renew for any such additional annual period.
3. The Position.
During the Period of Employment Executive shall serve as the
principal executive officer of both the Company and Group, reporting directly to
and only to the Board of the Company and Group, respectively, and shall have the
duties and responsibilities appropriate to such offices.
4. Duties.
Throughout the Period of Employment, Executive agrees to devote
Executive's full time and undivided attention during normal business hours to
the business and affairs of Employer and, in particular, to performance of all
the duties and responsibilities as Chief Executive Officer Group, except for
reasonable vacations and except for illness; but nothing in this Agreement shall
preclude Executive from devoting reasonable periods required for:
a. serving as a director, trustee, or member of a committee of any
organization involving no conflict of interest with the interests of
Employer or in direct competition with Employer;
b. engaging in charitable and community activities; and
c. managing Executive's personal investments;
provided that such activities do not, individually or together, interfere with
the regular performance of Executive's duties and responsibilities under this
Agreement and do not in any way conflict with Employer's interests.
5. Compensation.
For all services to be rendered by Executive pursuant to this
Agreement during the Period of Employment to the Company or Group:
a. Base Salary. Executive shall be paid as compensation a base
annual salary of $300,000 payable at the same intervals at which the Company's
executives are paid, but in no event less frequently than monthly, plus any
increase in base salary as determined by the Board of Directors of the Company;
b. Annual Bonus. Executive will receive an annual bonus of $300,000
for each of calendar years 1998 and 1999 (pro rated in the case of any partial
period within the Period of Employment). For each calendar year in the Period of
Employment (pro rated in
2
<PAGE> 3
the case of partial years in the Period of Employment), Executive shall be paid
an annual bonus of $300,000 (the "Target Bonus") if the Group's Consolidated
EBITDA (as defined below) equals or exceeds the target for such calendar year
set forth on Annex A hereto. If the Group's Consolidated EBITDA for a year is
80% of the target Consolidated EBITDA for such year, Executive shall be paid an
annual bonus equal to 25% of the Target Bonus. The annual bonus shall be pro
rated for Consolidated EBITDA results between 80% and 100% of the applicable
target. No annual bonus will be payable for a year in which the Consolidated
EBITDA is less than 80% of the applicable target.
c. Performance Bonus.
i. If the Group's Consolidated EBITDA for a calendar year ending
within the Period of Employment equals or exceeds $65,000,000, Executive
will receive a special one-time bonus of $1,000,000. The bonus provided
for in this clause (ii) will not again be payable if the Group's
Consolidated EBITDA equals or exceeds $65,000,000 for any subsequent
calendar year.
ii. If the Group's Consolidated EBITDA for a calendar year ending
within the Period of Employment equals or exceeds the Target (as defined
below) for such year, Executive will receive a special bonus of $500,000,
and, for each whole $5,000,000 of additional Consolidated EBITDA above
such Target, Executive will receive an additional $500,000. For these
purposes, the "Target" shall initially mean $70,000,000. If any bonus is
payable with respect to any calendar year pursuant to this clause (ii),
the Target with respect to any subsequent year shall be increased by
$5,000,000 whole increments for each $500,000 paid to Executive.*
iii. For purposes of this Section 5, "Consolidated EBITDA" shall
have the meaning given in the Credit Agreement, dated as of May 6, 1997,
among GST Acquisition Corp., a Delaware corporation and a predecessor of
Group, Morgan Stanley Senior Funding, Inc., as documentation agent, The
Chase Manhattan Bank, a New York banking corporation, as administrative
agent, and the other parties thereto, as amended on as of January 30,
1998, and as may be further amended from time to time except that "special
bonuses" shall not include bonuses payable under Section 5(c).
iv. In the event that Group or any of its subsidiaries consummates a
significant acquisition, disposition or other corporate transaction or
series of transactions that, in the judgement of the Board, would
reasonably be expected to impact the consolidated earnings of Group and
its subsidiaries, the Consolidated EBITDA figures set forth in clauses (i)
and (ii) may be
- - ----------
* By way of illustration, if the Company's Consolidated EBITDA for a Fiscal
Year is $82,000,000, and the Target for such Fiscal Year is $70,000,000,
Executive would receive a bonus pursuant to clause (ii) of $1,000,000, and
the Target for the subsequent Fiscal Year would be increased to
$80,000,000.
3
<PAGE> 4
appropriately adjusted by the Board to reflect such transaction or series
of transactions.
d. The bonus provided for in this paragraph (b) or (c) with respect
to a calendar year shall be payable, if at all, reasonably promptly following
the receipt by the Board of the audited financial statements of Group for such
calendar year; provided that if the Group's audited financial statements are not
prepared on a calendar year basis, any such bonus shall be payable reasonable
promptly following the receipt by the Board of the unaudited financial
statements, certified by the Group's chief financial officer, for the portion of
the Group's fiscal year within such calendar year that is not included in the
Group's audited financial statements.
e. Any increase in base salary or in annual incentive awards or
other compensation shall in no way diminish any other obligations of Employer
under this Agreement.
6. Provisions for Perquisites.
During the Period of Employment, Executive shall be entitled to
perquisites including an appropriate office, secretarial and clerical staff, and
fringe benefits accorded generally to executive officers of Employer pursuant to
their policies, as well as to reimbursement, upon proper accounting, of
reasonable expenses and disbursements incurred by Executive in the course of
Executive's duties.
7. Employment Benefit Plans.
a. Executive, Executive's dependents and beneficiaries, including,
without limitation, any beneficiary of a joint and survivor annuity or other
optional method of payment applicable to the payment of benefits under the
defined benefit or other pension plans of Employer, or any successor plans,
shall be entitled to all payments and benefits and service credit for benefits
during the Period of Employment to which officers of Employer, their dependents,
and beneficiaries are entitled as the result of their employment under the terms
of employee benefit plans and practices of Employer. Executive, and Executive's
dependents, shall also be entitled to participate in, be covered by and receive
benefits under, Employer's long-term disability, medical, dental, health,
welfare, accidental death and dismemberment, and life insurance plans, other
present or equivalent successor plans and practices of Employer, for which
officers, their dependents, and beneficiaries are eligible, if any, and its
401(k) Plan. Executive, his spouse and his dependents shall also be entitled to
all payments or other benefits under any such plan or practice subsequent to the
Period of Employment as a result of participation in such plan or practice
during the Period of Employment, as provided in such plans.
b. Nothing in this Agreement shall preclude Employer from amending
or terminating any employee benefit plan or practice.
4
<PAGE> 5
8. Stock Options.
Group shall grant to Executive options (the "Options") to purchase
250,000 shares of the Group's common stock, par value $.01 per share. The
Options shall be granted under the Group's Amended and Restated Stock Option
Plan (the "Stock Option Plan"), to be adopted by Group, a copy of which has been
provided to Executive and shall be of the type designated as "Exit Options"
under the Stock Option Plan. The Options shall be subject to the terms and
conditions of the Stock Option Plan.
9. Effect of Death.
If Executive dies during the Period of Employment, the legal
representative of Executive shall be entitled to (i) the base salary provided
for in paragraph 5(a) above for the month in which Executive's death shall have
occurred and the following month plus all accrued and unpaid vacation, at the
rate being paid at the time of death and (ii) a pro rata portion of any bonus
which would have been payable under paragraph 5(b) above for the year in which
Executive's death occurs payable on the date such bonus would otherwise have
been payable. The Period of Employment shall be deemed to have ended as of the
close of business on the last day of the month following the month in which
death shall have occurred but without prejudice to any payments otherwise due in
respect of Executive's death.
10. Effect of Disability.
a. In the event of the Disability of Executive during the Period of
Employment, Executive shall be entitled to (i) all compensation, benefits and
perquisites hereunder through the effective date of his termination of
employment, (ii) an amount equal to the base salary provided for in paragraph
5(a) above, at the rate being paid at the time of the commencement of
Disability, for the period of such Disability plus six (6) months from the end
of the period that establishes such Disability, as described in paragraph 10(c)
below and (ii) a pro rata portion of any bonus which would have been payable
under paragraph 5(b) above for the year in which Executive's Disability occurs
payable on the date such bonus would otherwise have been payable. The Period of
Employment shall be deemed to have ended as of the last day of the period that
establishes Disability.
b. The amount of any payments due under paragraph 10(a)(i) shall be
reduced by any payments to which Executive may be entitled for the same period
because of disability under any disability plan or insurance of Employer or as
the result of workers' compensation or non-occupational disability payments.
c. The term "Disability", as used in this Agreement, shall mean an
illness or accident occurring during the Period of Employment which prevents
Executive from performing Executive's duties under this Agreement 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 the Period of Employment. The
Period of Employment shall be deemed to have ended as of the close of business
on the last day of such period (either the 270th or 180th day, as the case may
be) but without prejudice to any payments due
5
<PAGE> 6
Executive in respect of disability under paragraph 11(a) or otherwise due to
Executive or Executive's legal representative or beneficiary and without
prejudice to continue any medical insurance coverage, subject to the terms of
the plan or applicable law.
11. Provision Upon Termination
a. Either Group or the Company may terminate the Period of
Employment and Executive's employment at any time during the Period of
Employment (i) for any reason upon thirty (30) days' written notice to Executive
and (ii) immediately for Cause, as defined in paragraph 12(c) below. Executive
may terminate his employment hereunder at any time during the Period of
Employment upon sixty (60) days' written notice to the Company. If Executive's
employment is terminated by either party, Employer shall pay Executive all
compensation, benefits and perquisites accrued hereunder through the effective
date of his termination of employment.
b. For the purpose of paragraph 11(a) above and any other provision
of this Agreement, termination of Executive's employment shall be deemed to have
been for "Cause" only (i) if termination of Executive's employment shall have
been the result of an act or acts of fraud, theft, or embezzlement on the part
of Executive which, if convicted, would constitute a felony, or (ii) if
termination of Executive's employment results from Executive's refusal to
perform the duties appropriate to Executive's position or a material breach by
Executive of Paragraphs 13, 14 or 15 of this Agreement and Executive has been
given written notice by the Board with respect to such refusal or such material
breach and Executive continues to refuse unreasonably the performance of the
duties specified or to materially breach the provisions of Paragraphs 13, 14 or
15 of this Agreement.
12. Resignation.
If Executive's employment hereunder terminates (except due to his
death), Executive agrees to resign effective immediately upon termination of the
Period of Employment all positions as an officer or director of Group or the
Company. If Executive fails to deliver such resignation, the Boards of Directors
of Employer may deem Executive to have resigned pursuant to this paragraph 12
effective upon the termination of his employment.
13. Non-Disclosure.
Executive shall not at any time after the date hereof divulge,
provide, or make assessable to anyone, other than in connection with the
business of the Company, any knowledge or information with respect to
confidential or secret processes, inventions, discoveries, improvements,
formulae, plans, materials, devises, materials, devices or ideas or other
know-how, whether patentable or not, with respect to any confidential or secret
aspects of the Company's business (including without limitation customer lists,
supplier lists and pricing arrangements with customers or suppliers or any
similar lists, arrangements or understandings, marketing plans, sales plans,
manufacturing plans, management organization information, data and other
information relating to members of the Board of Directors of Group and the
Company, management and GSCP), operating
6
<PAGE> 7
policies or manuals, business plans, financial records, packaging designs or
other financial, commercial, business or technical information relating to the
Employer or any of their subsidiaries or information designated as confidential
or proprietary that the Employer or any of their subsidiaries may receive
belonging to suppliers, customers or others who do business with the Employer or
any of their subsidiaries (collectively, "Confidential Information"); provided,
however, that Executive may disclose such information (i) at the request of any
governmental regulatory authority or in connection with an examination of
Executive by any such authority, (ii) pursuant to subpoena or other court
process, (iii) when required to do so in accordance with the provisions of any
applicable law or regulation, or (iv) if such information has otherwise been
made generally available to the public other than by reason of Executive's
breach of this paragraph 13. Upon the expiration of the Period of Employment or
upon termination of Executive's employment, Executive or his legal
representative shall promptly deliver to the Company all property relating to
the business of the Company, including all Confidential Information, and all
copies thereof that are in the possession or control of Executive.
14. Inventions.
Executive shall promptly disclose to the Company all processes,
trademarks, inventions, improvements and discoveries related to the business of
the Company (collectively, "Developments") conceived or developed by him or with
others during the Period of Employment, if such Developments were conceived or
developed during the Company's business hours or through the use of the
Company's resources. All such Developments shall be the sole and exclusive
property of the Company. Executive, upon the request of and at the Company's
expense, shall assist the Company in obtaining patents thereon and execute all
documents and other instruments necessary or proper to obtain letters patent and
to vest the Company with full title thereto.
15. Post-Employment Activities
a. Covenant Not to Compete. Following termination of Executive's
employment by the Company or Group for Cause or by Executive for any reason,
Executive shall not compete, directly or indirectly, in any area of the
continental United States, with the business conducted by the Company or any of
its subsidiaries, whether as an employee, director, agent, principal,
stockholder or limited partner owning more than 5% of any class of securities or
equity of a corporation, association or partnership, or by maintaining any other
type of interest in or affiliation with or providing any assistance whatsoever
to, any other person, firm, corporation or entity in any business located or
doing business within the continental United States which at the time of
Executive's affiliation therewith is in direct competition with any facet of the
business then being conducted by the Company or any of its subsidiaries, for a
one-year period beginning on the date of Executive's departure and terminating
on the first anniversary of the date of his departure (the "Non-Compete
Period").
b. Non-Solicitation of Employees. During (i) Executive's employment
with the Company or any of its subsidiaries or Affiliates and (ii) for a
two-year period beginning on the date of Executive's departure and terminating
on the second anniversary of the date of
7
<PAGE> 8
his departure, Executive shall not directly or indirectly induce any employee of
the Company or any of its subsidiaries to terminate employment with such entity,
and shall not directly or indirectly, either individually or as owner, agent,
employee, consultant or otherwise, employ or offer employment to any person who
is or was employed by the Company or any of its subsidiaries, unless such person
shall have ceased to be employed by such entity for a period of at least six
months.
c. Non-Solicitation of Customers and Suppliers. During (i)
Executive's employment with the Company or Group and (ii) the Non-Compete
Period, Executive shall not, directly or indirectly, interfere with the business
relationship of the Company or any of its subsidiaries, with any customer or
supplier, or prospective customer or supplier, with respect to which Executive
has had access to Confidential Information or with which Executive dealt in
connection with Executive's duties for Group, the Company or any of its
subsidiaries.
d. Injunctive Relief with Respect to Covenants. Executive
acknowledges that irreparable damage would result to Group and the Company if
the provisions of paragraphs 13, 14 and 15(a) through (c) were not specifically
enforced, and agrees that Group and the Company shall be entitled to any
appropriate legal, equitable or other remedy, including injunctive relief, a
restraining order or other equitable relief (without the requirement to post
bond) with respect to any failure of Executive to comply with the provisions of
such sections.
e. Severability; Reformation. In the event that one or more of the
provisions of this paragraph 15 shall become invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not be affected thereby. In the event any
provision of paragraph 13 or 15(a) through (c) is not enforceable in accordance
with its terms, such paragraph shall be reformed to make such paragraph
enforceable in a manner which provides the Company or any of its subsidiaries
the maximum rights permitted at law.
f. Waiver. Waiver by Group, the Company or any of its subsidiaries
of any breach or default by Executive of any of the terms of paragraphs 13, 14
or 15(a) through (c) shall not operate as a waiver of any other breach or
default, whether similar to or different from the breach or default waived. No
waiver of any provision of paragraph 13, 14 or 15(a) through (c) shall be
implied from any course of dealing between the Company or any of its
subsidiaries and Executive or from any failure by the Company or any of its
subsidiaries to assert its rights hereunder on any occasion or series of
occasions.
16. Insurance.
The Company shall have the right at its own cost and expense to
apply for and to secure in its own name, or otherwise, life, health or accident
insurance or any or all of them covering Executive, and Executive agrees to
submit to usual and customary medical examination and otherwise to cooperate
with the Company in connection with the procurement of any such insurance and
any claims thereunder.
8
<PAGE> 9
17. Notices.
All notices, requests and other communications pursuant to this
Agreement shall be in writing and shall be deemed to have been given if
delivered in person or by courier, the date delivered, and if sent by telegraph,
telex, facsimile transmission, the date sent, or if mailed by registered or
certified mail, postage prepaid, the date mailed, if sent, delivered or mailed
to the parties at the following addresses:
If to Executive:
Ned C. Jackson
34 Beethoven Drive
Wilmington, Delaware 19804
If to the Employer:
Telex Communications, Inc.
9600 Aldrich Avenue S.
Minneapolis, MN 55420
Attention: General Counsel
With a copy to:
Greenwich Street Capital Partners, Inc.
388 Greenwich Street, 36th Floor
New York, N.Y. 10013
Attention: Keith W. Abell
Any party may, by written notice to the other, change the address to
which notices to such party are to be delivered, sent or mailed.
18. No Trust Created.
Nothing contained in this Agreement and no action taken pursuant to
the provisions of this Agreement shall create or be construed to create a trust
fund of any kind. Any funds which may be set aside or provided for in this
Agreement shall continue for all purposes to be a part of the general funds of
Employer and no person other than Employer shall by virtue of the provisions of
this Agreement have any interest in such funds. To the extent that any person
acquires a right to receive payments from Employer under this Agreement, such
right shall be no greater than the right of any unsecured general creditor of
Employer.
19. Successor In Interest.
This Agreement and the rights and obligations hereunder shall be
binding upon and inure to the benefit of the parties hereto and their respective
legal representatives, and shall also bind and inure to the benefit of any
successor of Employer by merger or
9
<PAGE> 10
consolidation or any purchaser or assignee of all or substantially all of its
assets, but, except to any such successor, purchaser, or assignee of Employer,
neither this Agreement nor any rights or benefits hereunder may be assigned by
either party hereto.
20. Full Discharge of Company Obligations.
The amounts payable to Executive pursuant to paragraph 9, 10 and 11
following termination of his employment shall be in full and complete
satisfaction of Executive's rights under this Agreement but shall not affect
Executive's rights under any other agreement with Group or the Company. Such
amounts shall constitute liquidated damages with respect to any and all such
rights and claims and, upon Executive's receipt of such amounts, the Employer
shall be released and discharged from any and all liability to Executive in
connection with this Agreement or otherwise in connection with Executive's
employment with the Employer and their subsidiaries.
21. Arbitration of Disputes.
The parties agree that any controversy or claim arising out of or
relating to this Agreement, or any dispute arising out of the interpretation or
application of this Agreement, which the parties hereto are unable to resolve,
shall be finally resolved and settled exclusively by arbitration in New York,
New York by a single arbitrator under the American Arbitration Association's
Commercial Arbitration Rules then obtaining and in accordance with the
substantive laws of the State of New York. If the parties cannot agree upon an
arbitrator out of the panel, then for the sole purpose of selecting an
arbitrator, each party (the Company and Group shall be considered collectively
one party) shall choose its own independent representative and those independent
representatives shall in turn choose the single arbitrator within thirty (30)
days of the date of the selection of the first independent representative. The
parties severally recognize and consent to the jurisdiction over each of them by
the courts of the State of New York. The legal expenses of Executive shall be
reimbursed to Executive if an award is rendered in favor of Executive.
22. Governing Laws.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York.
23. Entire Agreement.
This Agreement shall constitute the entire agreement between the
parties superseding all prior agreements, and may not be modified or amended and
no waiver shall be effective unless by written document signed by both parties
hereto; provided, however, that any increase in base salary, as provided in
paragraph 5 hereof, shall become an
10
<PAGE> 11
amendment to this Agreement when approved by the Board of Directors of the
Company and recorded in the approved minutes of such meeting.
IN WITNESS WHEREOF, the parties execute this Employment Agreement as
of the date first above written.
EXECUTIVE: TELEX COMMUNICATIONS
GROUP, INC.
/s/ Ned Jackson By: /s/ Keith Abell
- - ---------------------------------- -------------------------------------
Ned Jackson Keith Abell
11
<PAGE> 12
Annex A
Calendar Year Consolidated EBITDA Targets
<TABLE>
<CAPTION>
Year Consolidated EBITDA
- - ---- -------------------
<S> <C>
2000 86,900,000
2001 98,400,000
2002 109,700,000
</TABLE>
<PAGE> 1
SCHEDULE 12(A)
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS)
<TABLE>
<CAPTION>
NEW BASIS OF ACCOUNTING
--------------------------------------------------
NINE-MONTH FISCAL YEAR PERIOD FROM
PERIOD ENDED ENDED FEBRUARY 11,
DECEMBER 31, MARCH 31, 1997, THROUGH
1998 1998(b) MARCH 31, 1997
------ ----------- --------------
<S> <C> <C> <C>
Income (loss) before income taxes..................... $ (3.8) $ (30.2) $ (2.8)
Interest expense...................................... 27.3 37.9 5.0
Interest portion of rent expense...................... 0.6 0.9 0.3
------ ------ ------
Adjusted income before income
taxes................................................. $ 24.1 $ 8.6 $ 2.5
======= ======= =======
Fixed charges:
Interest expense................................... $ 27.3 $ 37.9 $ 5.0
Interest portion of rent
expense............................................ 0.6 0.9 0.3
------- ------- -------
Total fixed charges................................... $ 27.9 $ 38.8 $ 5.3
======= ======= =======
Ratio of earnings to fixed
charges(1)............................................ 0.9 0.2 0.5
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR BASIS OF ACCOUNTING
-------------------------------------------------
PERIOD FROM YEAR ENDED
MARCH 1, FISCAL DAY OF
1996, THROUGH THE LAST FEBRUARY
FEBRUARY 10, 1997 1996 1995 1994
----------------- -------- -------- ------
<S> <C> <C> <C> <C>
Income (loss) before income taxes...................... $ 14.5 $ 17.7 $ 19.5 $ 19.6
Interest expense....................................... -- -- -- --
Interest portion of rent expense....................... 0.6 0.6 0.5 0.5
------ ------ ------ ------
Adjusted income before income
taxes................................................. $ 15.1 $ 18.3 $ 20.0 $ 20.1
======= ======= ======= =======
Fixed charges:
Interest expense................................... $ -- $ -- $ -- $ --
Interest portion of rent
expense............................................ 0.6 0.6 0.5 0.5
------- ------- ------- -------
Total fixed charges................................... $ 0.6 $ 0.6 $ 0.5 $ 0.5
======= ======= ======= =======
</TABLE>
(1) The ratio of earnings to fixed charges is not meaningful for any periods
prior to February 11, 1997 due to the absence of interest expense in the
Company's consolidated financial statements.
<PAGE> 1
SCHEDULE 12(B)
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
COMPUTATION OF EBITDA TO INTEREST EXPENSE
(IN MILLIONS)
<TABLE>
<CAPTION>
NEW BASIS OF ACCOUNTING
----------------------------------------------
PERIOD FROM
NINE-MONTH FISCAL YEAR FEBRUARY 11,
PERIOD ENDED ENDED THROUGH
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1997
-------------------- ---------------------- ----------------------
<S> <C> <C> <C>
EBITDA................................ $ 32.4 $ 26.2 $ 3.1
Interest expense...................... 27.3 37.9 5.0
Ratio of EBITDA to interest
expense............................... 1.2 0.7 0.6
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR BASIS OF ACCOUNTING
------------------------------------------------------------
PERIOD FROM
MARCH 1, 1996 FISCAL YEAR ENDED
THROUGH THE LAST DAY OF
FEBRUARY 10, FEBRUARY
1997 1996 1995
--------------------- ------------------ -------------------
<S> <C> <C> <C>
EBITDA................................ $ 19.6 $ 22.8 $ 24.3
Interest expense...................... -- -- --
Ratio of EBITDA to interest
expense............................... -- -- --
</TABLE>
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated March 19, 1999 included in Form 10-K. It should be noted that we have not
audited any financial statements of the company, subsequent to December 31,
1998 or performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,431
<SECURITIES> 0
<RECEIVABLES> 56,851
<ALLOWANCES> 2,925
<INVENTORY> 67,758
<CURRENT-ASSETS> 135,937
<PP&E> 48,275
<DEPRECIATION> 0
<TOTAL-ASSETS> 273,276
<CURRENT-LIABILITIES> 70,053
<BONDS> 337,703
0
0
<COMMON> 0
<OTHER-SE> (130,087)
<TOTAL-LIABILITY-AND-EQUITY> 273,276
<SALES> 246,342
<TOTAL-REVENUES> 246,342
<CGS> 157,246
<TOTAL-COSTS> 68,297
<OTHER-EXPENSES> (2,719)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,328
<INCOME-PRETAX> (3,830)
<INCOME-TAX> 1,222
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,052)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
