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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 333-27341
TELEX COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 38-1853300
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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9600 ALDRICH AVENUE SOUTH, BLOOMINGTON, MINNESOTA 55420
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (952) 884-4051
Securities registered pursuant to Section 12(b) of the Act:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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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, 2000 was $0.
As of February 28, 2000 there were 110 shares of Telex Communications, Inc.
Common Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TABLE OF CONTENTS
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PART I ............................................................ 1
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 9
ITEM 3. LEGAL PROCEEDINGS........................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 10
PART II ............................................................ 11
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED 11
STOCKHOLDER MATTERS.........................................
ITEM 6. SELECTED FINANCIAL DATA..................................... 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 12
AND RESULTS OF OPERATIONS...................................
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 22
RISK........................................................
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 23
AND FINANCIAL DISCLOSURE....................................
PART III ............................................................ 24
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS............................ 24
ITEM 11. EXECUTIVE COMPENSATION...................................... 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 30
MANAGEMENT..................................................
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 32
PART IV ............................................................ 34
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 34
8-K.........................................................
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PART I
ITEM 1. BUSINESS
OVERVIEW:
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, to a lesser extent, 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, wireless local area networks ("LAN") and
satellite-based mobile phone antennas ("SBA"), personal computer speech
recognition and speech dictation microphone 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.
Unless otherwise indicated, all references in this Form 10-K to Fiscal 1999
are to the twelve months ended December 31, 1999 and all references to Fiscal
1998 are to the fiscal year ended March 31, 1998. Fiscal 1998, which resulted
from the Company's 1998 change in fiscal year end from the last day of February
to March 31, includes the results for the twelve months ended March 31, 1998.
Effective December 31, 1998, the Company changed its fiscal year end from March
31 to December 31. Due to this change, the Company reported audited financial
results for a short fiscal period beginning April 1, 1998 and ending on December
31, 1998. 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 (952) 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. The words "believe," "anticipate," "project," "plan," "expect,"
"intend," "will likely result," "will continue," and similar expressions
identify 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, beliefs or expectations
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." The Company is under no
obligation to update any forward-looking statements to the extent it becomes
aware that they will not be achieved for any reason.
SEGMENT INFORMATION:
OVERVIEW
The Company has two business segments: Professional Sound and Entertainment
and Multimedia/Audio Communications. Financial information for the Company's two
business segments for the twelve months
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ended December 31, 1999, the nine-month period ended December 31, 1998, and
Fiscal 1998 (the period from April 1, 1997 through March 31, 1998) is set forth
in note 13 to the Consolidated Financial Statements of the Company included
elsewhere herein.
PROFESSIONAL SOUND AND ENTERTAINMENT
Professional Sound and Entertainment consists of five lines of business
within the overall professional audio market: (i) Fixed Installation, or
permanently installed sound systems; (ii) Professional Music Retail, or sound
products used by professional musicians and sold principally through retail
channels; (iii) Concert/ Recording/Broadcast, or sound products used in
professional concerts, recording projects and radio and television broadcast;
(iv) Broadcast Communications Systems, or 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 (v) Sound Reinforcement or 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 and 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 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.
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 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. Sales are also driven by demand for
smaller and lighter weight products that 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. 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.
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. 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 produces a broad line of
broadcast communications equipment for end markets such as sports and
broadcasting. The Company's smallest system, the Telex(R) Audiocom(R) modular
intercom system, is used by theaters, small sporting arenas, network affiliates
and independent cable channels for their communications needs. Typically, these
systems are used to link 20 to 30 people so they can communicate during an event
or performance. The Company's middle market offering,
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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 Company also provides wired and wireless communication systems and
related components to the National Football League (the "NFL") as well as to
high school and college teams and the World and Canadian Football League. In
1996, the Company began providing professional, college and high school coaches
with an encrypted wireless intercom system, which allows the head coach to
communicate confidentially with 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 system. 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.
MULTIMEDIA/AUDIO COMMUNICATIONS
Multimedia/Audio Communications segment targets nine principal product
markets: (i) computer audio, (ii) audio duplication, (iii) multimedia
presentation/training, (iv) aviation communications/other applications, (v)
wireless LAN and SBA systems, (vi) talking book players, (vii) wireless
communications, (viii) hearing aids and (ix) wireless assistive listening
systems.
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 LAN providers, public safety and law
enforcement groups (police, fire departments, emergency services, CIA, FBI and
the Secret Service), 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.
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, including Compaq,
Gateway, Hewlett-Packard and IBM, as well as dozens of other component and
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original equipment manufacturers (OEMs). 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 revenue in the computer
audio market is 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.
Audio 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. The current product line is comprised of four
models: the Replica(R) and the Copyette(TM), simple portable units, the new
XGEN(TM) series, a duplicator that expands to sixty-seven copy positions with
adjustable volume controls, and the EDAT system, which allows the download of
information from a PC hard drive to produce analog cassette copies at high
speed. A complementary product, Zing(TM), is used to digitize multiple audio
channels from analog sources at high speed. 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. The Company is exiting the LCD projector
product line in 2000 because of significant decline in profitability due to
continued extreme downward price pressure.
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
and private pilots. The Company's aviation communications products are known for
their design innovation, lightweight construction, technological strength and
product value. The Company uses its ANR(TM)(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 Systems. The Company entered the wireless LAN market
in 1994 to capitalize on the Company's antenna design and communications
technology expertise. 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. In 1998 the Company entered the SBA market,
leveraging off its significant antenna expertise, to penetrate an emerging
market. The Company provides antennas to Telit, an Italy-based company, and to
Qualcomm, a U.S.-based company, two of the three companies manufacturing mobile
phones for the Globalstar consortium of low earth orbiting satellite
communications systems.
Talking Book Players. The Company produces a unique cassette player that
is sold to the Library of Congress ("LOC") for use in its 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. In April 1998, the Company entered into a new contract
with the LOC with a maximum term of five years. 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)
and commercial truck drivers. The Company believes that it has established a
reputation within these markets for providing reliable communications products,
which is the key requirement for most users. Many of the
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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 for 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. Its Threshold Compression(TM) (patent pending) 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 the compression technology
and advanced design offer superior sound as well. The Company also offers a
significantly improved soft shell hearing aid. Sold under the SoftWear(TM) and
Sound Advantage(TM) names, these hearing aids are composed of a new material
that, due to its flexibility, is more comfortable than hard plastic based molds.
Wireless Assistive Listening Systems. The Company also produces and
distributes wireless assistive listening systems, such as auditory trainers and
personal assistive listening devices for the hearing impaired, which help the
user in environments with high levels of background noise and poor building
acoustics. Auditory trainers allow the user to hear directly from a sound
source, such as a teacher, via wireless FM transmitters. Personal assistive
listening devices amplify a certain source, such as a speaker. The Company
serves the educational and consumer marketplaces for wireless assistive
listening systems by providing cost-effective, technologically differentiated,
and functionally superior products maintained by excellent customer service. The
Company's principal focus is on the educational market, where many 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. For the twelve months ended December 31, 1999, approximately
42% of the Company's net revenue 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.
For the twelve months ended December 31, 1999, the Company's total net
sales into each of its principal geographic regions were as follows: United
States--$199.9 million, Germany--$34.8 million, Japan--$19.2 million,
Canada--$12.9 million, China--$14.4 million, and other foreign countries--$62.4
million.
See note 13 to the Consolidated Financial Statements of the Company
included elsewhere herein for further information regarding the Company's
international operations.
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PRODUCT DEVELOPMENT
The Company believes that it is one of the most active developers of new
products in its industry. The Company has several product development projects
planned or currently in progress that 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 implemented a number of strategic initiatives to
identify new market opportunities and to reduce its product development cycle in
order to facilitate the timely introduction of new and enhanced products. The
Company maintains close relationships with its institutional customers to
develop products that meet their requirements. The Company believes this has
enabled it to design new products offering enhanced features, product quality
and reliability, and lower product costs.
For the twelve months ended December 31, 1999, the nine-month period ended
December 31, 1998, and Fiscal 1998, engineering expenses for product development
were $14.9 million, $11.2 million, and $17.3 million, respectively.
MANUFACTURING
The Company manufactures most of the products it sells and most of the
active acoustic components that they contain in twelve 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 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
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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:
<TABLE>
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- Adaptive Compression(R) - Midas(R)
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- Audiocom(R) - Caramate(R)
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- ClassMate(R) - Dynacord(R)
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- Electro-Voice(R) - Klark Teknik(R)
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- Klark-Teknik(R) - ProStar(R)
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- Manifold Technology(R) - SoundMate(R)
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- Road King(R) - University Sound(R)
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- Telex(R)
- - ---------------------------------------------------------------------------------------------
</TABLE>
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.
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 the 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, 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 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 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. No single
supplier accounts for 10% or more of the Company's total cost of supplies.
7
<PAGE> 10
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% 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 twelve months ended December 31, 1999 comprised 2.8% of the total supplies
purchased by the Company. The Company believes that it could locate alternative
sources of supply for these components. Doing so, however, could result in
increased development costs and product shipment delays.
The Company has several other sole-source suppliers, though none of the
suppliers accounts for a significant portion of Company's purchases. Although
the Company believes that with adequate notice it can secure, if necessary,
alternate suppliers, its inability to do so could result in increased
development costs and product shipments 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,
1999, the Company had a backlog of approximately $36.8 million compared to
approximately $39.4 million as of December 31, 1998.
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 Industries, Inc. ("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.
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 notices of noncompliance. 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. In
December 1997, the Company entered into an Administrative Order on Consent with
the U.S. Environmental Protection Agency 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, 1999, 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 $1.5 million
had been incurred. See note 12 to the Consolidated Financial Statements of the
Company included elsewhere herein.
8
<PAGE> 11
The Company estimates that it will incur, in Fiscal 2000, approximately
$150,000 of environmental 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.
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
Mark IV 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 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.
EMPLOYEES
As of December 31, 1999, the Company employed 2,978 persons worldwide, of
which 2,899 were full-time employees.
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. PROPERTIES
The Company's principal manufacturing, sales, administrative, product
development, marketing, distribution and service facilities are described in the
table below. In addition the Company has other sales facilities throughout the
world. Management believes that the Company's plants and facilities are
maintained in good condition and, except as noted below, 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(A)
- - -------- ------------ ------------- ----------------
<S> <C> <C> <C>
UNITED STATES:
Bloomington,
Minnesota(b)........ Owned 50,000 Corporate Headquarters/Marketing/
Administration/Product Development/Sales
Blue Earth,
Minnesota........... Owned 150,000 Manufacturing/Distribution
Buchanan, Michigan.... Owned 28,500 Product Development
Buchanan, Michigan.... Owned 144,000 Manufacturing/Sales/Marketing/Administration
Distribution/Service
Glencoe, Minnesota.... Owned 100,000 Manufacturing
Lincoln, Nebraska..... Owned 120,000 Manufacturing/Distribution/Product
Development/Sales
Newport, Tennessee.... Owned 49,000 Manufacturing
Rochester,
Minnesota........... Owned 30,000 Manufacturing/Distribution
Sevierville,
Tennessee........... Owned 44,000 Manufacturing
Austin, Texas(c)...... Leased 95,000 Manufacturing/Distribution
Burbank, California... Leased 2,500 Sales
Newport, Tennessee.... Leased 40,000 Distribution
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
SIZE
LOCATION OWNED/LEASED (SQUARE-FEET) FACILITY TYPE(A)
- - -------- ------------ ------------- ----------------
<S> <C> <C> <C>
INTERNATIONAL:
Kidderminster,
England............. Owned 35,000 Manufacturing/Sales/Marketing/Administration/Product
Development/Service
Straubing, Germany.... Owned 95,000 Manufacturing/Sales/Marketing/Administration/Product
Development/Distribution/Service
Hertfordshire,
England............. Leased 700 Sales
Hermosillo, Sonora,
Mexico.............. Leased 32,500 Manufacturing
Hohenwarth, Germany... Leased 7,600 Manufacturing
Ipsach, Switzerland... Leased 3,400 Sales/Marketing/Administration/Distribution/Service
Kowloon, Hong Kong.... Leased 18,300 Sales/Marketing/Administration/Distribution/Service
London, England....... Leased 11,500 Sales/Marketing/Administration/Distribution/Service
Nagoya, Japan......... Leased 500 Sales/Marketing
Osaka, Japan.......... Leased 1,200 Sales/Marketing
Paris, France......... Leased 3,500 Sales/Marketing/Administration/Distribution/Service
Singapore............. Leased 2,300 Sales/Distribution/Service
Straubing, Germany.... Leased 10,700 Warehouse
Sydney, Australia..... Leased 8,000 Sales/Marketing/Administration/Distribution/Service
Tokyo, Japan.......... Leased 14,800 Sales/Marketing/Administration/Distribution/Service
Toronto, Ontario,
Canada.............. Leased 4,000 Sales/Distribution
</TABLE>
- - ---------------
(a) The Rochester, Minnesota facility is dedicated to the Multimedia/Audio
Communications business segment. The Austin, Texas, the Burbank, California,
the Hohenwarth, Germany, the two Buchanan, Michigan, and the two Newport,
Tennessee facilities are dedicated to the Professional Sound and
Entertainment business segment. All other facilities are used for both of
the Company's business segments.
(b) In March 2000, the Company entered into a ten-year operating lease
commitment, with three five-year renewal options, for its new Corporate
Headquarters in Burnsville, Minnesota, with a limited liability company in
which the Company has a 50% interest (see note 17 to the Consolidated
Financial Statements of the Company included elsewhere herein). The Company
anticipates selling its existing Corporate Headquarters by June 2000.
(c) The Company has given notice of its intention to terminate this lease
effective as of August 31, 2000. The Company intends to relocate the
production from this facility to a 202,000 square foot facility, acquired in
March 2000, in Morrilton, Arkansas (see note 17 to the Consolidated
Financial Statements of the Company included elsewhere herein).
The Company is committed to achieving ISO 9000 Certification at all its
principal manufacturing facilities. The Sevierville, Tennessee, the Glencoe,
Minnesota, the Kidderminster, England and the 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.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is a party to various legal actions in the
normal course of business. The Company believes that it is not currently a party
in any litigation which, if adversely determined, would have a material adverse
effect on the 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 the
Company during the fourth quarter of the fiscal year ended December 31, 1999.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All of the Company's outstanding common stock is held by Holdings. There is
no established public trading market for the Common Stock of the Company or
Holdings.
Holdings has not paid dividends on its Common Stock and the ability of
Holdings and the Company to pay dividends on their respective common stock is
restricted under the Company's Senior Secured Credit Facility (as defined
herein) and the indentures governing the 11% Senior Subordinated Notes due March
15, 2007 (the "EVI Notes") and the 10 1/2% Senior Subordinated Notes due May 1,
2007 (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 indebtedness.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1999 and for the
twelve months ended December 31, 1999, the nine-month period ended December 31,
1998, and the fiscal year ended March 31, 1998, 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 1996, for the period March 1, 1996 through February 10, 1997 and for
the period from February 11, 1997 through March 31, 1997 are derived from
audited consolidated financial statements of the Company which are not included
herein. The Merger (as defined herein) has been accounted for essentially as a
pooling of interests from May 6, 1997, the date on which Old EVI (as defined
herein) and Old Telex (as defined herein) came under common control, and the
selected historical financial data below for the fiscal year ended March 31,
1998 accordingly includes the results of operations of Old Telex from May 6,
1997. The results of operations and balance sheet data of Old Telex are not
reflected in the data for periods prior to May 6, 1997.
<TABLE>
<CAPTION>
PREDECESSOR BASIS OF
ACCOUNTING (A) NEW BASIS OF ACCOUNTING (B)
--------------------------- ---------------------------------------------------------
PERIOD FROM PERIOD FROM
MARCH 1, FEBRUARY 11,
FISCAL YEAR 1996, 1997, FISCAL YEAR NINE-MONTH TWELVE MONTHS
ENDED THROUGH THROUGH ENDED PERIOD ENDED ENDED
FEBRUARY 29, FEBRUARY 10, MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998(C) 1998 1999
------------ ------------ ------------ ----------- ------------ -------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................... $195.5 $177.1 $28.3 $333.0 $246.3 $343.7
Cost of sales........................... 123.9 112.1 18.0 205.7 157.2 219.4
------ ------ ----- ------ ------ ------
Gross profit............................ 71.6 65.0 10.3 127.3 89.1 124.3
Engineering............................. 8.5 8.0 1.3 17.3 11.2 14.9
Selling, general and administrative..... 44.4 41.6 6.4 81.7 53.7 86.2
Restructuring charges................... -- -- -- 6.2 -- (2.1)
Corporate charges....................... -- -- 0.1 2.2 1.3 1.7
Amortization of goodwill and other
intangibles........................... 1.0 0.9 0.2 5.4 2.1 12.0
------ ------ ----- ------ ------ ------
Operating profit........................ 17.7 14.5 2.3 14.5 20.8 11.6
Interest expense........................ -- -- 5.0 37.9 27.3 36.7
Recapitalization expense................ -- -- -- 6.7 -- --
Other (income) expense.................. (0.4) -- 0.1 0.1 (2.7) (6.7)
------ ------ ----- ------ ------ ------
Income (loss) before income taxes and
extraordinary item.................... 18.1 14.5 (2.8) (30.2) (3.8) (18.4)
Provision (benefit) for income taxes.... 7.1 6.2 (1.1) 0.1 1.3 4.0
------ ------ ----- ------ ------ ------
Income (loss) before extraordinary
item.................................. 11.0 8.3 (1.7) (30.3) (5.1) (22.4)
Extraordinary loss from early retirement
of debt............................... -- -- -- 20.6 -- --
------ ------ ----- ------ ------ ------
Net income (loss)....................... $ 11.0 $ 8.3 $(1.7) $(50.9) $ (5.1) $(22.4)
====== ====== ===== ====== ====== ======
FINANCIAL DATA:
EBITDA (d).............................. $ 23.2 $ 19.6 $ 3.2 $ 26.2(e) $ 32.4(f) $ 42.8(g)
EBITDA margin (h)....................... 11.9% 11.1% 11.3% 7.9% 13.2% 12.5%
Capital expenditures.................... $ 3.7 $ 3.3 $ 0.4 $ 8.5 $ 5.2 $ 8.4
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
NEW BASIS OF ACCOUNTING(B)
------------------------------------------------------
AS OF
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................ $ 83.9 $ 69.9 $ 63.5 $ 49.1
Total assets............................... 210.8 300.3 273.3 262.0
Total debt................................. 118.7 353.3 337.7 343.9
Shareholder's equity (deficit)............. 55.1 (125.8) (130.1) (154.5)
</TABLE>
NOTES TO SELECTED HISTORICAL FINANCIAL DATA
(a) Certain previously reported amounts have been reclassified to conform to
1999 presentation. These reclassifications had no impact on the previously
reported operating profit, net income (loss), EBITDA or shareholder's
deficit. Variable selling costs, such as freight and commissions paid to
sales representatives, previously included in cost of sales, are now
included in selling, general and administrative expenses. Additionally,
depreciation expense, previously combined with and reported as a separate
line item on the Statement of Operations as "depreciation and amortization,"
is now allocated to cost of sales, engineering expense, and selling, general
and administrative expense.
(b) The 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 (as defined herein)
under the purchase method of accounting.
(c) 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.
(d) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. EBITDA is included because management
understands that such information is considered by certain investors to be
an additional basis on which to evaluate the Company's ability to pay
interest, repay debt and make capital expenditures. Excluded from EBITDA are
interest expense, 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.
(e) The Fiscal 1998 EBITDA, as presented, includes non-cash compensation charges
for stock options associated with the Recapitalization (as defined herein),
non-recurring charges for management cash bonus, and restructuring charges
and excludes the charge for the non-cash impairment loss included in
amortization expenses.
(f) The nine-month period ended December 31, 1998 EBITDA includes merger-related
charges, severance charges for the former CEO and gain on the sale of the
Gauss business.
(g) The twelve months ended December 31, 1999 EBITDA includes merger-related
charges, the loss on the sale of discontinued product lines, revenue
attributed to past due royalty fees from a licensee for the use of the Altec
Lansing trademark and reversal of excess restructuring charges and excludes
the non-cash goodwill write-off attributed to the sale of certain product
lines and the non-cash impairment loss included in amortization expense.
(h) Represents EBITDA as a percentage of net sales.
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 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
12
<PAGE> 15
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; (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 reports and filings with the Securities and Exchange Commission.
The Company's consolidated financial statements for periods prior to May 6,
1997, the date on which EV International, Inc. (together with its subsidiaries
and any predecessor companies in respect of periods prior to the Merger (as
defined herein), "Old EVI") and Telex Communications, Inc. (together with its
subsidiaries and any predecessor companies in respect of periods prior to the
Merger, "Old Telex") came under common control, reflect the financial position,
results of operations and cash flows of Old EVI. The Merger has 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 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 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.
Unless otherwise indicated, all references in this Form 10-K to Fiscal 1996
are to the fiscal year ended on the last day of February 1996, and all
references to Fiscal 1997 are for the period beginning March 1, 1996 and ending
on February 10, 1997. In connection with the Merger, the Company changed its
fiscal year end, effective as of March 31, 1998, from the last day of February
to March 31; accordingly, unless otherwise indicated, all references to Fiscal
1998 are for the twelve months ended March 31, 1998. Effective December 31,
1998, the Company changed its fiscal year end from March 31 to December 31;
accordingly the financial results for the transition period are for the period
beginning on April 1, 1998 and ending on December 31, 1998. 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 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 Greenwich Street Capital Partners, L.P. ("GSCP") and
certain affiliated investors acquired from Mark IV and one of its subsidiaries
all of the issued and outstanding capital stock of 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 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
13
<PAGE> 16
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 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 diluted basis) were retained by
such managers. In connection with the Recapitalization, Old Telex completed (i)
a tender offer (the "Tender Offer") to repurchase all of Old Telex's then
outstanding 12% Senior Notes due 2004, in aggregate principal amount of $100.0
million, for $118.3 million (including premium and consent fees along with
accrued interest), and (ii) a solicitation of consents with respect to certain
amendments to the indenture pursuant to which such notes were issued. The
Recapitalization, the financing thereof (including the issuance by Old Telex of
10 1/2% Senior Subordinated Notes due 2007 (the "Existing Telex Notes") to Chase
Securities, Inc., Morgan Stanley & Co. Incorporated and Smith Barney, Inc.), the
Tender Offer and the payment of the related fees and expenses are herein
referred to as the "Recapitalization Transaction."
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 Merger. 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
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<PAGE> 17
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 Merger has
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 Merger, 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 Merger, 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
Merger were $1.7 million, including the $0.4 million paid at closing. The EVI
Notes remain outstanding following the Merger.
The Acquisition Transactions, the Recapitalization Transaction, and the
Merger are referred to herein collectively as the "Transactions."
OVERVIEW
The Company, formed as a result of the February 2, 1998 merger of Old Telex
and Old EVI (see "The Merger"), 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, to a
lesser extent, 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, wireless LAN and SBA systems,
personal computer speech recognition and speech dictation microphone systems and
hearing aids and wireless assistive listening devices.
Subsequent to the Merger, the Company has reorganized its business into two
business segments: Professional Sound and Entertainment and Multimedia/Audio
Communications. The Merger 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 40% of the Company's sales are made internationally, in over 80
countries. The Company conducts its foreign sales through its foreign
subsidiaries in Germany, Japan, Hong Kong, the United Kingdom, Canada,
Australia, Switzerland, Singapore, Mexico 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 elsewhere herein. The
Company has generally been able to effect price increases equal to any
inflationary increase in costs.
The Company maintains assets and/or operations in a number of foreign
jurisdictions, the most significant of which are Germany, the United Kingdom,
Japan, Singapore, and Hong Kong. In addition, the Company conducts business in
local currency in many countries, the most significant of which are Germany, the
United Kingdom, Japan, Singapore, Hong Kong, Canada, Australia, Switzerland and
France. Exposure to U.S. dollar/German mark and U.S. dollar/British pound
exchange rate volatility is mitigated to some extent by the Company's ability to
source its production needs with existing manufacturing capacity in Germany and
Great Britain, and the exposure to U.S. dollar/Japanese yen exchange rate
volatility is to some extent mitigated by sourcing products denominated in yen
from Japan or through contractual provisions in sales agreements with certain
customers. Nevertheless, the Company has a direct and continuing exposure to
both positive and negative foreign currency movements.
The Company reports the foreign exchange gains or losses on transactions as
part of other (income) expense. Gains and losses on translation of foreign
currency denominated balance sheets are classified as currency translation
adjustments and are included as part of shareholder's deficit The Company's
predecessor financial statements (i.e., Old EVI's financial statements) excluded
realized foreign currency
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<PAGE> 18
transaction gains and losses since these were viewed as an integral part of Mark
IV's consolidated risk management.
RESULTS OF OPERATIONS
TWELVE MONTHS AND NINE-MONTH PERIOD ENDED DECEMBER 31, 1999 COMPARED TO
NINE-MONTH PERIOD ENDED DECEMBER 31, 1998
Effective December 31, 1998, the Company changed its fiscal year end from
March 31 to December 31. Due to this change, the Company reported audited
consolidated financial results for a short fiscal period beginning April 1, 1998
and ending on December 31, 1998. The management's discussion and analysis that
follows compares the audited results for the twelve months ended December 31,
1999 and, where appropriate, the unaudited results for the nine-month period
ended December 31, 1999 to the audited results for the nine-month period ended
December 31, 1998.
Net Sales. The Company's net sales increased $97.4 million from $246.3
million for the nine-month period ended December 31, 1998 to $343.7 million for
the twelve months ended December 31, 1999. The Company's net sales increased
$17.9 million, or 7.3 percent, from $246.3 million for the nine-month period
ended December 31, 1998 to $264.2 million for the nine-month period ended
December 31, 1999. Both the Professional Sound and Entertainment and the
Multimedia/Audio Communication business segments contributed to the sales
increase.
Net sales in the Company's Professional Sound and Entertainment segment
increased $4.5 million, or 2.9 percent, from $152.8 million for the nine-month
period ended December 31, 1998 to $157.3 million for the nine-month period ended
December 31, 1999. Net sales for the Multimedia/Audio Communication business
segment increased $13.4 million, or 14.3 percent, from $93.5 million for the
nine-month period ended December 31, 1998 to $106.9 million for the nine-month
period ended December 31, 1999. The sales increase in both the segments is
attributed primarily to new products introduced in 1999, offset to some extent
by phased-out products, and to improving economies in many of the geographic
regions.
Gross Profit. The Company's gross profit increased $35.2 million from
$89.1 million for the nine-month period ended December 31, 1998 to $124.3
million for the twelve months ended December 31, 1999. The Company's gross
profit increased $6.5 million, or 7.3 percent, from $89.1 million for the
nine-month period ended December 31, 1998 to $95.6 million for the nine-month
period ended December 31, 1999. As a percentage of sales, the gross margin rate
of 36.2 percent for the twelve months ended December 31, 1999 remained unchanged
from the nine-month period ended December 31, 1998. The Company achieved
significant manufacturing cost reductions in 1999, which were offset by lower
gross margins on phased-out products and promotional pricing on certain newly
introduced products.
Engineering. The Company's engineering expenses increased $3.7 million
from $11.2 million for the nine-month period ended December 31, 1998 to $14.9
million for the twelve months ended December 31, 1999. The Company's engineering
expenses of $11.2 million for the nine-month period ended December 31, 1999
remained relatively flat compared with $11.2 million for the nine-month period
ended December 31, 1998. The Company continues to benefit from the restructuring
implemented in Fiscal 1998.
Selling, General and Administrative. The Company's selling, general and
administrative expenses increased $32.5 million from $53.7 million for the
nine-month period ended December 31, 1998 to $86.2 million for the twelve months
ended December 31, 1999. The Company's selling, general and administrative
expenses increased $14.1 million, or 26.3 percent, from $53.7 million for the
nine-month period ended December 31, 1998 to $67.8 million for the nine-month
period ended December 31, 1999. The increase is attributed to certain charges
described below, to general inflation, to spending on information technology,
primarily to enhance the information reporting for business decisions, and to
increases in salary and incentive compensation.
Included in the selling, general and administrative expenses for the
nine-month period ended December 31, 1999 are charges of $5.5 million related to
legal fees and settlement costs attributed to a lawsuit filed by the Company's
former CEO and $0.5 million of additional depreciation attributed to the write
off of certain fixed assets. Included in the selling, general and administrative
expenses for the nine-month period ended December 31, 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.
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<PAGE> 19
Corporate Charges. Corporate charges of $1.7 million for the twelve months
ended December 31, 1999 represent fees to GSCP for consulting and management
services provided under a management and services agreement. New covenants with
lenders were signed in October 1999 that require the Company to suspend payment
of the management fees until certain financial conditions are met. When these
financial conditions are met, all current payments and payments in arrears are
due. The Company is recording a liability for such future payments.
Amortization of Goodwill and Other Intangibles. Included in amortization
of goodwill and other intangibles for the twelve months ended December 1999 are
a $2.9 million charge for write-off of goodwill attributed to certain
discontinued products, and a $6.3 million charge attributed to impairment loss
on certain long-lived assets (see note 6 to the Consolidated Financial
Statements of the Company included elsewhere herein).
Restructuring Charges. In the fourth quarter of 1999, the Company reversed
an excess of $2.1 million of the previously provided $6.2 million restructuring
reserve, retaining a reserve of $0.1 million related to future estimated costs
to be incurred for environmental and employee related transactions (see note 3
to the Consolidated Financial Statements of the Company included elsewhere
herein).
Other (income) expense. The Company recorded $6.7 million of other income
in the twelve months ended December 31, 1999. The significant components of
other income were $0.9 million of income attributed to the Company's insurance
claim for business interruption related to a facility destroyed in a fire, $7.0
million attributed to royalty income, of which $6.0 million is attributed to the
estimated shortfall of past royalty fees due to the Company (see note 17 to the
Consolidated Financial Statements of the Company included elsewhere herein),
$0.5 million loss on foreign exchange and $0.3 million loss attributed to the
sale of certain product lines and facilities.
Interest (income) expense. The Company's interest expense increased $9.4
million from $27.3 million for the nine-month period ended December 31, 1999 to
$36.7 million for the twelve months ended December 31, 1999. Interest expense
was relatively unchanged for the nine-month periods, increasing from $27.3
million for the nine-month period ended December 31, 1998 to $27.6 million for
the nine-month period ended December 31, 1999. The increase in interest expense
is attributed to the increase in amortization of deferred finance charges
incurred for amendment of the Senior Secured Credit facility.
Income Taxes. The Company's income tax benefit, excluding the income tax
provision related to the net deferred tax asset valuation allowance and $2.0
million attributed to a provision for a currently unsettled dispute with the
IRS, was 13.3% of the pretax loss for the twelve months ended December 31, 1999,
compared with 34.8% for the nine-month period ended December 31, 1998. The
decrease in the effective tax rate is principally due to the nondeductibility of
certain costs related to the write-off of goodwill and other intangible assets.
As of December 31, 1999, the Company has provided a reserve of $6.8 million for
tax liability, penalties, and accrued interest related to the unsettled dispute
with the IRS for taxable years 1990 through 1995. (See note 8 to the
Consolidated Financial Statements of the Company included elsewhere herein).
The Company has established a net deferred tax valuation allowance of $23.4
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 carry forward period. Management considered
these factors in reaching its conclusion as to the adequacy of the valuation
allowance for financial reporting purposes.
NINE-MONTH PERIOD ENDED DECEMBER 31, 1998 COMPARED TO NINE MONTHS AND FISCAL
YEAR ENDED MARCH 31, 1998
Effective December 31, 1998, the Company changed its fiscal year end from
March 31 to December 31. Due to this change, the Company reported audited
consolidated financial results for a short fiscal period beginning April 1, 1998
and ending on December 31, 1998. The management's discussion and analysis that
follows compares the audited 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 for the nine-month period beginning July 1, 1997
and ending 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
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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.
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. 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 31, 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.
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. 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. 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
Merger-related restructuring 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. The Company's 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.
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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. 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 Merger-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 Merger which reduced the effective tax loss
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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999 the Company had cash and cash equivalents of $3.2
million compared to $3.4 million at December 31, 1998. The Company's principal
sources of funds for the twelve months ended December 31, 1999 consisted of $6.9
million of proceeds from the sale of businesses and facilities, and $17.1
million of net borrowings under revolving credit lines. The Company's principal
uses of funds for the twelve months ended December 31, 1999 consisted of $4.1
million for operating activities, $8.4 million for capital expenditures and
$10.8 million for retirement of debt.
The Company's investing activities consist mainly of capital expenditures
to maintain facilities, to acquire machines or tooling, to update certain
manufacturing processes, to update information systems and to improve
efficiency. The Company's ability to make capital expenditures is subject to
certain restrictions under its Senior Secured Credit Facility.
The Company's consolidated indebtedness increased $6.2 million from $337.7
million at December 31, 1998 to $343.9 million at December 31, 1999. Increases
in borrowings under the Revolving Credit Facility were partially offset by a
reduction of $10.8 million in consolidated Term Loan indebtedness mandated by
the terms of the Senior Secured Credit Facility.
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
Transaction 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 $6.0 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, 1999, $9.0 million of the Company's $96.2 million
remaining under the Term Loan Facility is payable in the next 12 months, with
the balance payable as described below. In addition, the Company had $19.5
million outstanding under the Revolving Credit Facility, and $3.2 million
outstanding under the foreign working capital lines. Net availability at
December 31, 1999 under the Revolving Credit Facility, computed by deducting
approximately $3.6 million of open letters of credit and applying applicable
borrowing base limitations, totaled $1.9 million. Net availability at December
31, 1999 under such foreign working capital lines totaled $2.8 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 twelve months ended December 31, 1999 was 8.6%.
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 ($34.5 million of which was outstanding at December 31,
1999), of $8.5 million, $11.0 million, and $15.0 million in 2000, 2001, and 2002
(with a final
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maturity date of November 6, 2002), respectively, and (ii) the $65.0 million
Tranche B Term Loan Facility ($61.7 million of which was outstanding at December
31, 1999), of $0.5 million, $0.5 million, $0.5 million, $24.1 million, and $36.1
million in 2000, 2001, 2002, 2003, and 2004 (with 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) certain 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 2000 the
Company will not make any payment under the excess cash flow requirements of the
Senior Secured Credit Facility.
The Company's ability to fund its liquidity requirements in 1999 was
partially facilitated by its receipt of a portion of the proceeds associated
with a royalty fee agreement related to the Altec Lansing trademark described in
note 17 to the Consolidated Financial Statements of the Company included
elsewhere herein. The Company also expects to receive $11.8 million, in varying
amounts through March 2005, in connection with the royalty fee agreement and the
sale of the trademark. Because the Company has limited unused availability under
its working capital facilities, the Company is particularly reliant on cash flow
from operations, the above noted one-time royalty fees and cash flow
enhancements, as described below, to fund its liquidity needs in 2000.
The Company has incurred substantial indebtedness in connection with a
series of leveraged transactions (see note 2 to the Consolidated Financial
Statements of the Company included elsewhere herein). As a result, debt service
obligations represent significant liquidity requirements for the Company. The
Company intends to improve operations and liquidate nonproductive assets in part
to meet the liquidity needs of the debt service and to satisfy the requirements
of the debt covenants. The Company's year 2000 operating plan includes
strategies to significantly improve operating results by reducing purchased
material costs through more effective supply chain management, increasing
selling prices on selective products, managing other operating costs to planned
levels, reducing inventory through the use of consigned inventory from certain
vendors and by consolidating overseas warehouses, and improving the accounts
receivable collection experience. In the event the Company is unable to achieve
the necessary operating improvements, it could be in default under the terms of
its Senior Secured Credit Facility, the EVI Notes and the Telex Notes. In the
event the operating improvements are not realized, management would consider
other strategic alternatives, including the renegotiation of the debt covenants,
and the sale of certain operating assets and certain product lines. There can be
no assurance that the Company will be successful in achieving the planned
operating improvements or executing alternative strategies on terms acceptable
to the Company, or that the Company will be able to renegotiate the debt
covenants. Additionally, 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. While the Company believes that the cash flow enhancements described
above, 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 in
year 2000, no assurance can be given in this regard.
YEAR 2000
In preparation for Year 2000, the Company conducted an internal inventory
and assessment of Year 2000 readiness of its computer hardware and software and
its non-information technology and replaced, modified or upgraded its
information systems with Year 2000 ready systems. In addition to internal
remediation activities, the Company contacted 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, were vulnerable
to Year 2000 issues.
To date, the Company has not experienced any problems related to Year 2000
readiness, but there can be no assurance that problems may not arise in the
future. 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. 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 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 were funded
through operating cash flow and were expensed as incurred or capitalized as
appropriate.
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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/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. 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 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
21
<PAGE> 24
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, 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.
Control of the Company. G-I and G-II, which are owned by GSCP and certain
other investors, own approximately 91% of the issued and outstanding common
stock of Holdings on a diluted basis, 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. The
general partner of GSCP's general partner is a wholly-owned subsidiary of
Citigroup Inc. 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 1999, the principal transactions hedged were certain intercompany
balances attributed primarily to intercompany sales. Gains and losses on forward
exchange contracts and the offsetting losses and gains on the hedged
transactions are reflected in the income statement.
At December 31, 1999, the Company had $9.0 million outstanding forward
exchange contracts, with a weighted average maturity of 66 days.
At December 31, 1999, the difference between the fair value of all
outstanding contracts, as estimated by the amount required to enter into
offsetting contracts with similar remaining maturities based on quoted prices,
and the contract amounts was immaterial. A 10% fluctuation in exchange rates for
these currencies would change the fair value by approximately $0.9 million.
However, since these contracts hedge foreign
22
<PAGE> 25
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, 1999, the Company had fixed rate debt of $225.0 million and
floating rate debt of $118.9 million. Holding all other variables constant (such
as foreign exchange rates and debt levels), a one percentage point decrease in
interest rates would increase the unrealized fair market value of the $225.0
million fixed rate debt by approximately $8.1 million. The earnings and cash
flow impact for the next year resulting from a one percentage point increase in
interest rates on the $118.9 million floating rate debt would be approximately
$1.2 million, holding all other variables constant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Reports of Independent Public 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.
23
<PAGE> 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position, as of March 15,
2000, of each of the executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ---- --- ------------------------------------------------------
<S> <C> <C>
Ned C. Jackson*............ 64 Director, Chief Executive Officer and President
Richard J. Pearson......... 48 Vice President, Chief Financial Officer
John A. Palleschi*......... 49 Group Vice President and President, Speakers and
Microphones Group and Corporate Secretary
Joseph P. Winebarger....... 51 Vice President and Chief Technical and Environmental
Officer
Glen E. Cavanaugh.......... 56 Group Vice President and President, Multimedia/Audio
Communications Group
Roger H. Gaines............ 57 Vice President, Manufacturing Special Projects
Scott Myers................ 53 Vice President, Worldwide Operations/International ROW
Mathias von Heydekampf..... 37 President, Electronics Group and Managing Director,
Europe
Edgar S. Woolard, Jr....... 65 Director, Chairman of the Board
Christopher P. Forester.... 49 Director
Keith W. Abell............. 43 Director
Joseph J. Plumeri II....... 56 Director
Barry Hamerling............ 54 Director
</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.
Mr. Pearson joined the Company in April 1999 as Vice President and Chief
Financial Officer. Prior to joining the Company, Mr. Pearson was a consultant to
various companies. From September 1991 to November 1998 Mr. Pearson was
Executive Vice President Finance and Chief Financial Officer of Harmon Glass, a
subsidiary of Apogee Enterprises, Inc.
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.
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.
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.
Mr. Gaines is Vice President, Manufacturing Special Projects of the
Company. Prior to this position, he served as Vice President, Manufacturing from
1997 until December 1999. 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. Myers is Vice President, Worldwide Operations/International ROW
responsible for worldwide manufacturing and international sales to the rest of
the world (ROW). He joined the Company in
24
<PAGE> 27
January 1999 as Chief Information Officer and Vice President, Planning and
Supply Chain and in June 1999 he also assumed responsibility for International
ROW sales, which positions he held until his appointment as Vice President,
Worldwide Operations/International ROW. From 1997 to 1998, he was Vice President
of Operations Services for Viasystems Group, Inc., the world's largest printed
circuit board manufacturer. From 1993 to 1997, 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 DuPont in corporate planning, acquisitions and joint ventures,
business management, purchasing and transportation, information systems and
manufacturing.
Mr. von Heydekampf was promoted to the position of President, Electronics
Group and Managing Director for Europe in December 1999. He joined the Company
in February 1997 as Managing Director, Straubing, Germany and for the Company's
subsidiaries in France and Switzerland. Prior to joining the Company, Mr. von
Heydekampf was General Manager of Harmon France Division Grand Public from
February 1995 to October 1996.
Mr. Woolard was appointed Chairman of the Board of Directors in March 2000.
He 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. Forester became a director in December 1997. Mr. Forester has been a
director of Cyber Dialogue, Inc. and a partner of eCom Partners LLC since 1999.
eCom Partners is a venture capital firm specializing in internet and e-commerce
related investments. Mr. Forester was retired from 1996 through 1998. From 1994
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.
Mr. Plumeri became a director of the Company in March 2000. From 1998 to
1999, Mr. Plumeri served as the Chief Executive Officer of Citibanking North
America, where he was responsible for the integration of the merged consumer
businesses of Citibank and Travelers Group Inc. From 1994 to 1998, Mr. Plumeri
served as the Chairman of the Board of Directors and Chief Executive Officer of
Primerica Financial Services, an affiliate of Travelers Group Inc. From 1992 to
1994, Mr. Plumeri was the President of Smith Barney Shearson. Mr. Plumeri also
serves as a board member and advisor to many organizations, including The
Council on Foreign Relations, The United Negro College Fund and The College of
William & Mary.
Mr. Hamerling became a director of the Company in March 2000. Mr. Hamerling
has been the managing partner of Premium Desserts of America, Inc. from October
1998 to the present. He was the President of AYCO Co. L.P., a large financial
and tax counseling firm, from January 1992 until September 1998. Mr. Hamerling
has been the President of the AYCO Charitable Foundation for the last four
years.
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. 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 one of the Company's directors is an employee
of GSCP, to which the Company pays fees for management and financial consulting
services. See Item 13, "Certain Relationships and Related Transactions."
25
<PAGE> 28
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation with
respect to all compensation paid or accrued by the Company during the last three
fiscal years for services rendered in all capacities by its Chief Executive
Officer and the four most highly compensated executive officers whose cash
compensation exceeded $100,000 for the twelve months ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
(A) COMPENSATION
------------------- ------------------
SALARY BONUS NUMBER OF SHARES
NAME AND PRINCIPAL POSITION YEAR ($)(B) ($)(C) UNDERLYING OPTIONS
--------------------------- ----------------- -------- -------- ------------------
<S> <C> <C> <C> <C>
Ned C. Jackson(f)....................... Fiscal 1999 305,769 300,000 250,000
President and Chief Executive Officer Transition Period 70,385 75,000 --
Fiscal 1998 -- -- --
Glen E. Cavanaugh....................... Fiscal 1999 170,308 14,139 40,934(e)
Group Vice President and President, Transition Period 161,692 81,351 --
Multimedia/Audio Communications Fiscal 1998 150,601 81,351 8,240
Dan M. Dantzler(d)...................... Fiscal 1999 162,465 24,843 41,778(e)
Group Vice President and President, Transition Period 140,304 120,632 --
Electronics Group Fiscal 1998 129,808 120,632 12,000
John A. Palleschi....................... Fiscal 1999 157,800 32,176 44,292(e)
Group Vice President and President, Transition Period 145,331 241,634 --
Speakers and Microphones Group, Fiscal 1998 137,286 241,634 26,240
Corporate Secretary
Richard J. Pearson(f)................... Fiscal 1999 113,232 56,000 30,000
Vice President and Transition Period -- -- --
Chief Financial Officer Fiscal 1998 -- -- --
Joseph P. Winebarger.................... Fiscal 1999 141,680 30,636 37,608(e)
Vice President and Chief Technical Transition Period 138,483 132,172 --
and Environmental Officer Fiscal 1998 131,308 132,172 12,720
</TABLE>
- - ---------------
(a) Amounts reported for Fiscal 1999 are for the fiscal year ended December 31,
1999. In connection with the change in the Company's fiscal year from March
31 to December 31, executive compensation is reported for the twelve-month
period from January 1, 1998 to December 31, 1998 (the "Transition Period").
Amounts reported for Fiscal 1998 are for the fiscal year ended March 31,
1998.
(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 and Mr. Pearson, amounts shown
for Fiscal 1999, 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." Amounts reported as Bonus for Mr. Pearson include a
one-time special bonus paid with respect to Mr. Pearson's employment with
the Company. Except with respect to Mr. Jackson, bonuses reported by the
Company for Fiscal 1998 were earned during the twelve month period ended
March 31, 1998 and paid in the nine-month period ended December 31, 1998.
(d) Mr. Dantzler resigned his employment with the Company on December 17, 1999.
(e) This amount reflects amendments to the 1997 Amended and Restated Stock
Option Plan.
(f) Mr. Jackson joined the company in October 1998, and Mr. Pearson joined the
Company in April 1999.
26
<PAGE> 29
OPTION GRANTS IN FISCAL 1999
The following table sets forth information on the options to acquire Common
Stock of Holdings granted to the Named Executive Officers during Fiscal 1999 and
the potential realizable value of each grant:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SHARES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM (C)
OPTIONS EMPLOYEES EXERCISE EXPIRATION ----------------------
NAME GRANTED IN FISCAL 1999 PRICE DATE 5% 10%
- - ---- ---------- -------------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ned C. Jackson.................... 250,000(a) 27.1% $ .01 10/05/08 $ 1,572 $ 3,984
Glen E. Cavanaugh................. 35,000(a) 3.8% $ .01 01/28/08 220 558
5,934(b) 0.6% $7.98 03/08/09 29,780 75,469
Dan M. Dantzler................... 35,000(a) 3.8% $0.01 01/28/08 220 558
6,778(b) 0.7% $7.98 03/08/09 34,016 86,203
John A. Palleschi................. 35,000(a) 3.8% $ .01 01/28/08 220 558
9,292(b) 1.0% $7.98 03/08/09 46,633 118,176
Richard J. Pearson................ 30,000(a) 3.3% $ .01 04/20/09 189 478
Joseph P. Winebarger.............. 30,000(a) 3.3% $ .01 01/28/08 189 478
7,608(b) 0.8% $7.98 03/08/09 38,181 96,759
</TABLE>
- - ---------------
(a) Represents options granted under the Amended and Restated 1998 Performance
Stock Option Plan. None of the options granted under the Amended and
Restated 1998 Performance Stock Option Plan are exercisable unless and until
(a) an "Exit Event" has occurred, as such item is defined in the Amended and
Restated 1998 Stock Option Plan, and (b) GSCP's Internal Rate of Return
("IRR") is greater than 20%. As GSCP's IRR increases from a percentage that
is greater than 20%, and up to the point where the IRR is 30%, the number of
options that are exercisable increases from 10% of such options (if GSCP's
IRR is equal to or greater than 20%) to 100% of such options (if GSCP's IRR
is equal to or greater than 30%). A vesting schedule is also applied in
cases where an option grantee's employment with the Company is terminated.
Options have a term of ten years, subject to earlier expiration upon
termination of employment and are not transferable.
(b) Represents options granted under the 1997 Amended and Restated Stock Option
Plan. Options vest immediately and expire ten years after the date of grant,
subject to earlier expiration upon termination of employment and are not
transferable.
(c) The hypothetical potential appreciation shown in these columns reflects the
required calculations at annual rates of 5% and 10% set by the Securities
and Exchange Commission and, therefore, is not intended to represent either
historical appreciation or anticipated future appreciation of the Company's
Common Stock price.
27
<PAGE> 30
STOCK OPTION EXERCISES AND VALUE AT DECEMBER 31, 1999
The following table provides information with respect to the Named
Executive Officers of the Company concerning stock options exercised during the
twelve months ended December 31, 1999 to acquire Common Stock of Holdings. No
stock appreciation rights have been granted under any incentive plan.
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR
AND OPTION VALUES AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
NUMBER OF UNDERLYING-UNEXERCISED IN-THE-MONEY
SHARES VALUE OPTIONS OPTIONS
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE ($)(A) UNEXERCISABLE UNEXERCISABLE($)(B)
- - ---- ----------- -------- ---------------------- -------------------
<S> <C> <C> <C> <C>
Ned C. Jackson......................... -- -- 0/250,000(c) $0/$0
Glen E. Cavanaugh...................... 24,740 $0 0/35,000(c) 0/0
13,258/916(d) 0/0
Dan M. Dantzler........................ -- -- 0/35,000(c) 0/0
17,108/0(d) 0/0
John A. Palleschi...................... -- -- 0/35,000(c) 0/0
32,616/2,916(d)
Richard J. Pearson..................... -- -- 0/30,000(c) 0/0
Joseph J. Winebarger................... 12,200 $0 0/30,000(c) 0/0
18,915/1,413(d) 0/0
</TABLE>
- - ---------------
(a) The per share value of the underlying securities at exercise date was $0.
(b) Value of unexercised in-the-money options granted under the 1997 Amended and
Restated Stock Option Plan and the Amended and Restated 1998 Performance
Stock Option Plan is based on per share value determined as of December 31,
1999 in accordance with a formula set forth in the Stockholders'
Registration and Rights Agreement, dated May 6, 1997.
(c) None of the options granted under the Amended and Restated 1998 Performance
Stock Option Plan are exercisable unless and until (a) an "Exit Event" has
occurred, as such term is defined in the Amended and Restated 1998
Performance Stock Option Plan, and (b) GSCP's Internal Rate of Return
("IRR") is greater than 20%. As GSCP's IRR increases from a percentage that
is greater than 20%, and up to the point where the IRR is 30%, the number of
options that are exercisable increases from 10% of such options (if GSCP's
IRR is equal to or greater than 20%) to 100% of such options (if GSCP's IRR
is equal to or greater than 30%). A vesting schedule is also applied in
cases where an option grantee's employment with the Company is terminated.
(d) Amounts reflect options granted under the 1997 Amended and Restated Stock
Option Plan. They include Initial Option Grants, which vest over a 3 year
period beginning on the date of grant, and Special Service Option Grants
which vest upon grant.
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, Palleschi and Winebarger 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, $160,880 and
$153,180, 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 approximately
$0.27 million in Fiscal 2000 and 2001. For a description of bonuses payable to
Mr. Jackson, see "Employment Agreements".
28
<PAGE> 31
PENSION PLAN
The Company maintains a defined benefit pension plan (the "Pension Plan")
qualified under the Internal Revenue Code that provides a benefit upon
retirement to the Company's eligible employees. Since July 1, 1999 the Pension
Plan has been a cash balance pension plan. Under the terms of the Pension Plan,
"account balances" are maintained for each participant. For individuals
participating in the plan as of June 30, 1999, an opening account balance was
created equal to the present value of the benefit accrued as of June 30, 1999
under the plan benefit formula prior to the change to the cash balance plan. The
Company credits each active participant's account with a benefit credit each
year determined based on the participant's age, vesting service, and total
remuneration covered by the plan (consisting of base salary, commission,
overtime and bonuses paid to the participant), as illustrated in the following
table.
BENEFIT CREDIT CHART
<TABLE>
<CAPTION>
BENEFIT CREDIT AS A PERCENTAGE OF
--------------------------------------------------------------
PENSION EARNINGS FOR THE YEAR
AGE + YEARS OF VESTING SERVICE ON THAT ARE GREATER THAN
JANUARY 1 PENSION EARNINGS FOR THE YEAR THE INTEGRATION
--------------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Under 40...................... 1.5% 1.5%
40-49...................... 2.0% 2.0%
50-59...................... 2.6% 2.6%
60-69...................... 3.2% 3.2%
70-79...................... 4.2% 4.2%
80-89...................... 5.4% 5.4%
90 and above.................... 6.8% 5.4%
</TABLE>
The Integration Level each year is equal to one-half of the Social Security
taxable wage base for the year. For 2000 the Integration Level is $38,100. The
Integration Level will change each year. For plan years beginning in 1999 and
later, annual compensation taken into account for purposes of calculating
benefits is limited to $160,000 ($170,000 for 2000, and adjusted in future years
to reflect inflation).
The accounts are also credited with an interest credit, which is based on
the average six month Treasury bill rate for the November 1 of the prior year,
plus 1%. The Interest Credit for a full calendar year will not be less than 5%.
The total estimated projected annual single life annuity benefit for the
Named Executive Officers, assuming they continue with Telex Communications, Inc.
to normal retirement age (age 65), and their compensation, the maximum
recognizable compensation and the Integration Level do not change, would be as
follows:
Mr. Jackson, $1,071
Mr. Palleschi, $58,193
Mr. Cavanaugh, $23,207
Mr. Winebarger, $59, 919
Mr. Dantzler, $40,256
Mr. Pearson, $23,849
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 $1.0
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 has received options to purchase 250,000 shares of
Holdings Common Stock pursuant to the Amended and Restated 1998 Performance
Stock Option Plan adopted by Holdings. 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
29
<PAGE> 32
will be entitled to receive all compensation, benefits and perquisites
accrued under his Employment Agreement through the effective date of his
termination of employment.
Mr. Jackson and Holdings entered into an Incentive Compensation Agreement
on March 14, 2000 ("Incentive Agreement"). The Incentive Agreement provides that
Mr. Jackson is entitled to certain cash compensation upon the occurrence of a
"Triggering Event," which includes any of the following events: (a) a merger or
consolidation of Holdings resulting in the holders of Holdings Common Stock
ceasing to own more than 80% of Holdings Common Stock immediately after such
merger or consolidation, (b) a sale of all or substantially all of the assets of
Holdings, including a sale by Holdings of more than 80% of the Common Stock of
the Company, (c) a sale or transfer by G-I and/or G-II (other than transfers to
a Permitted Assignee), together with sales and transfers by Permitted Assignees,
of more than 50% of Holdings Common Stock, or (d) a recapitalization of Holdings
resulting in a distribution of cash or property to the holders of Holdings
Common Stock in which the consideration received by G-I and G-II exceeds $141.0
million plus an allocable portion of the amount of the incentive payment paid
pursuant to the Incentive Agreement upon the occurrence of a Triggering Event.
In the event a Triggering Event occurs, Mr. Jackson is entitled to receive up to
2 percent of the proceeds G-I and G-II receive in excess of $141.0 million.
John A. Palleschi has entered into a five-year employment agreement with
GST effective as of May 6, 1997 (an "Employment Agreement"), which automatically
extends for successive annual periods. Pursuant to such Employment Agreement,
Mr. Palleschi will receive a base annual salary of $129,000 (as adjusted from
time to time, as provided in such Employment Agreement) and a special bonus of
$32,176 on June 6, 2000 and on June 6, 2001, provided that on such date GSCP or
its affiliates control 50% or more of the voting power of the outstanding voting
securities of Holdings and the Company and there has not occurred an initial
public offering of Holdings Common Stock. In addition, he is entitled to receive
certain perquisites and participate in a management incentive compensation plan,
pursuant to which he may be awarded up to 100% of his base annual salary if
certain performance objectives are achieved. Mr. Palleschi's Employment
Agreement is terminable by the Company on 30 days' written notice (or
immediately for cause). If Mr. Palleschi's employment is terminated by the
Company for any reason other than for cause or by reason of his death or
disability, or if his employment is terminated by him for Good Reason (as
defined in the Employment Agreement) during the period of employment but prior
to a Change in Control (as defined in the Employment Agreement), the Company
shall pay to Mr. Palleschi (x) all compensation, benefits and perquisites
accrued under his Employment Agreement through the effective date of his
termination of employment, (y) a severance allowance equal to the sum of (1) one
year's base salary at the rate being paid at the time of termination of Mr.
Palleschi's employment, (2) two times the most recent fiscal year's incentive
bonus compensation plan, and (3) a pro rata portion of the highest incentive
bonus payable under the management incentive compensation plan in the three most
recent fiscal years, and (z) the remaining installments of the special bonus
payable only to the extent and at such times Mr. Palleschi would otherwise be
entitled to the special bonus. Mr. Palleschi may terminate his employment under
his Employment Agreement at any time during the period of employment upon 60
days' written notice to the Company, and, without regard to whether such
termination occurs prior to a Change in Control, he shall be paid (1) all
compensation, benefits and perquisites accrued under his Employment Agreement
through the effective date of his termination of employment, plus (2) the
remaining installments of the special bonus payable only to the extent and at
such times as Mr. Palleschi would otherwise be entitled to such special bonus.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The authorized common stock of the Company as of March 15, 2000 consists of
1,000 shares of common stock, par value $.01 per share, of which 110 shares are
issued and outstanding and all of which are owned by Holdings. The authorized
Common Stock of Holdings as of March 15, 2000 consists of 7,000,000 shares of
Common Stock, par value $.0005 per share, of which 4,237,580 shares are issued
and outstanding.
30
<PAGE> 33
The following table sets forth information with respect to the beneficial
ownership of Holdings Common Stock and options to purchase such stock as of
March 15, 2000 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 named executive 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 PERCENTAGE OF
NAME OF BENEFICIAL OWNER NUMBER OF SHARES OPTIONS (A) CLASS
- - ------------------------ ---------------- ---------------- -------------
<S> <C> <C> <C>
Greenwich II, LLC(b)......................... 2,605,060 -- 59.1%
Greenwich I, LLC(b).......................... 1,397,400 -- 31.7%
Ned C. Jackson............................... -- -- --
Glen E. Cavanaugh............................ 46,220 14,174 1.4%
Dan M. Dantzler.............................. 37,740 31,528 1.6%
John A. Palleschi............................ 48,880 55,692 2.4%
Richard J. Pearson........................... -- -- --
Joseph P. Winebarger......................... 58,740 20,328 1.8%
Edgar S. Woolard, Jr.(d)..................... -- 10,783 *
Christopher P. Forester...................... -- 5,484 *
Keith W. Abell (c)........................... -- -- --
Joseph J. Plumeri II......................... -- -- --
Barry Hamerling.............................. -- -- --
All directors and officers as a group
(13 persons) (b)(c)........................ 191,580 137,989 7.5%
</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 the table that follows for information concerning the ownership of
limited liability company interests of Greenwich I, LLC and Greenwich II,
LLC.
(c) Does not include any of the 4,002,460 shares of Holdings Common Stock
beneficially owned by Greenwich I, LLC and Greenwich II, LLC, which Mr.
Abell may be deemed to beneficially own by virtue of his affiliation with
GSCP. Mr. Abell disclaims any such beneficial ownership.
(d) Does not include up to a maximum of 444,938.93 shares of Holdings Common
Stock that may be acquired by Mr. Woolard upon the exercise of warrants
granted to him pursuant to the Warrant, dated March 14, 2000 (the
"Warrant"), a vested portion of which warrants are exercisable only upon
the occurrence of a Triggering Event (as defined in the Warrant), which may
occur at any time. See Item 13, "Certain Relationships and Related
Transactions," for a description of the terms of the Warrant.
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, except for New Century
Enterprises, Ltd.
<TABLE>
<CAPTION>
NAME AND ADDRESS PERCENT OF INTEREST
- - ---------------- -------------------
<S> <C>
GSCP(a)(b).................................................. 65.2%
TRV Employees Fund, L.P.(c)(b).............................. 15.9%
Greenwich Street Capital Offshore Fund, Ltd. (d)(b)......... 4.0%
The Travelers Insurance Company (e)(b)...................... 3.3%
The Travelers Life and Annuity Company (e)(b)............... 1.6%
New Century Enterprises, Ltd. (f)........................... 10.0%
</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").
31
<PAGE> 34
(b) By virtue of the relationships set forth in notes (a), (c), (d) and (e),
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 is a wholly-owned subsidiary
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. 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. This person is an indirect wholly-owned subsidiary of
Citigroup.
(f) Mr. Woolard has a 92.7% interest in New Century Enterprises, Ltd. The
address of this person is 16952 Passage Island South, Jupiter, Florida
33477.
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. Mr. Abell is a principal of
GSCP and a director of Holdings and of the Company. See Item 10. "Directors an
Executive Officers."
The Company has engaged Greenwich Street Capital Partners, Inc.
("Greenwich"), 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 ("Management Fee"), prepaid semi-annually, 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 October 1999, Greenwich agreed to defer collection of the
Management Fee for periods when a certain financial ratio of the Company is
below a threshold amount as required under the October 1999 Amendment to the
Senior Secured Credit Facility. When the financial ratio is met, all current
payments and payments in arrears are due.
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. The Company has indemnified Mr. Abell and certain other principals
of GSCP for the costs associated with the settlement of certain litigation
commenced against such parties by the Company's former CEO, as permitted by
Delaware law and the By-Laws of the Company. The cost of settlement indemnified
and the cost of the related legal fees incurred by the Company was $5.5 million.
Mr. Woolard received a warrant from Holdings dated March 14, 2000 (the
"Warrant"), which entitles him to purchase up to a maximum of 444,938.93 shares
of Common Stock of Holdings upon the occurrence of a Triggering Event. The
Warrant is immediately vested with respect to one-third of the underlying
shares, and the remainder vests in 24 monthly installments beginning in April 1,
2001, subject to certain adjustments in the event of Mr. Woolard's death or
removal as Chairman of the Board of Directors because of his disability, his
resignation as Chairman of the Board of Directors, or his removal as Chairman of
the Board of Directors for cause (as such term is defined in the Warrant). In
the event that a Triggering Event occurs prior to any of these events, the
Warrant becomes 100% vested. A Triggering Event occurs upon the (a) merger or
consolidation of Holdings resulting in the holders of Holdings Common Stock
ceasing to own more than 80% of Holdings Common Stock immediately after such
merger or consolidation, (b) a sale of all or substantially all of the assets of
Holdings, including a sale by Holdings of more than 80% of the Common Stock of
the Company, or (c) a sale or transfer by G-I and/or G-II (other than transfers
to a Permitted Assignee), together with sales and transfers by Permitted
Assignees, of more than 50% of Holdings Common Stock. The Warrant entitles
Woolard to purchase a number of shares of Holdings Common Stock determined by
reference to a formula based on the Triggering Event valuation multiplied by the
percentage of vested
32
<PAGE> 35
Warrants. If the valuation is $550 million or less, the maximum number of shares
of Holdings Common Stock that may be issued is 187,451.13; if the valuation is
between $550 million and $700 million, the number of shares that may be issued
will be a minimum of 187,452.75, and a maximum of 444,937.12; and in the event
if the valuation is greater than $700 million, the maximum number of shares that
may be issued is 444,938.93. The Triggering Event valuation is based upon a
formula that takes into account prior distributions to Holdings' shareholders,
the purchase price paid for the Holdings Common Stock in connection with the
Triggering Event, and any debt of Holdings assumed by the purchaser. The number
of shares issuable upon exercise of the Warrant is to be adjusted for dividends
on the outstanding Common Stock payable in shares of Common Stock, stock splits
or combinations, and mergers or consolidations of Holdings with or into another
entity (other than a merger or consolidation which is a Triggering Event)
entitling the holders of Common Stock to receive shares of stock and other
securities or property receivable upon such consolidation or merger.
33
<PAGE> 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(a) The following documents are filed as part of this
report:
1. Financial Statements:
Report of Independent Accountants................ 37
Consolidated Balance Sheets as of December 31,
1999 and 1998...................................... 38
Consolidated Statements of Operations for the
twelve months ended December 31, 1999, the
nine-month period ended December 31, 1998 and the
fiscal year ended March 31, 1998................... 39
Consolidated Statements of Shareholders' Deficit
for the twelve months ended December 31, 1999, the
nine-month period ended December 31, 1998 and the
fiscal year ended March 31, 1998................... 40
Consolidated Statements of Cash Flows for the
twelve months ended December 31, 1999, the
nine-month period ended December 31, 1998 and the
fiscal year ended March 31, 1998................... 41
Notes to Consolidated Financial Statements....... 42
2. Financial Statement Schedules:
The following supplemental schedule is filed as
part of this report:
Valuation and Qualifying Accounts................ 66
</TABLE>
All other schedules are omitted because they are inapplicable, not
required, or the information is in the consolidated financial statements
or related notes.
3. Exhibits:
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 by
reference.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter ended December
31, 1999.
(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) Not applicable.
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 twelve months ended December 31, 1999 nor any proxy material relating to any
annual or other meeting of security holders. The indentures governing the EVI
Notes and 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 Section 13 and 15(d) of the Securities Exchange Act of 1934, as
amended.
34
<PAGE> 37
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 30th day of
March, 2000.
TELEX COMMUNICATIONS, INC.
/s/ Ned C. Jackson
By:
--------------------------------------
Ned C. Jackson
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
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
--------- ----- ----
<C> <S> <C>
/s/ Ned C. Jackson Chief Executive Officer and Director March 30, 2000
- - ---------------------------------------------
Ned C. Jackson
/s/ Richard J. Pearson Vice President and Chief Financial March 30, 2000
- - --------------------------------------------- Officer
Richard J. Pearson
/s/ Edgar S. Woolard, Jr. Chairman of the Board and Director March 30, 2000
- - ---------------------------------------------
Edgar S. Woolard, Jr.
/s/ Christopher P. Forester Director March 30, 2000
- - ---------------------------------------------
Christopher P. Forester
/s/ Keith W. Abell Director March 30, 2000
- - ---------------------------------------------
Keith W. Abell
/s/ Joseph J. Plumeri II Director March 30, 2000
- - ---------------------------------------------
Joseph J. Plumeri II
/s/ Barry Hamerling Director March 30, 2000
- - ---------------------------------------------
Barry Hamerling
</TABLE>
35
<PAGE> 38
TELEX COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... 37
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 38
Consolidated Statements of Operations for the twelve months
ended December 31, 1999, the nine-month period ended
December 31, 1998 and the fiscal year ended March 31,
1998........................................................ 39
Consolidated Statements of Shareholders' Deficit for the
twelve months ended December 31, 1999, the nine-month period
ended December 31, 1998 and the fiscal year ended March 31,
1998........................................................ 40
Consolidated Statements of Cash Flows for the twelve months
ended December 31, 1999, the nine-month period ended
December 31, 1998 and the fiscal year ended March 31,
1998........................................................ 41
Notes to Consolidated Financial Statements.................. 42
</TABLE>
36
<PAGE> 39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Telex Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Telex
Communications, Inc. (a Delaware corporation) and Subsidiaries as of December
31, 1999 and December 31, 1998, and the related consolidated statements of
operations, shareholder's deficit and cash flows for the year ended December 31,
1999, the nine-month period ended December 31, 1998 and the year ended March 31,
1998. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, the results of their
operations and their cash flows for the year ended December 31, 1999, the
nine-month period ended December 31, 1998 and the year ended March 31, 1998, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 3, 2000,
Except for Note 17, as to which the date is March 30, 2000
37
<PAGE> 40
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Data)
As of December 31
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,239 $ 3,431
Accounts receivable, net of allowance for doubtful
accounts of $2,178 and $2,925.......................... 59,438 53,926
Inventories, net.......................................... 66,573 67,758
Other current assets...................................... 14,665 10,822
--------- ---------
Total current assets................................... 143,915 135,937
PROPERTY, PLANT AND EQUIPMENT, net.......................... 45,048 48,275
DEFERRED FINANCING COSTS, net............................... 10,476 11,586
INTANGIBLE ASSETS, net...................................... 62,559 77,478
--------- ---------
$ 261,998 $ 273,276
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES:
Revolving lines of credit................................. $ 22,688 $ 5,703
Current maturities of long-term debt...................... 8,982 10,811
Accounts payable.......................................... 20,817 20,920
Accrued wages and benefits................................ 10,708 9,156
Accrued interest.......................................... 5,898 6,416
Other accrued liabilities................................. 16,750 14,158
Income taxes payable...................................... 8,935 5,200
--------- ---------
Total current liabilities.............................. 94,778 72,364
LONG-TERM DEBT.............................................. 312,207 321,189
OTHER LONG-TERM LIABILITIES................................. 9,470 9,810
--------- ---------
Total liabilities...................................... 416,455 403,363
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 3 and 12)
SHAREHOLDER'S DEFICIT:
Common stock, $.01 par value, 1,000 shares authorized; 110
shares issued and outstanding.......................... -- --
Capital in excess of par.................................. 3,139 2,980
Accumulated deficit....................................... (154,087) (131,667)
Accumulated other comprehensive loss...................... (3,509) (1,400)
--------- ---------
Total shareholder's deficit............................ (154,457) (130,087)
--------- ---------
$ 261,998 $ 273,276
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
38
<PAGE> 41
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ----------
<S> <C> <C> <C>
NET SALES............................................ $343,659 $246,342 $332,964
COST OF SALES........................................ 219,399 157,266 205,624
-------- -------- --------
Gross profit.................................... 124,260 89,076 127,340
-------- -------- --------
OPERATING EXPENSES:
Engineering........................................ 14,872 11,214 17,278
Selling, general and administrative................ 86,165 53,678 81,695
Corporate charges.................................. 1,716 1,287 2,203
Amortization of goodwill and other intangibles..... 11,972 2,118 5,438
Restructuring charges.............................. (2,124) -- 6,232
-------- -------- --------
112,601 68,297 112,846
-------- -------- --------
OPERATING PROFIT..................................... 11,659 20,779 14,494
INTEREST EXPENSE..................................... 36,689 27,328 37,938
RECAPITALIZATION EXPENSE............................. -- -- 6,710
OTHER (INCOME) EXPENSE............................... (6,674) (2,719) 43
-------- -------- --------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM...... (18,356) (3,830) (30,197)
PROVISION FOR INCOME TAXES........................... 4,064 1,222 103
-------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEM....................... (22,420) (5,052) (30,300)
EXTRAORDINARY LOSS FROM EARLY
RETIREMENT OF DEBT................................... -- -- 20,579
Net loss........................................ $(22,420) $ (5,052) $(50,879)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
39
<PAGE> 42
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
--------------- CAPITAL IN EXCESS OF ACCUMULATED COMPREHENSIVE SHAREHOLDER'S
SHARES AMOUNT PAR DEFICIT LOSS DEFICIT
------ ------ -------------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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)
Vesting of new options......... -- -- 159 -- -- 159
Net loss....................... -- -- -- (22,420) --
Other comprehensive loss, net
of tax-
Foreign currency translation
adjustments............... -- -- -- -- (2,308)
Minimum pension liability
adjustment................ -- -- -- -- 199
Comprehensive net loss......... -- -- -- -- -- (24,529)
--- ---- --------- --------- ------- ---------
BALANCE, December 31, 1999....... 110 $ -- $ 3,139 $(154,087) $(3,509) $(154,457)
=== ==== ========= ========= ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE> 43
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
YEAR NINE-MONTH YEAR
ENDED PERIOD ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $(22,420) $(5,052) $(50,879)
Adjustments to reconcile net loss to cash flows from
operations-
Depreciation............................................ 10,048 6,784 8,585
Amortization of intangibles and deferred financing
costs................................................. 14,012 2,619 7,087
Provision for bad debts................................. 858 382 980
(Gain) loss on sale of business......................... 360 (946) --
Write-off of deferred financing costs................... -- -- 1,674
Recapitalization costs incurred......................... -- -- 6,710
Restructuring and special charges....................... (2,124) -- 6,232
Extraordinary loss on early retirement of debt.......... -- -- 20,579
Stock option compensation expense....................... 159 (176) 10,566
Deferred income taxes................................... (128) 794 5,609
Change in operating assets and liabilities:
Income taxes.......................................... 4,232 7,442 (5,621)
Accounts receivable................................... (7,169) 9,694 4,769
Inventories........................................... 4 12,383 (5,832)
Other current assets.................................. (8,827) 742 2,260
Accounts payable and accrued liabilities.............. 6,389 (11,606) 1,572
Other long-term liabilities........................... 552 (637) (1,502)
-------- ------- --------
Net cash provided by (used in) operating
activities........................................ (4,054) 22,423 12,789
-------- ------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment, net........... (8,441) (5,060) (8,096)
Proceeds from sale of business............................ 6,905 1,990 --
Other..................................................... -- (381) (372)
-------- ------- --------
Net cash used in investing activities............... (1,536) (3,451) (8,468)
-------- ------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................. -- -- 240,000
Borrowings (repayments) under revolving lines of credit,
net..................................................... 17,137 (9,964) 14,414
Repayment of long-term debt and payment of fees........... (10,811) (6,125) (134,968)
Proceeds from equity contribution......................... -- -- 108,353
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..................... (885) (784) (12,312)
Recapitalization costs incurred........................... -- -- (6,710)
Other..................................................... -- -- (309)
-------- ------- --------
Net cash provided by (used in) financing
activities........................................ 5,441 (16,873) (10,677)
-------- ------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (43) (892) (1,686)
-------- ------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease)................................... (192) 1,207 (8,042)
Beginning of period....................................... 3,431 2,224 10,266
-------- ------- --------
End of period............................................. $ 3,239 $ 3,431 $ 2,224
======== ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for-
Interest................................................ $ 35,710 $27,896 $ 26,167
======== ======= ========
Income taxes, net....................................... $ 511 $(7,017) $ 866
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE> 44
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
Telex Communications, 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 Merger (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 Merger 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 Merger.
The Company, formed as a result of the February 2, 1998 merger of Old Telex
and Old EVI, is a leader in the design, manufacture and marketing of
sophisticated audio, wireless and multimedia communications equipment to
commercial, professional and industrial customers. The Company provides high
value-added communications products designed to meet the specific needs of
customers in commercial, professional and industrial markets and, to a lesser
extent, in the retail consumer electronic 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, wireless LAN and
satellite-based mobile phone antennas, personal computer speech recognition and
speech dictation microphone 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 has incurred substantial indebtedness in connection with a
series of leveraged transactions (see Note 2). As a result, debt service
obligations represent significant liquidity requirements for the Company. The
Company intends to improve operations and liquidate nonproductive assets in part
to meet the liquidity needs of the debt service and to satisfy the requirements
of the debt covenants. The Company's 2000 operating plan includes strategies to
significantly improve operating results by reducing purchased material costs
through more effective supply chain management, increasing selling prices on
selective products, managing other operating costs to planned levels, reducing
inventory through the use of consigned inventory from certain vendors and by
consolidating overseas warehouses, and improving the accounts receivable
collection experience. In the event the Company is unable to achieve the
necessary operating improvements, it could be in default under the terms of its
Senior Secured Credit Facility, the EVI Notes and the Telex Notes. In the event
the operating improvements are not realized, management would consider other
strategic alternatives, including the renegotiation of the debt covenants, and
the sale of certain operating assets and certain product lines. There can be no
assurance that the Company will be successful in achieving the planned operating
improvements or executing alternative strategies on terms acceptable to the
Company, or that the Company will be able to renegotiate the debt covenants.
Additionally, 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.
While the Company believes that the cash flow enhancements described above,
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 in 2000, no
assurance can be given in this regard.
42
<PAGE> 45
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.
SEGMENT REPORTING
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information," is 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue 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
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." 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, 1999, software implementation costs of $8.8 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 to issue the EVI 11%
Senior Subordinated Notes, the Telex 10.5% Senior Subordinated Notes (together,
the "Senior Subordinated Notes"), the Senior Secured Credit Facility and the
amendments to the Senior Secured Credit Facility (see Note 7) and are being
amortized over the terms of the related debt.
43
<PAGE> 46
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>
LONG-LIVED ASSETS
The Company follows the provisions of 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
Revenue from product sales is recognized at the time of shipment. Revenue
from the sale of hearing instrument extended warranty contracts is recognized
ratably over the lives of the contracts.
WARRANTY COSTS
The Company warrants certain of its products for workmanship and
performance for periods of generally up to one year. The accrual for warranty
costs is based on expected average repair costs and return rates developed by
the Company using historical data.
PRODUCT DEVELOPMENT COSTS
Engineering costs associated with the development of new products and
changes to existing products are charged to operations as incurred.
ADVERTISING COSTS
Advertising costs are expensed when incurred. Advertising costs for the
year ended December 31, 1999, the nine-month period ended December 31, 1998 and
the year ended March 31, 1998 were $7.3 million, $5.3 million and $8.9 million,
respectively.
INCOME TAXES
The Company accounts for income taxes utilizing the liability method of
accounting. 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 deficit. Foreign exchange transaction gains and losses realized
during the year ended December 31, 1999, the nine-month period ended December
31, 1998 and the year ended March 31, 1998, and those attributable to exchange
rate movements on intercompany receivables and payables not deemed to be of a
long-term investment nature are recorded in other (income) expense.
CONCENTRATIONS, RISKS AND UNCERTAINTIES
The Company is highly leveraged. The Company's high degree of leverage
could have important consequences, including but not limited to the following:
(i) the Company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions, 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
44
<PAGE> 47
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 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, 1999, the Company had $9.0
million of outstanding foreign currency forward exchange contracts, with an
average maturity of 66 days.
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, 1999, 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.
NEW ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as revised by SFAS No. 137, must be adopted by Telex no later than
January 1, 2001. 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 impact 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
45
<PAGE> 48
Street Capital Partners, L.P. ("GSCP") and certain affiliated investors acquired
from Mark IV Industries, Inc. ("Mark IV") and one of its subsidiaries all of the
issued and outstanding capital stock of Gulton Industries, Inc. ("Gulton"), the
former parent of Old EVI, and each of its subsidiaries for an initial cash
purchase price of $151.5 million, plus $4.9 million in estimated adjustments
paid on the closing date, with this aggregate amount subject to further
postclosing adjustments as described herein. The acquisition subsidiary
subsequently merged with and into the parent of Old EVI, and the parent then
merged with and into Old EVI, with Old EVI ultimately surviving (the
"Acquisition"). Prior to the Acquisition Closing Date, (i) EVI Audio LLC, a
subsidiary wholly owned by GSCP and certain affiliated investors, purchased all
of the issued and outstanding shares of common stock and pay-in-kind preferred
stock of EV Holdings for an aggregate amount of $57.6 million and (ii) EV
Holdings, a Delaware corporation organized by GSCP to hold all of the issued and
outstanding stock of EVI, contributed $57.6 million to the Company.
Financing for the Acquisition and the related fees and expenses consisted
of (i) $57.6 million of equity capital provided by GSCP and certain affiliated
investors, (ii) a $60.0 million senior credit facility (consisting of a term
loan and a revolving credit facility), and (iii) a $75.0 million senior
subordinated credit facility issued as interim financing by Chase Securities
Inc. and Smith Barney Inc., the initial purchasers of the EVI Existing Notes (as
defined herein), and certain other lenders. Of these amounts, $156.4 million was
used for the purchase price for the Acquisition and $10.4 million was used for
financing and transaction fees and expenses. Under the Purchase Agreement, the
purchase price was subject to adjustment on the basis of (i) the audited working
capital and audited cash flow of the Company as of and for the ten-month period
ended December 31, 1996, and (ii) the net intercompany transfers of cash between
Mark IV and its affiliates (other than the Company and its subsidiaries), on the
one hand, and the Company and its subsidiaries, on the other hand, during the
period between December 31, 1996 and the Acquisition Closing Date. Based on
these provisions, Mark IV has requested a purchase price increase of
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 in 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.
In connection with the Acquisition, Mark IV and the Company entered into a
transition services agreement pursuant to which Mark IV agreed to provide
certain services, including accounting, tax planning, foreign currency hedging,
cash management and administering certain pension plan assets pending their
transfer to the Company, for a period not to exceed 12 months following the
Acquisition Closing Date. In Fiscal 1998, the Company paid an aggregate of
approximately $41,000 in fees for services provided pursuant to such transition
services agreement, which terminated on January 31, 1998. In addition, Mark IV
and the Company entered into a sublease agreement with respect to certain
premises located in Austin, Texas, and a nonexclusive, royalty-free license to
use certain names which incorporate the "Mark IV" name, including related
tooling and sales and marketing materials, and to sell products incorporating
such names for periods ranging from 18 to 36 months after the Acquisition
Closing Date.
RECAPITALIZATION
On May 6, 1997 (the "Recapitalization Closing Date"), Old Telex completed a
recapitalization (the "Recapitalization") pursuant to an agreement (the
"Recapitalization Agreement") among Old Telex, Greenwich II, LLC ("G-II"), a
Delaware limited liability company formed by GSCP and certain other investors,
and GST Acquisition Corp. ("GST"), a Delaware corporation and a wholly owned
subsidiary of G-II. In connection with the Recapitalization, all of the shares
of common stock of Holdings ("Holdings Common Stock") and all options and
warrants to acquire Holdings Common Stock (other than certain shares of Holdings
Common Stock and certain options to acquire Holdings Common Stock owned by
certain members of management of Old Telex) were converted into the right to
receive an aggregate amount of cash (the "Recapitalization Consideration") equal
to approximately $253.9 million. In addition, in connection with the
Recapitalization Agreement, certain shares of Holdings Common Stock held by
management of Old Telex
46
<PAGE> 49
(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 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 in 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 in 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 statements of operations.
The Recapitalization was financed by (i) $108.4 million of new equity
provided by GSCP and certain other co-investors; (ii) the Rollover Shares and
Rollover Options valued at $21.2 million; (iii) a $140.0 million senior secured
credit facility (the "Senior Secured Credit Facility") with The Chase Manhattan
Bank, Morgan Stanley Senior Funding, Inc. and certain other lenders consisting
of (a) a $115.0 million term loan facility (the "Term Loan Facility"), and (b) a
$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 in 2009 (the "GST Subordinated Debentures").
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 in 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 MERGER
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 Merger has 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 Merger, 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 Merger, 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 Merger were $1.7 million,
including the $0.4 million paid at closing. The EVI Notes remain outstanding
following the Merger.
As a result of the Merger, 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
statements of operations.
47
<PAGE> 50
PRO FORMA RESULTS OF TRANSACTIONS (UNAUDITED)
Pro forma information is presented below for the year ended March 31, 1998,
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 1998. The pro forma results are for illustrative purposes
only and do not purport to be indicative of the actual results which occurred,
nor are they indicative of future results of operations for the year ended March
31, 1998 as adjusted (in thousands):
<TABLE>
<S> <C>
Net sales............................................... $345,775
Operating income(a)..................................... 24,088
Net loss(a)............................................. (14,145)
</TABLE>
- - ---------------
(a) Included in the year ended March 31, 1998 operating income and net loss, as
presented, are noncash compensation charges for stock options associated
with the Recapitalization, nonrecurring charges for management cash bonuses,
restructuring charges and a noncash impairment loss described in Note 6.
DISPOSITIONS
During the year ended December 31, 1999, the Company sold the VEGA business
and facility for approximately $3.2 million, of which $2.8 million in cash was
received at the closing on October 15, 1999, and the remaining $0.4 million,
held in escrow subject to closing balance sheet adjustments and other customary
conditions, is to be received in installments extending to March 31, 2001 as
conditions are satisfied. The Company recognized a loss of $1.1 million
associated with this transaction. The Company also recorded a gain of $0.8
million on cash proceeds of approximately $4.1 million related to the sales of
certain vacated facilities and certain product lines. In the nine-month period
ended December 31, 1998, the Company sold the Gauss business and facility for
$2.0 million on which it recognized a gain of $0.9 million.
3. 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 2000.
As of December 31, 1999, the Company has charged to the restructuring
reserve $4.0 million, consisting of $1.6 million of cash expenditures and $2.4
million of noncash charges. The Company reversed $2.1 million of the reserve in
1999, retaining approximately $0.1 million related to future estimated costs to
be incurred for environmental and employee-related transactions.
4. INVENTORIES:
Inventories consist of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Raw materials............................................... $31,848 $32,667
Work in progress............................................ 9,852 10,690
Finished goods.............................................. 24,873 24,401
------- -------
$66,573 $67,758
======= =======
</TABLE>
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<PAGE> 51
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following as of December 31
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Land........................................................ $ 2,193 $ 2,841
Buildings and improvements.................................. 23,053 23,777
Machinery and equipment..................................... 92,894 88,570
Construction in progress.................................... 343 1,821
-------- --------
118,483 117,009
Less- Accumulated depreciation.............................. (73,435) (68,734)
-------- --------
$ 45,048 $ 48,275
======== ========
</TABLE>
6. INTANGIBLE ASSETS:
In the year ended December 31, 1999, the Company determined that the
estimated future undiscounted cash flows for certain product lines were below
the carrying value of related long-lived intangible assets primarily due to
changes in related product technologies. In addition, goodwill associated with
discontinued products was written off, and goodwill associated with the sale of
certain product lines was charged against the proceeds (included in other
income) from the sale. Accordingly, in 1999 the Company recorded a $6.3 million
charge attributed to the impairment of long-lived intangible assets, a $4.9
million charge for a goodwill write-off (of which $2.0 million was charged
against the proceeds from the sale of product lines), and a $0.5 million charge
for write-off of fixed assets attributed to the discontinued products.
In the fiscal year ended March 31, 1998, the Company recognized a noncash
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.
Intangible assets consist of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Goodwill.................................................... $77,009 $83,300
Dealer and distributor lists................................ 5,626 5,626
Patents and engineering drawings............................ 5,888 5,888
Other intangibles........................................... 3,681 3,540
------- -------
92,204 98,354
Less- Accumulated amortization.............................. (29,645) (20,876)
------- -------
$62,559 $77,478
======= =======
</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 $19.5 million and letters of credit outstanding in the amount of
$3.6 million as of December 31, 1999, reducing the availability under the
Facility to $1.9 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 $6.0 million. At December 31,
1999, the Company had borrowings of $3.2 million under these facilities,
reducing the amount available to $2.8 million. The rates of interest in effect
on these facilities as of December 31, 1999, ranged from 1.9% to 9.0%, and are
generally subject to change based upon prevailing local
49
<PAGE> 52
prime rates. In certain instances, the facilities are secured by a lien on
foreign real estate property, leaseholds or accounts receivable and inventories,
or guaranteed by another subsidiary of the Company.
LONG-TERM DEBT
Long-term debt consists of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1999 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 3.25%
(9.72% at December 31, 1999) payable semiannually,
secured by substantially all assets of the Company..... 34,500 42,500
Term Loan B, due in quarterly installments through
November 6, 2004, bearing interest at LIBOR plus 3.75%
(10.22% at December 31, 1999) payable semiannually,
secured by substantially all assets of the Company..... 61,689 64,500
-------- --------
321,189 332,000
Less- Current portion....................................... (8,982) (10,811)
-------- --------
$312,207 $321,189
======== ========
</TABLE>
The Senior Subordinated Notes and the Senior Secured Credit Facility
contain certain financial and nonfinancial restrictive covenants, including
limitations on additional indebtedness, payment of dividends, certain
investments, sale of assets, and consolidations, mergers 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 October 1999. The
Company was in compliance with all covenants related to the Senior Subordinated
Notes and the Senior Secured Credit Facility at December 31, 1999.
The Company intends to improve operations and liquidate nonproductive
assets in part to meet the liquidity needs of the debt service and to satisfy
the requirements of the debt covenants. The Company's year 2000 operating plan
includes strategies to significantly improve operating results by reducing
purchased material costs through more effective supply chain management,
increasing selling prices on selective products, managing other operating costs
to planned levels, reducing inventory through the use of consigned inventory
from certain vendors and by consolidating overseas warehouses, and improving the
accounts receivable collection experience. In the event the Company is unable to
achieve the necessary operating improvements, it could be in default under the
terms of its Senior Secured Credit Facility and the Senior Subordinated Notes.
In the event the operating improvements are not realized, management would
consider other strategic alternatives, including the renegotiation of the debt
covenants, and the sale of certain operating assets and certain product lines.
There can be no assurance that the Company will be successful in achieving the
planned operating improvements or executing alternative strategies on terms
acceptable to the Company, or that the Company will be able to renegotiate the
debt covenants. Additionally, 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. While the Company believes that the cash flow enhancements
described above, 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 in
year 2000, no assurance can be given in this regard.
50
<PAGE> 53
Aggregate annual maturities of long-term debt are as follows for the years
ended December 31 (in thousands):
<TABLE>
<S> <C>
2000.................................................... $ 8,982
2001.................................................... 11,482
2002.................................................... 15,482
2003.................................................... 24,097
2004.................................................... 36,146
Thereafter.............................................. 225,000
--------
$321,189
========
</TABLE>
8. INCOME TAXES:
Significant components of the provision for income taxes attributable to
income (loss), including the extraordinary item, are as follows (in thousands):
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ----------
<S> <C> <C> <C>
Current:
Federal............................................ $2,000 $ 37 $(5,709)
State.............................................. 116 125 --
Foreign............................................ 2,076 266 203
------ ------ -------
4,192 428 (5,506)
Deferred............................................. (128) 794 5,609
------ ------ -------
$4,064 $1,222 $ 103
====== ====== =======
</TABLE>
A reconciliation of the income taxes computed at the federal statutory rate
to the Company's income tax provision including the extraordinary item is as
follows (in thousands):
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ----------
<S> <C> <C> <C>
Federal benefit at statutory rate.................... $(6,244) $(1,341) $(17,262)
State benefit, net of federal tax.................... (629) 27 (1,668)
Amortization and write-off of goodwill............... 2,271 200 1,450
Change in deferred tax asset valuation allowance and
other income tax accruals.......................... 5,022 2,597 15,739
Recapitalization costs............................... -- -- 2,522
Foreign tax rate differences......................... 1,843 (171) (741)
Other................................................ 1,801 (90) 63
------- ------- --------
$ 4,064 $ 1,222 $ 103
======= ======= ========
</TABLE>
51
<PAGE> 54
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 for the years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation................................ $ 6,245 $ 6,876
-------- --------
Deferred tax assets:
Compensation accruals..................................... 4,325 3,957
Book over tax amortization................................ 4,525 2,656
Pension accrual........................................... 946 920
Inventory reserves........................................ 2,348 3,034
Foreign tax credits....................................... 2,440 2,440
Vacation accrual.......................................... 1,109 1,029
Warranty reserves......................................... 1,114 1,020
Restructuring reserves.................................... 613 1,650
Tax loss carryforward..................................... 10,804 5,643
Other..................................................... 1,380 2,680
-------- --------
Total deferred tax assets.............................. 29,604 25,029
Valuation allowance......................................... (23,359) (18,337)
-------- --------
Net deferred tax assets................................ 6,245 6,692
-------- --------
Net deferred tax assets (liabilities)....................... $ -- $ (184)
======== ========
</TABLE>
The Company has established a net deferred tax valuation allowance of $23.4
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 deficit.
Prior to the merger of Old Telex and Old EVI, Old Telex received a
settlement offer from the Internal Revenue Service (the "IRS") principally with
respect to the amortization of certain intangibles for the taxable years 1990
through 1995. The Company subsequently rejected the offer. As of December 31,
1999, the Company has provided a reserve of $6.8 million for the tax liability,
penalties and accrued interest related to the unsettled dispute. Management
believes any additional taxes which may ultimately result from these audits or
any other state or local agencies' audits would not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
Accumulated and current unremitted earnings of the Company's foreign
subsidiaries are deemed to be reinvested in each country and are not expected to
be remitted.
9. RELATED-PARTY TRANSACTIONS:
Holdings' principal asset is its investment in the Company and, therefore,
Holdings is dependent on the operations of the Company for its cash flow needs;
however, there are no agreements between the Company and Holdings requiring the
transfer of funds from the Company to Holdings. The Senior Subordinated Notes
and the provisions of the indenture agreements pursuant to which the Senior
Subordinated Notes were issued restrict Telex's payment of dividends, loans or
advances to its affiliates.
Prior to October 1999, the Company paid fees to Holdings' majority
shareholder for management services in the amount of $1.7 million annually. New
covenants with lenders signed in October 1999 require the Company to suspend
payment of the fees until certain financial conditions are met. When these
financial conditions are met, all current payments and payments in arrears are
due. The Company is recording a liability for such future payments. For the year
ended December 31, 1999, 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 $1.7 million, $1.3 million and $2.2 million, respectively,
for such fees.
52
<PAGE> 55
Income taxes payable and receivable include tax benefits related to
Holdings as the Company makes all tax payments for the consolidated group.
10. RETIREMENT PLANS:
The Company has two noncontributory defined benefit pension plans. One plan
covers union employees in the U.S. The benefit formula provisions of this plan
are based on years of service multiplied by a benefit level. The second plan,
amended effective July 1, 1999, covers substantially all non-union employees in
the U.S. Since July 1, 1999, this plan has been a cash balance pension plan.
Under the terms of the plan, account balances are maintained for each
participant. For individuals participating in the plan as of June 30, 1999, an
opening account balance was created equal to the present value of the benefit
accrued as of June 30, 1999 under the then plan benefit formula. The Company
credits each active participant's account with a benefit credit each year
determined based on the participant's age, vesting service and total
remuneration covered by the plan. The amendment resulted in a decrease of
approximately $4.9 million in benefit obligation for the year ended December 31,
1999. Pension costs are funded annually, subject to limitations.
The following table presents the funded status of the above plans as
recognized in the consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ----------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period.......... $32,187 $27,931 $ 19
Service cost....................................... 1,771 1,350 520
Interest cost...................................... 1,817 1,494 187
Merger............................................. -- -- 27,212
Actuarial (gain) loss.............................. (4,726) 2,750 277
Benefits paid...................................... (1,536) (1,338) (292)
Amendments......................................... (4,893)
Effects of curtailment............................. -- -- 8
------- ------- -------
Benefit obligation at end of period.................. 24,620 32,187 27,931
------- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of period... 26,695 23,155 --
Merger............................................. -- -- 22,414
Actual return on plan assets....................... 7,643 3,680 866
Employer contribution.............................. 996 1,263 212
Noninvestment related expenses..................... (262) (65) (45)
Benefits paid...................................... (1,536) (1,338) (292)
------- ------- -------
Fair value of plan assets at end of period........... 33,536 26,695 23,155
------- ------- -------
Funded status........................................ 8,916 (5,492) (4,776)
Unrecognized actuarial (gain) loss................... (8,781) 1,102 570
Unrecognized net transition obligation............... 50 89 119
Unrecognized prior service cost...................... (4,563) 5 8
------- ------- -------
Net amount recognized................................ $(4,378) $(4,296) $(4,079)
======= ======= =======
Amounts recognized in the consolidated balance sheets
consist of:
Accrued benefit liability.......................... $(4,402) $(4,519) $(4,171)
Accumulated other comprehensive loss............... 24 223 92
------- ------- -------
Net amount recognized................................ $(4,378) $(4,296) $(4,079)
======= ======= =======
Weighted average assumptions:
Discount rate...................................... 7.75% 6.5% 7.0%
Expected return on plan assets..................... 9.0 9.0 9.0
Rate of compensation increase...................... 4.5 4.5 4.5
</TABLE>
53
<PAGE> 56
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ----------
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost....................................... $ 1,771 $ 1,350 $ 187
Interest cost...................................... 1,817 1,494 520
Expected return on plan assets..................... (2,243) (1,416) (147)
Amortization of unrecognized net transition
obligation...................................... 40 30 3
Amortization of prior service cost................. (326) 3 --
Recognized actuarial loss.......................... 19 18 14
------- ------- -------
Net periodic benefit cost............................ $ 1,078 $ 1,479 $ 577
======= ======= =======
</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 defined contribution plan of Mark IV Industries, Inc. and Mark IV
PLC (the "Sellers") that relate to the Company's employees were transferred into
the Company's plan, and, at that time, employee payroll withholding for 401(k)
contributions into the Company's defined contribution plan resumed. Effective
July 1, 1999, the Company merged the Employee's Investment Plan into the Savings
and Retirement Plan. Under the new Plan, the Company matches 50% of the first 6%
contributed by U.S. employees.
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, 1999, 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 1.7% and 2.8%, respectively. For the year ended
December 31, 1999, the nine-month period ended December 31, 1998 and the year
ended March 31, 1998, the Company charged $0.4 million, $0.1 million and $0.3
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.
54
<PAGE> 57
The following table presents the status of the above plans as recognized in
the consolidated financial statements (in thousands):
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ----------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period.......... $ 585 $ 513 $ 415
Service cost....................................... 30 18 23
Interest cost...................................... 40 28 36
Actuarial (gain) loss.............................. (65) 29 39
Benefits paid...................................... (18) (3) --
----- ----- -----
Benefit obligation at end of period.................. 572 585 513
----- ----- -----
Fair value of plan assets at end of period........... -- -- --
----- ----- -----
Funded status........................................ (572) (585) (513)
Unrecognized actuarial loss.......................... 61 132 106
Unrecognized prior service cost...................... -- -- --
----- ----- -----
Net amount recognized................................ $(511) $(453) $(407)
===== ===== =====
Amounts recognized in the consolidated balance sheets
consist of:
Prepaid benefit cost............................... $ -- $ -- $ --
Accrued benefit liability.......................... (511) (453) (407)
Intangible asset................................... -- -- --
Accumulated other comprehensive income............. -- -- --
----- ----- -----
Net amount recognized................................ $(511) $(453) $(407)
===== ===== =====
Weighted average assumptions:
Discount rate...................................... 7.75% 6.5% 7.0%
</TABLE>
The assumed healthcare cost trend rate used in measuring the benefit
obligation is 6% for the year ended December 31, 1999, declining at a rate of
1.0% per year to an ultimate rate of 5.0% in 2000.
The net periodic benefit cost included the following components (in
thousands):
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ----------
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost....................................... $30 $18 $24
Interest cost...................................... 40 28 36
Amortization of unrecognized net actuarial loss.... 5 3 2
--- --- ---
Net periodic benefit cost............................ $75 $49 $62
=== === ===
</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 Postemployment
Benefits."
12. COMMITMENTS AND CONTINGENCIES:
LITIGATION
From time to time the Company is a party to various legal actions in the
normal course of business. The Company believes that it is not currently a party
in any litigation which, if adversely determined, would have a material adverse
effect on the financial condition of the Company.
55
<PAGE> 58
ENVIRONMENTAL MATTERS
The Company and its operations are subject to extensive and changing U.S.
federal, state, 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 (or, for certain sites, Mark IV, on behalf of the Company) has
undertaken or is currently undertaking remediation of contamination at certain
of its currently or formerly owned sites (some of which are unrelated to the
audio business), and the Company has agreed that it is a de minimis responsible
party at a number of other such sites, which have been designated as Superfund
sites under U.S. environmental laws. The Company has 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. Mark IV has
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 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 notices of noncompliance. The Company is
in discussions with the NDEQ regarding future actions, but it 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. In December 1997, the Company entered into an Administrative Order on
Consent with the U.S. Environmental Protection Agency 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, 1999, the Company had accrued approximately $1.7
million over the life of the project for anticipated costs to be incurred for
the Lincoln facility cleanup activities, of which approximately $1.5 million had
been incurred.
The Company's environmentally related expenditures for the year ended
December 31, 1999, the nine-month period ended December 31, 1998 and the year
ended March 31, 1998 were not material. The Company estimates that it will incur
in 2000 approximately $150,000 of environmentally related capital expenditures
in addition to those costs associated with the Lincoln facility 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
Mark IV 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 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.
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 9 to 12 months' salary in the event such executives are terminated
without cause.
56
<PAGE> 59
The Chief Executive Officer (CEO) entered into an employment agreement with
Holdings 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 the 1998
and 1999 calendar years, 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 $1.0 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 has received
options to purchase 250,000 shares of Holdings Common Stock pursuant to the 1998
Amended and Restated Performance Stock Option Plan adopted by Holdings. 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, 1999, 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 for the years ended December 31 (in thousands):
<TABLE>
<S> <C>
2000...................................................... $2,685
2001...................................................... 1,277
2002...................................................... 731
2003.................................................... 437
2004...................................................... 274
2005 and thereafter....................................... 1,481
------
Total minimum lease commitments........................... $6,885
======
</TABLE>
13. SEGMENT INFORMATION:
Subsequent to the Merger, 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.
57
<PAGE> 60
SEGMENT INFORMATION
As of and for the Year Ended December 31, 1999
(In Thousands)
<TABLE>
<CAPTION>
PROFESSIONAL MULTIMEDIA/
SOUND AND AUDIO
ENTERTAINMENT COMMUNICATIONS CORPORATE TOTAL
------------- -------------- --------- --------
<S> <C> <C> <C> <C>
Net sales............................. $206,914 $136,745 $ -- $343,659
Cost of sales......................... 125,347 94,052 -- 219,399
-------- -------- --------- --------
Gross profit..................... 81,567 42,693 124,260
Operating expenses:
Engineering......................... -- -- 14,872 14,872
Selling, general and
administrative................... -- -- 86,165 86,165
Corporate charges................... -- -- 1,716 1,716
Amortization of goodwill and other
intangibles...................... -- -- 11,972 11,972
Restructuring charges............... -- -- (2,124) (2,124)
-------- -------- --------- --------
-- -- 112,601 112,601
-------- -------- --------- --------
Operating profit (loss)............... 81,567 42,693 (112,601) 11,659
Interest expense...................... -- -- 36,689 36,689
Other income.......................... -- -- (6,674) (6,674)
Provision for income taxes............ -- -- 4,064 4,064
-------- -------- --------- --------
Net income (loss)................ $ 81,567 $ 42,693 $(146,680) $(22,420)
======== ======== ========= ========
Depreciation expense.................. $ 2,158 $ 2,364 $ 5,526 $ 10,048
======== ======== ========= ========
Capital expenditures.................. $ 3,752 $ 2,882 $ 1,807 $ 8,441
======== ======== ========= ========
Total assets.......................... $107,762 $ 58,013 $ 96,223 $261,998
======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
UNITED
STATES GERMANY JAPAN CANADA CHINA OTHERS TOTAL
-------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $199,929 $34,815 $19,212 $12,948 $14,369 $62,386 $343,659
======== ======= ======= ======= ======= ======= ========
Long-lived assets by
country..................... $108,047 $ 4,551 $ 1,357 $ 52 $ 76 $ 4,000 $118,083
======== ======= ======= ======= ======= ======= ========
</TABLE>
58
<PAGE> 61
SEGMENT INFORMATION
As of and for the Nine-Month Period Ended December 31, 1998
(In Thousands)
<TABLE>
<CAPTION>
PROFESSIONAL MULTIMEDIA/
SOUND AND AUDIO
ENTERTAINMENT COMMUNICATIONS CORPORATE TOTAL
------------- -------------- --------- --------
<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 goodwill and other
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........................... -- -- (2,719) (2,719)
Provision for income taxes............. -- -- 1,222 1,222
-------- ------- -------- --------
Net income (loss)................. $ 55,111 $33,965 $(94,128) $ (5,052)
======== ======= ======== ========
Depreciation expense................... $ 2,346 $ 1,788 $ 2,650 $ 6,784
======== ======= ======== ========
Capital expenditures................... $ 1,734 $ 892 $ 2,560 $ 5,186
======== ======= ======== ========
Total assets........................... $115,402 $52,491 $105,383 $273,276
======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
UNITED
STATES GERMANY JAPAN CANADA CHINA OTHERS TOTAL
-------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $148,454 $22,923 $12,244 $10,888 $ 9,970 $41,863 $246,342
======== ======= ======= ======= ======= ======= ========
Long-lived assets by
country..................... $126,277 $ 5,564 $ 1,533 $ -- $ 93 $ 3,872 $137,339
======== ======= ======= ======= ======= ======= ========
</TABLE>
59
<PAGE> 62
SEGMENT INFORMATION
As of and for the Year Ended March 31, 1998
(In Thousands)
<TABLE>
<CAPTION>
PROFESSIONAL MULTIMEDIA/
SOUND AND AUDIO
ENTERTAINMENT COMMUNICATIONS 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
Corporate charges................... -- -- 2,203 2,203
Amortization of goodwill and other
intangibles...................... -- -- 5,438 5,438
Restructuring charges............... -- -- 6,232 6,232
-------- -------- --------- --------
-- -- 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 expense......................... -- -- 43 43
Provision for income taxes............ -- -- 103 103
Extraordinary loss.................... -- -- 20,579 20,579
-------- -------- --------- --------
Net income (loss)................ $ 82,025 $ 45,315 $(178,219) $(50,879)
======== ======== ========= ========
Depreciation expense.................. $ 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 $15,817 $74,602 $332,964
Long-lived assets by
country..................... $131,185 $ 5,186 $ 690 $ 142 $ 121 $ 3,820 $141,144
</TABLE>
60
<PAGE> 63
The net sales to unaffiliated customers in each geographic region may
include both the sales from the Company's operating unit in the region and sales
made in the region by an operating unit from another region. Net sales to the
unaffiliated customers in the geographic regions for the year ended December 31,
1999 were as follows: United States $199.9 million, Germany--$34.8, Japan--$19.2
million, Canada--$12.9 million, China--$14.4 million, and other foreign
countries--$62.4 million. Net sales to the unaffiliated customers in the
geographic regions for the nine-month period ended December 31, 1998 were as
follows: United States--$148.5 million, Germany--$22.9 million, Japan--$12.2
million, Canada--$10.9 million, China--$10.0 million, and other foreign
countries--$41.9 million. Net sales to the unaffiliated customers in the
geographic regions for the year ended March 31, 1998 were as follows: United
States--$188.2 million, Germany--$22.9 million, Japan--$19.4 million,
Canada--$12.0 million, China--$15.8 million, and other foreign countries--$74.6
million. Export sales from the United States to unaffiliated customers were
approximately $32.4 million, $52.4 million and $44.3 million for the year ended
December 31, 1999, the nine-month period ended December 31, 1998 and the year
ended March 31, 1998, respectively. Sales from the Company's foreign
subsidiaries accounted for approximately 73%, 74% and 75% of the total
international sales for the year ended December 31, 1999, the nine-month period
ended December 31, 1998 and the year ended March 31, 1998, respectively.
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 reflect the Common Stock
split.
STOCK COMPENSATION PLANS
The 1997 Amended and Restated Stock Option Plan authorizes the issuance of
up to 267,728 shares of Holdings Common Stock, of which 237,216 have been
granted and 76,432 have been canceled. The exercise price of these options is
$7.98. These nonqualified options may be granted to certain key employees,
directors and independent contractors of the Company or Holdings.
The Amended and Restated 1998 Performance Stock Option Plan authorizes the
issuance of up to 880,732 shares of Holdings Common Stock, of which 837,500 have
been granted and 45,000 have been canceled. The exercise price of these options
is $0.01. These nonqualified options may be granted to certain key employees of
the Company or Holdings.
A summary of the Company's stock option activity and related information
for the period from May 6, 1997 (the date on which both entities came under
common control) through December 31, 1999 is as follows:
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 MARCH 31, 1998
-------------------- ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning of period................. 479,985 $6.91 780,560 $10.61 242,000 $ 1.27
Granted........................... 921,007 0.73 1,700 12.91 557,020 14.80
Exercised......................... (43,120) 0.08 -- -- (873) 7.98
Canceled.......................... (292,661) 9.02 (302,275) 16.49 (17,587) 17.63
--------- -------- -------
End of period....................... 1,065,211 1.08 479,985 6.91 780,560 10.61
========= ======== =======
Exercisable at end of period........ 208,535 3.97 353,735 3.39 289,500 2.37
========= ======== =======
Available for future grants......... 199,024 453,537 212,440
========= ======== =======
</TABLE>
Exercise prices for options outstanding as of December 31, 1999 range from
$0.01 to $7.98. The weighted average remaining contractual life of those options
is 8.3 years as of December 31, 1999. Compensation
61
<PAGE> 64
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 $159,000, $0 and $3,156,000 was
recorded in the year ended December 31, 1999, 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," the
Company's net loss would have been recorded at the following pro forma amounts:
<TABLE>
<CAPTION>
NINE-MONTH YEAR
YEAR ENDED PERIOD ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ---------
<S> <C> <C> <C>
Net loss (in thousands):
As reported............................................... $22,420 $5,052 $50,879
Pro forma................................................. 23,257 6,025 51,849
</TABLE>
The fair value of each award under the Option Plan is estimated on the date
of grant using the Black-Scholes minimum value theory options pricing model. The
following assumptions were used to estimate the fair value of options:
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
Risk-free interest rate..... 6.75% 6.75% 4.5%
Expected life............... 7.0 5.0 5.0
</TABLE>
The weighted average fair values at the grant dates are as follows:
<TABLE>
<S> <C> <C> <C>
December 31, 1999........... $(14.79)
December 31, 1998........... (11.01)
March 31, 1998.............. --
</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 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 2000, 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.
62
<PAGE> 65
The estimated fair values of the Company's financial instruments are as
follows as of December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents............................. $ 3,239 $ 3,239 $ 3,431 $ 3,431
Accounts receivable................................... 59,438 59,438 53,926 53,926
Accounts payable...................................... 20,817 20,817 20,920 20,920
Revolving line of credit.............................. 22,688 22,688 5,703 5,703
Long-term debt, excluding Senior Subordinated Notes... 96,189 96,189 107,000 107,000
Senior Subordinated Notes............................. 225,000 155,000 225,000 200,000
</TABLE>
16. QUARTERLY FINANCIAL DATA:
The following table shows the unaudited quarterly financial data (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales.......................................... $79,410 $86,761 $88,411 $ 89,077
Operating profit (loss)............................ 5,448 7,967 6,841 (8,597)
Net loss........................................... (2,357) (1,290) (1,506) (17,267)
</TABLE>
<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>
The results for the quarter ended March 31, 1998 contained certain
Merger-related costs and expenses, some of which are not easily quantifiable.
Therefore, the Company believes that comparing the financial results for the
quarter ended March 31, 1998 with the quarter ended March 31, 1999 is not
meaningful and has excluded that quarter.
17. SUBSEQUENT EVENTS:
ROYALTY FEE AGREEMENT AND SALE OF TRADEMARK
In March 2000, the Company reached a final agreement for payment of $6.0
million of past due royalty fees from a licensee for the use of the Altec
Lansing trademark. In addition, the Company restructured the license agreement
to provide for a one-time, up-front fee of $6.5 million in lieu of future
royalties. The Company received $1.7 million in cash in 1999. The remaining
$10.8 million will be received in varying amounts through March 2005.
Subsequent to entering into the Royalty Fee Agreement with the licensee of
the Altec Lansing trademark, the Company sold the Altec Lansing trademark to the
licensee for $1.0 million. In consideration, the Company will receive a $1.0
million promissory note payable March 2004.
LEASE COMMITMENT ON NEW CORPORATE HEADQUARTERS
In March 2000, the Company entered into a ten-year operating lease
commitment, with three five-year renewal options, for its new corporate
headquarters in Burnsville, Minnesota, with a limited liability company in which
the Company has a 50% interest. The remaining 50% interest is owned by a
previously unrelated party. The lease becomes effective on the date of purchase
of the new corporate headquarters by the limited liability company. The annual
minimum lease payments are expected to be $1.1 million for years one to five and
$1.2 million for years six to ten. The Company anticipates selling its existing
corporate headquarters by June 2000.
63
<PAGE> 66
CLOSING OF THE AUSTIN, TEXAS, MANUFACTURING FACILITY AND ACQUISITION OF A NEW
MANUFACTURING FACILITY
The Company has given notice of its intention not to renew the lease on its
Austin, Texas, manufacturing facility at its expiration on August 31, 2000. The
Company intends to relocate the production from this facility to a 202,000
square-foot facility, acquired in March 2000, in Morrilton, Arkansas.
The Company will recognize restructuring costs related to the closure of
the Austin, Texas, facility in the second quarter ended June 30, 2000, when
plans are expected to be finalized.
The Company acquired the Morrilton, Arkansas, facility for $1.8 million.
The Company financed the acquisition, in part, with a $1.7 million ten-year,
interest-free loan, with no principal repayments in the first two years, from
the Arkansas Department of Economic Development. The Company estimates that it
will incur approximately $1.6 million of expenditures to renovate the facility.
In addition, the state of Arkansas, through its Create Rebate Program, has
offered the Company certain rebates on payroll expenses based on the number of
new full-time, permanent jobs created at the facility.
64
<PAGE> 67
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Telex
Communications, Inc. and Subsidiaries' included in this Form 10-K, and have
issued our report thereon dated March 3, 2000, except for note 17, as to which
the date is March 30, 2000.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule II -- Valuation and
Qualifying Accounts of Registrant are the responsibility of the company's
management and are presented for purposes of complying with the Securities and
Exchange Commissions rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
March 3, 2000
65
<PAGE> 68
SCHEDULE II
TELEX COMMUNICATIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
for the twelve months ended December 31, 1999, the nine-month period
ended December 31, 1998 and the fiscal year ended March 31, 1998
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - ---------------------------------- ---------- ---------------------- ---------- ----------
ADDITIONS
----------------------
BALANCE AT CHARGED DEDUCTIONS BALANCE AT
BEGINNING CHARGED TO TO OTHER FROM END OF
DESCRIPTION OF YEAR INCOME ACCOUNTS RESERVES YEAR
- - ----------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended March 31, 1998
Valuation account deducted from
assets to which it applies--
Allowance for doubtful
accounts........................ $1,849 $980 $ 1,639(a) $ 485(b) $3,983
====== ==== ======== ====== ======
Nine-Month Period Ended December
31, 1998
Valuation account deducted from
assets to which it applies--
Allowance for doubtful
accounts........................ $3,983 $382 $1,440(b) $2,925
====== ==== ====== ======
Twelve Months Ended December 31,
1999
Valuation account deducted from
assets to which it applies--
Allowance for doubtful
accounts........................ $2,925 $858 $1,605(b) $2,178
====== ==== ====== ======
</TABLE>
- - ---------------
(a) Includes Old Telex balance as of February 2, 1998 when Old EVI and Old Telex
merged.
(b) Uncollectible accounts written off and adjustments to the allowance.
66
<PAGE> 69
EXHIBIT INDEX
for
Form 10-K
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S> <C>
2.1 -- 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. and EV
International, Inc. (incorporated by reference to Exhibit 2
to Old Telex's Quarterly Report on Form 10-Q for the nine
months ended December 31, 1997, filed with the Commission on
February 17, 1998, File No. 333-30679).
2.2(a) -- Recapitalization Agreement and Plan of Merger, dated March
4, 1997, among Greenwich 11 LLC ("G-11"), 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).
2.2(b) -- 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).
2.2(c) -- 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).
3.1 -- 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).
3.2 -- 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).
4.1(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).
4.1(b) -- 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).
4.1(c) -- 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 the nine
months ended December 31, 1997, filed with the Commission on
February 17, 1998, File No. 333-30679).
4.2 -- 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).
4.3(a) -- 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).
4.3(b) -- 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).
4.3(c) -- 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. 33330679).
</TABLE>
67
<PAGE> 70
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S> <C>
4.3(d) -- 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).
4.3(e) -- 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 the nine months ended
December 31, 1997, filed with the Commission on February 17,
1998, File No. 333-30679).
4.3(f) -- 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 Report on Form 8-K, filed with the Commission on
January 15, 1999, File No 33327341).
4.3(g) -- Amendment No. 3, dated as of October 29, 1999, to the Credit
Agreement, among the Company, the Lenders, Morgan Stanley
Senior Funding, Inc. as Documentation Agent for the Lenders,
and The Chase Manhattan Bank, as Administrative Agent for
the Lenders (incorporated by reference to Exhibit (10(b) to
the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999, filed with the
Commission on November 15, 1999, Registration No.
333-27341).
10.1 -- Amended and Restated Stockholders Agreement, dated March 4,
1997, among Old Telex, G-11 and the Stockholders set forth
on Schedule A thereto (incorporated by reference to Exhibit
10(a) to Old Telex's Registration Statement on Form S-4,
Registration No. 333-30679).
*10.2(a) -- Consulting Agreement, dated May 6, 1997, between Greenwich
Street Capital Partners, Inc. ("GSCP Inc."), Holdings and
G-11 (incorporated by reference to Exhibit 10(c) to Old
Telex's Registration Statement on Form S-4, Registration No.
333-30679).
*10.2(b) -- Form of Amendment, dated May 1, 1998, to the Consulting
Agreement, dated May 6, 1997, between GSCP Inc., Holdings
and G-11 (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).
*10.3 -- Indemnification Agreement, dated May 6, 1997, between GSCP
Inc., Holdings and G-11 (incorporated by reference to
Exhibit 10(d) to Old Telex's Registration Statement on Form
S-4, Registration No. 333-30679).
*10.4 -- 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).
*10.5(a) -- Employment Agreement, dated as of August 26, 1998 between
Ned C. Jackson and Telex Communications Group, Inc.
(incorporated by reference to Exhibit 10(g) to the Company's
Annual Report on Form 10-K for the Transition Period from
April 1, 1998 to December 31, 1998, filed with the
Commission on March 31, 1999, File No 333-27341).
*10.5(b) -- Incentive Compensation Agreement, dated as of March 15, 2000
between Ned C. Jackson and Telex Communications Group, Inc.
(filed as an exhibit hereto).
*10.6(a) -- 1997 Telex Communications Group, Inc. Stock Option Plan
(incorporated by reference to Exhibits 10(h), 10(i) and 100)
to Old Telex's Registration Statement on Form S-4,
Registration No. 333-30679).
*10.6(b) -- 1997 Telex Communications Group, Inc. Amended and Restated
Stock Option Plan (incorporated by reference to Exhibit
10(h) to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999, filed with the
Commission on August 16, 1999, Registration No. 333-27341).
*10.7 -- Telex Communications Group, Inc. Cash Bonus Plan
(incorporated by reference to Exhibits 10(h), 10(i) and 100)
to Old Telex's Registration Statement on Form S-4,
Registration No. 333-30679).
</TABLE>
68
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S> <C>
*10.8 -- Telex Communications Group, Inc. Management Cash
Compensation Plan (incorporated by reference to Exhibits
10(f), 10(g) and 10(h) to Old Telex's Registration Statement
on Form S-4, Registration No 333-30679).
*10.9 -- 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).
*10.10 -- 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).
*10.11(a) -- 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).
*10.11(b) -- Warrant, dated March 14, 2000, issued by Holdings to Edgar
S. Woolard, Jr. (filed as an exhibit hereto).
*10.12 -- 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).
10.13 -- 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).
10.14 -- 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).
*10.15 -- Amended and Restated 1998 Telex Communications Group, Inc.
Performance Stock Option Plan (incorporated by reference to
Exhibit 10(ee) to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999, filed
with the Commission on August 16, 1999, Registration No.
333-27341).
10.16(a) -- Member Control Agreement of DRF 12000 Portland LLC, dated
March 16, 2000, by and between Telex Communications, Inc.
and DRF TEL LLC, a Minnesota limited liability company
(filed as an exhibit hereto).
10.16(b) -- Lease, dated March 16, 2000, by and between Telex
Communications, Inc. and DRF 12000 Portland LLC, a Minnesota
limited liability company, for the property located at 12000
Portland Avenue South, Burnsville, Minnesota (filed as an
exhibit hereto).
10.17 -- Real Estate Purchase Agreement dated January 31, 2000, by
and between Joseph H. Baldiga, Chapter 7 Trustee of Arrow
Automotive Industries, Inc. ("Seller") and Telex
Communications, Inc. ("Buyer") for the purchase of property
located at One Arrow Drive, Morrilton, Arkansas 72110 (filed
as an exhibit hereto).
21 -- List of Subsidiaries (filed as an exhibit hereto).
27 -- Financial Data Schedules (filed as an exhibit hereto).
</TABLE>
- - ---------------
* Denotes management contract, executive compensation plan, or arrangement.
69
<PAGE> 1
EXHIBIT 10.5(b)
INCENTIVE COMPENSATION AGREEMENT dated as of March 14, 2000 (this "Agreement")
between:
(a) TELEX COMMUNICATIONS GROUP, INC., a Delaware corporation (the "Company");
(b) NED C. JACKSON ("Jackson").
Certain capitalized terms used in this Agreement shall have the meanings given
such terms on Schedule A hereto, unless otherwise defined herein.
Witnesseth:
Whereas, the Company has requested that Jackson serve as President of the
Company; and
Whereas, in order to inducement Jackson to serve as the President of the
Company, the Company proposes to executed and deliver this Agreement.
Now, therefore, in consideration of the mutual benefits to be derived and the
representations and warranties, conditions and promises herein contained, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. Triggering Event Incentive Payment.
(a) Upon the occurrence of a Triggering Event, Jackson shall be entitled
to receive from the Company a payment in cash (the "Triggering Event
Incentive Payment") in an amount determined by multiplying (i) an
amount equal to the Greenwich Proceeds less $141 million and an
allocable portion of the amount of the Triggering Event Incentive
Payment, by (ii) the Applicable Percentage.
(b) The "Applicable Percentage" shall be determined as set forth below
based on the indicated Greenwich Proceeds:
<TABLE>
<S> <C>
Greenwich Proceeds Applicable Percentage
------------------ ---------------------
Not greater than $200 million 1%
Greater than $200 million 2%
</TABLE>
The calculation of the Triggering Event Incentive Payment is
illustrated on Schedule B hereto.
(c) A "Triggering Event" shall be deemed to have occurred if the Company
shall have effected any of the following transactions:
(i) (A) a merger or consolidation of the Company resulting in the
holders of the Common Stock of the Company as of immediately
prior to such transaction ceasing to own as of immediately
after the transaction more than 80% of the Common Stock of the
Company or its successor; or (B) a sale of all or
substantially all of the assets of the Company, including
without limitation a sale by
<PAGE> 2
the Company of more than 80% of the Common Stock of Telex
Communications, Inc.;
(ii) a sale or transfer by Greenwich I, LLC and/or Greenwich II,
LLC (other than transfers by Greenwich II, LLC to any
"Permitted Assignee" (as defined in the Stockholders and
Registration Rights Agreement as amended and restated as of
May 6, 1997), and other than transfers by Greenwich I, LLC to
any Person who would be a Permitted Assignee of Greenwich I,
LLC under the same definition if applied to Greenwich I, LLC),
together with sales and transfers by any Permitted Assignees,
in one or more transactions, of shares of the Common Stock
which represents more than 50% of shares of the Common Stock
owned by them as of the date hereof; or
(iii) a recapitalization of the Company resulting in a distribution
of cash or property to the holders of the Common Stock (a
"Recapitalization") and Greenwich Proceeds in an amount
greater than the sum of $141 million and an allocable portion
of the amount of the Triggering Event Incentive Payment that
would be payable upon the occurrence of such Triggering Event.
(d) "Greenwich Proceeds" shall mean the aggregate purchase price,
or exchange or conversion consideration, or distributions of cash or
property, received by Greenwich I, LLC and Greenwich II, LLC
(together "Greenwich"), in the Triggering Event, in respect of the
Common Stock and the Series A Pay-in-Kind Preferred Stock, par value
$0.01 per share (the "PIK Preferred Stock"), of the Company owned by
Greenwich). In the event that a Triggering Event shall occur
subsequent to the occurrence of a Recapitalization (where such
previous Recapitalization did not itself constitute a Triggering
Event), Greenwich Proceeds in the Triggering Event shall include also
any distributions of cash or property to Greenwich in respect of the
Common Stock or the PIK Preferred Stock made in connection with the
prior Recapitalization. In the event of the occurrence of another
Triggering Event subsequent to a Recapitalization which was a
Triggering Event, the Triggering Event Incentive Payment and the
Applicable Percentage shall be recalculated and adjusted, on a
cumulative basis taking into account the prior Recapitalization
Triggering Event and all such other distributions. In the event that
the purchase price or exchange or conversion consideration paid, or
the distributions received, in the transaction includes securities or
assets, the value of such securities or assets for purposes of
determining the Greenwich Proceeds shall be determined by the Board
of Directors of the Company in its reasonable judgment. In such
determination, all of the members of the Board of Directors may
participate notwithstanding that any such director might be
Affiliated or associated with, or have any financial or other
interest or relationship with or in, Greenwich and the vote of such
director shall be counted in such determination.
2. Not an Employment Agreement; Etc.
(a) Nothing contained in this Agreement shall constitute an agreement of
employment between the Company and Jackson or shall establish any
entitlement of Jackson to employment by the Company.
<PAGE> 3
(b) The rights of Jackson under this Agreement shall terminate,
and his entitlement to the Triggering Event Incentive Payment shall
be automatically forfeited: (i) as of the date of the voluntary
resignation by Jackson as President, the death of Jackson or the
removal of Jackson as President for Cause or because of Jackson's
Disability; or (ii) upon the occurrence of any Insolvency Event with
respect to Jackson. However, if a Triggering Event occurs within one
year following the death of Jackson or the removal of Jackson because
of Jackson's Disability, and if the Triggering Event Incentive
Payment would have been payable to Jackson but for his death, then
the estate of Jackson shall be entitled to receive the Triggering
Event Incentive Payment.
3. Miscellaneous.
(a) This Agreement contains the entire agreement between the parties
hereto with respect to the Triggering Event Incentive Payment and
supersedes all prior arrangements or understandings with respect
thereto.
(b) The descriptive headings of this Agreement are for convenience only
and shall not control or affect the meaning or construction of any
provision of this Agreement.
(c) All notices or other communications which are required or permitted
under this Agreement shall be in writing and sufficient if delivered
personally or sent by facsimile transmission, internationally
recognized over-night courier or registered or certified mail,
postage prepaid, addressed as follows:
<TABLE>
<S><C>
If to the Company: with a copy to:
9600 Aldrich Avenue South Dechert Price & Rhoads
Bloomington, Minnesota 55420 30 Rockefeller Plaza
Attention: Kris Bruer New York. New York 10112
General Counsel Attention: Ronald R. Jewell
Fax: 612-887-5588 Fax: (212) 698-3599
If Jackson:
1976 Pine Ridge Drive
West St. Paul, Minnesota 55118
Fax : 651-453-1507
</TABLE>
Any such notices or communications shall be deemed to have been
received: (i) if delivered personally or sent by facsimile
transmission (with transmission confirmed in a writing) or nationally
recognized overnight courier; or (ii) if sent by registered or
certified mail, on the date on which such mailing was received by the
party to whom it was addressed. Any party may by notice as aforesaid
change the address to which notices or other communications to it are
to be delivered or mailed.
(d) This Agreement shall be governed by and construed in accordance with
the Laws of the State of New York (other than the choice of law
principles thereof).
<PAGE> 4
(e) Any action, suit or other proceeding initiated by any party hereto
against the others under or in connection with this Agreement may be
brought in any Federal or state court in the State of New York, as
the party bringing such action, suit or proceeding shall elect,
having jurisdiction over the subject matter thereof. The parties
hereto hereby submit themselves to the jurisdiction of any such court
for the purpose of any such action and agree that service of process
on them in any such action, suit or proceeding may be effected by the
means by which notices are to be given to it under this Agreement.
(f) The parties hereto acknowledge that the award of damages for any
breach of the obligations undertaken by the parties hereto may be
insufficient and inadequate and that the parties hereto shall be
entitled to obtain specific performance of the obligations of the
other parties under this Agreement or other injunctive relief, in
addition to damages.
(g) Except as provided in the last sentence of Section 2(b) hereof, the
rights of Jackson under this Agreement are personal to Jackson, and
may not be assignable by Jackson, and any purported assignment by
Jackson shall be void.
(h) Any waiver of any term or condition of this Agreement, or any
amendment or supplementation of this Agreement, shall be effective
only if in writing. A waiver of any breach or failure to enforce any
of the terms or conditions of this Agreement shall not in any way
affect, limit or waive a party's rights under this Agreement at any
time to enforce strict compliance thereafter with every term or
condition of this Agreement.
(i) In the event that any provision contained in this Agreement shall be
determined to be invalid, illegal or unenforceable in any respect for
any reason, the validity, legality and enforceability of any such
provision in every other respect and the remaining provisions of this
Agreement shall not, at the election of the party for whose benefit
the provision exists, be in any way impaired.
(j) This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, and it shall not be necessary in
making proof of this Agreement or the terms hereof to produce or
account for more than one of such counterparts.
* * *
In witness whereof, the undersigned have executed this Agreement as of the date
first above written.
TELEX COMMUNICATIONS GROUP, INC. JACKSON:
By:
---------------------------------------- ---------------------------
Edgar S. Woolard, Jr. Ned C. Jackson
Chairman of the Board of Directors
<PAGE> 5
SCHEDULE A TO INCENTIVE COMPENSATION AGREEMENT
Certain Definitions
For purposes of this Agreement, the following terms shall have the following
meanings:
"Affiliate" shall mean as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person and, if such Person is an individual, shall mean also any member of the
immediate family (including parents, spouse, children and grandchildren) of such
individual and any trust whose principal beneficiary is such individual or one
or more members of such immediate family and any Person who is controlled by any
such member or trust. As used in this definition, "control" (including, with its
correlative meanings, "controlled by" and "under common control with") shall
mean possession, directly or indirectly, of power to direct or cause the
direction of the management or policies (whether through the ownership of
securities or partnership or other ownership interests, by contract or
otherwise); and any Person which owns directly or indirectly 10% or more of the
securities having ordinary voting power for the election of directors or other
governing body of a corporation or 10% or more of a partnership or other
ownership interest of any other Person will be deemed to control such
corporation or other Person.
"Agreement" shall mean this Agreement, as it may be amended or supplemented at
any time and from time to time after the date hereof.
"Applicable Percentage" shall have the meaning given such term in Section 1(b)
hereof.
" Cause", when used with respect to the removal of Jackson as President of the
Company, shall have the meaning given such term in the Employment Agreement
dated as of August 26, 1998 between the Company and Jackson.
"Common Stock" shall mean the Common Stock, par value $0.0005 per share, of the
Company, together with any shares of the capital stock of the Company issued in
substitution therefor.
"Company" shall mean Telex Communications Group, Inc. and any successor Telex
Communications Group, Inc. whether by merger, law or otherwise.
"Disability", when used with respect to the removal of Jackson as President of
the Company, shall have the meaning given such term in the Employment Agreement
dated as of August 26, 1998 between the Company and Jackson.
"Greenwich" and "Greenwich Proceeds" shall have the meaning given such term in
Section 1(e) hereof.
"Insolvency Event" shall mean and include any of the following affecting
Jackson: bankruptcy; reorganization; insolvency proceeding; receivership;
appointment of a trust or conservatorship; foreclosure on or seizure of assets;
enforcement of any lien, mortgage, collateral assignment or similar agreement or
security interest on any assets; liquidation or dissolution; suspension or
withdrawal of any banking or loan privileges or arrangements; or any similar
proceeding or action affecting Jackson or any of the assets of Jackson.
<PAGE> 6
2
"Jackson" shall have the meaning given such term at the beginning of this
Agreement.
"Person" shall mean shall mean: any corporation, partnership, joint venture,
trust, unincorporated association or organization, business, enterprise, or
other entity; any individual; and any Government.
"PIK Preferred Stock" shall have the meaning given such terms in Section 1(d)
hereof.
"Recapitalization" shall have the meaning given such terms in Section 1(c)(iii)
hereof.
"Related Persons" when used with respect to any other Person shall mean and
include: members of the family of such Person (including without limitation
natural and adopted children, parents, grand-parents, siblings and children of
siblings); the estate of such Person upon such Person's death; descendents of
such Person; and trusts or similar entities created for the benefit of such
Person or any Related Person.
"Triggering Event" shall have the meaning given such term in Section 1(c)
hereof.
"Triggering Event Incentive Payment" shall have the meaning given such term in
Section 1(a) hereof.
<PAGE> 7
SCHEDULE B TO INCENTIVE COMPENSATION AGREEMENT
FORMULA FOR CALCULATION OF JACKSON INCENTIVE COMPENSATION
G = Greenwich Proceeds
P = The percentage of the outstanding Common Stock of Telex held by
Greenwich as of immediately prior to the Triggering Event
J = Incentive Payment to Jackson
BASIC FORMULA ASSUMING G IS NOT GREATER THAN $200 MILLION:
J = (G - 141,000,000 - (P x J)) x 0.01
or
J = (0.01G - 1,410,000) (1 + (0.01 x P))
For example, if the Greenwich Proceeds before calculation of the Triggering
Event Incentive Payment is $200 million, and assuming that the percentage of the
outstanding Common Stock of Telex held by Greenwich is 96.1227%, then the
Triggering Event Incentive Payment would be $584,382.76.
BASIC FORMULA ASSUMING G IS GREATER THAN $200 MILLION:
J = (G - 141,000,000 - (P x J)) x 0.02
or
J = (0.02G - 1,410,000) (1 + (0.02 x P))
For example, if the Greenwich Proceeds before calculation of the Triggering
Event Incentive Payment is $250 million, and assuming that the percentage of the
outstanding Common Stock of Telex held by Greenwich is 96.1227%, then the
Triggering Event Incentive Payment would be $2,138,881.00.
<PAGE> 1
EXHBIT 10.11(b)
TELEX COMMUNICATIONS GROUP, INC.
WARRANT FOR THE PURCHASE OF SHARES OF
COMMON STOCK, PAR VALUE $0.0005 PER SHARE
THE TRANSFER OF THIS WARRANT IS RESTRICTED AS DESCRIBED HEREIN.
CERTAIN CAPITALIZED TERMS USED IN THIS WARRANT SHALL HAVE THE MEANINGS GIVEN
SUCH TERMS ON SCHEDULE A HERETO, UNLESS OTHERWISE DEFINED HEREIN.
1. THIS CERTIFIES that, for value received, Edgar S. Woolard, Jr. ("Holder" or
"Woolard"), is entitled to subscribe for and purchase from Telex
Communications Group, Inc., a Delaware corporation (the "Company"), upon
the terms and conditions set forth herein, upon the effectiveness of any
Triggering Event, such number of shares (the "Warrant Shares") of the
Company's Common Stock, par value $0.0005 per share (the "Common Stock"),
as shall be determined pursuant to Section 3(b) hereof, at a price equal to
$0.01 per share, subject to adjustment as provided herein (the "Exercise
Price"). This Warrant shall be deemed to have been exercised, to the extent
Vested, automatically and without the necessity of any action on the part
of Holder (other than the payment of the Exercise Price) as of immediately
prior to the effectiveness of any Triggering Event.
2. (a) This Warrant shall be exercisable only to the extent that its has
become Vested as of the Triggering Event. Any portion of this Warrant
which is not Vested as of the Triggering Event shall expire and be no
longer exercisable.
(b) Except as hereinafter provided, this Warrant with respect to one-third
(1/3rd) of the underlying Warrant Shares that become issuable upon
exercise of this Warrant shall become "Vested" as of the date hereof,
and the remainder of this Warrant as it relates to the underlying
Warrant Shares that become issuable upon exercise of this Warrant
shall become Vested at a rate of 1/36th of the aggregate amount of
this Warrant as of the first day of each month, commencing with the
thirteenth (13th) month after the date hereof.
(c) In the event of the death of Woolard or his removal as Chairman of the
Board of Directors of the Company because of Disability, then this
Warrant shall become Vested in an amount equal to the greater of: (i)
the amount as determined pursuant to Section 2(b) hereof; or (ii) 50%
of the total amount of this Warrant. The estate of Woolard shall be
entitled to the benefits of the exercise of this Warrant in accordance
with its terms.
(d) In the event that Woolard shall cease to be the Chairman of the Board
of Directors of the Company because of the removal of Woolard as
Chairman of the Board of Directors of the Company For Cause, then this
Warrant shall, in its entirety, expire and be no longer exercisable
and any Vested portion of this Warrant shall be forfeited.
(e) In the event that Woolard shall cease to be Chairman of the Board of
Directors of the Company because of his resignation, then any portion
of this Warrant which has not become Vested prior to the effectiveness
of such resignation shall expire.
(f) In the event that a Triggering Event shall have occurred prior to the
death of Woolard or his removal as Chairman of the Board of Directors
of the Company because of Disability,
<PAGE> 2
2
or prior to the removal of Woolard as Chairman of the Board of
Directors of the Company For Cause, or prior to any resignation by
Woolard as Chairman of the Board of Directors of the Company, then
this Warrant shall become 100% Vested.
3. (a) A "Triggering Event" shall be deemed to have occurred if any of
the following transactions shall have been effected:
(i) (A) a merger or consolidation of the Company resulting in the
holders of the Common Stock of the Company as of immediately
prior to such transaction ceasing to own as of immediately
after the transaction more than 80% of the Common Stock of the
Company or its successor; or (B) a sale of all or
substantially all of the assets of the Company, including
without limitation a sale by the Company of more than 80% of
the Common Stock of Telex Communications, Inc.; or
(ii) a sale or transfer by Greenwich I, LLC and/or Greenwich II,
LLC (other than transfers by Greenwich II, LLC to any
"Permitted Assignee" (as defined in the Stockholders and
Registration Rights Agreement as amended and restated as of
May 6, 1997), and other than transfers by Greenwich I, LLC to
any Person who would be a Permitted Assignee of Greenwich I,
LLC under the same definition if applied to Greenwich I, LLC),
but together with sales and transfers by any such Permitted
Assignees), in one or more transactions, of shares of the
Common Stock which represents in the aggregate more than 50%
of shares of the Common Stock owned by them as of the date
hereof.
(b) This Warrant shall entitle Holder to purchase, provided that a
Triggering Event shall have occurred, such number of shares of the
Common Stock as shall be determined by multiplying: (i) the number of
shares of Common Stock set forth below based on the indicated
Triggering Event Valuation; by (ii) a fraction which represents that
portion of this Warrant which has become Vested as of the date of the
Triggering Event:
<TABLE>
<CAPTION>
Triggering Event Valuation Number of Shares of Common Stock*
-------------------------- ---------------------------------
<S> <C>
Level I: $550 million or less 187,451.13
Level II: Greater than $550 million but not greater A number of shares determined in the manner
than $700 million described on Schedule B hereto
with respect to Level II.
Level III (maximum): Greater than $700 444,938.93
million
</TABLE>
* Subject to adjustment pursuant to the provisions of Sections 6
and 7 hereof.
<PAGE> 3
3
(c) "Triggering Event Valuation" shall equal the sum of the amounts
determined pursuant to the following clauses (i) and (ii):
(i) (A) in the case of a Triggering Event involving the transfer,
exchange or conversion of 100% of the Common Stock, or a
sale of all or substantially all of the assets of the
Company, and where the purchaser or acquiring Person in the
Triggering Event is obligated to satisfy or assume (directly
or indirectly) the Indebtedness of the Company: (A) the
purchase price or exchange or conversion consideration paid
with respect to the Common Stock upon the effectiveness or
closing of the Triggering Event; plus (B) an amount equal to
the Assumed Indebtedness; plus (C) the full redemption value
of the Preferred Stock as of immediately prior to the
effectiveness or closing of the Triggering Event; or
(B) in the case of a Triggering Event involving the transfer,
exchange or conversion of 100% of the Common Stock, or a
sale of all or substantially all of the assets of the
Company, and where the purchaser or acquiring Person in the
Triggering Event is not obligated to satisfy or assume
(directly or indirectly) the Indebtedness of the Company:
the purchase price paid with respect to the Company (for
example, a sale of the entire Company for cash) upon the
effectiveness or closing of the Triggering Event; or
(C) in the case of a Triggering Event involving the transfer,
exchange or conversion of less than 100% of the Common
Stock, the Triggering Event Valuation shall be: (A) the
product of the weighted average purchase price or exchange
or conversion consideration per share paid for all of the
Common Stock sold or transferred and 4,498,827 (subject to
adjustment based on any event which gives rise to a similar
adjustment of the number of Warrant Shares issuable upon
exercise of this Warrant pursuant to the provisions of
Sections 6 and 7 hereof); plus (B) an amount equal to the
Assumed Indebtedness; plus (C) the full redemption value of
the Preferred Stock as of immediately prior to the
effectiveness or closing of the Triggering Event;
and
(ii) the aggregate of all distributions of cash or property which have
been made to Greenwich I, LLC and Greenwich II, LLC, with respect
to the Common Stock and the Preferred Stock held by them, and to
the holder of this Warrant pursuant to any Recapitalization.
For purposes hereof, "Assumed Indebtedness" shall mean $345 million. The
actual amount of Indebtedness of the Company outstanding as of Triggering
Event shall not be taken into account in any calculation of the
Triggering Event Valuation.
In the event that the purchase price or exchange or conversion
consideration paid in the transaction includes securities or assets, the
value of such securities or assets for purposes of determining the
Triggering Event Valuation shall be determined by the Board of Directors
of the Company in its reasonable judgment. In such determination, all of
the members of the Board of Directors may participate notwithstanding
that any such director might be Affiliated
<PAGE> 4
4
or associated with, or have any financial or other interest or
relationship with or in, Greenwich and the vote of such director
shall be counted in such determination.
(d) Upon the automatic exercise of this Warrant, this Warrant shall be
surrendered to the Company or its duly authorized agent and
accompanied by payment in an amount equal to the Exercise Price
multiplied by the number of Warrant Shares for which this Warrant is
exercised. Such payment may be made by certified or bank cashier's
check payable to the order of the Company. This Warrant shall expire
and terminate as to any Warrant Shares for which Holder fails to pay
the Exercise Price within 10 days following the Triggering Event.
(e) Holder shall be deemed to be the holder of record of the Warrant
Shares issuable upon exercise of this Warrant as of immediately prior
to the effectiveness of the Triggering Event, notwithstanding that
the such Warrant Shares shall not then have been actually delivered
to Holder.
4. (a) The Company shall have no obligation to cause Warrants or Warrant
Shares to be transferred on its books to any Person if: (i) such
transfer violates the restrictions on transfer contained in Section
10(a) hereof; or (ii) in the opinion of counsel to the Company, such
transfer does not comply with the provisions of the Securities Act of
1933, as amended (the "Securities Act"), and the rules and
regulations promulgated thereunder.
(b) Holder acknowledges that it has been advised by the Company that
neither this Warrant nor the Warrant Shares have been registered
under the Securities Act, that this Warrant is being or has been
issued and the Warrant Shares may be issued on the basis of the
statutory exemption provided by Section 4(2) of the Securities Act or
Regulation D promulgated thereunder, or both, relating to
transactions by an issuer not involving any public offering. Holder
acknowledges that it has been informed by the Company of, or is
otherwise familiar with, the nature of the limitations imposed by the
Securities Act and the rules and regulations thereunder on the
transfer of securities. In particular, Holder agrees that no sale,
assignment or transfer of this Warrant or the Warrant Shares issuable
upon exercise hereof shall be valid or effective, and the Company
shall not be required to give any effect to any such sale, assignment
or transfer, unless: (i) the sale, assignment or transfer of this
Warrant or such Warrant Shares is registered under the Securities
Act, it being understood that neither this Warrant nor such Warrant
Shares are currently registered for sale and that the Company has no
obligation hereunder or intention to so register this Warrant or such
Warrant Shares; or (ii) such sale, assignment or transfer is exempt
from registration under the Securities Act.
(c) The Company shall be entitled to treat the registered holder of any
Warrant on the Warrant Register as the owner in fact thereof for all
purposes and shall not be bound to recognize any equitable or other
claim to or interest in such Warrant on the part of any other person,
and shall not be liable for any registration or transfer of Warrants
which are registered or to be registered in the name of a fiduciary
or the nominee of a fiduciary unless made with the actual knowledge
that a fiduciary or nominee is committing a breach of trust in
requesting such registration or transfer, or with the knowledge of
such facts that its participation therein amounts to bad faith. This
Warrant shall be transferable only on the books of the Company upon
delivery thereof duly endorsed by Holder or by
<PAGE> 5
his duly authorized attorney or representative, or accompanied by
proper evidence of succession, assignment or authority to transfer.
In all cases of transfer by an attorney, executor, administrator,
guardian or other legal representative, duly authenticated evidence
of his or its authority shall be produced. Upon any registration of
transfer, the Company shall deliver a new Warrant or Warrants to the
person entitled thereto. This Warrant may be exchanged, at the option
of Holder thereof, for another Warrant, or other Warrants of
different denominations, of like tenor and representing in the
aggregate the right to purchase a like number of Warrant Shares (or
portions thereof), upon surrender to the Company or its duly
authorized agent.
5. (a) The Company shall at all times reserve and keep available out of
its authorized and unissued Warrant Shares, solely for the purpose of
providing for the exercise of the rights to purchase all Warrant
Shares granted pursuant to this Warrant, such number of shares of
Common Stock as shall, from time to time, be sufficient therefor. The
Company covenants that, if and when this Warrant is exercised, the
shares of Common Stock issued upon such exercise, upon receipt by the
Company of the full Exercise Price therefor, shall be validly issued,
fully paid and nonassessable and will not be issued in violation of
any preemptive rights of stockholders.
(b) If and so long as the Common Stock is listed on any securities
exchange (as defined in the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), or quoted on Nasdaq, the Company will,
at its expense, obtain and maintain the approval for listing or
quotation on Nasdaq upon official notice of issuance of all shares of
Common Stock issuable upon the exercise of the Warrants at the time
outstanding and maintain the listing or quotation on Nasdaq of such
shares after their issuance; and the Company will so list on such
securities exchange or obtain such quotation on Nasdaq and will
register under the Exchange Act (or any similar statue then in
effect), and will maintain such listing or quotation of, any other
securities that at any time are issuable upon exercise of this
Warrant if, and at the time that, any securities of the same class
shall be listed on such securities exchange or quotation on Nasdaq by
the Company.
6. (a) In case the Company shall, at any time prior to the occurrence of a
Triggering Event, declare a dividend on the outstanding Common Stock
of the Company payable in shares of its Common Stock, subdivide the
outstanding Common Stock, or combine the outstanding Common Stock
into a smaller number of shares, then, in each case, the number of
Warrant Shares issuable upon exercise of this Warrant, in effect at
the time of the record date for such dividend or of the effective
date of such subdivision or combination, shall be proportionately
adjusted so that Holder after such time shall be entitled to purchase
the aggregate number of shares of Common Stock which, if this Warrant
had been exercised immediately prior to such time at the then-current
exercise price, such holder would have owned upon such exercise and
been entitled to receive by virtue of such dividend, subdivision or
combination. Upon any adjustment of the number of Warrant Shares
pursuant to this Section 6(a), the exercise price in effect prior to
such adjustment shall be adjusted to the price obtained by
multiplying such exercise price by a fraction, the numerator of which
is the number of Warrant Shares issuable upon exercise of this
Warrant immediately prior to such adjustment and the denominator of
which is the number of Warrant Shares issuable upon exercise of this
Warrant immediately after such adjustment. Such adjustments shall be
made successively whenever any event listed above shall occur.
<PAGE> 6
(b) Whenever there shall be an adjustment as provided in this Section 6,
the Company shall promptly cause written notice thereof to be sent by
certified mail, postage prepaid, to Holder, at its address as it
shall appear in the Warrant Register, which notice shall be
accompanied by an officer's certificate setting forth the number of
Warrant Shares purchasable upon the exercise of this Warrant and the
Exercise Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment and the computation
thereof, which officer's certificate shall be conclusive evidence of
the correctness of any such adjustment absent manifest error.
(c) The Company shall not be required to issue fractions of shares of
Common Stock of the Company upon the exercise of this Warrant. If any
fraction of a share would be issuable upon the exercise of this
Warrant, the aggregate number of Warrant Shares issuable upon
exercise of this Warrant (and any Warrants issued in exchange or
substitution for this Warrant, whether upon any transfer or
otherwise, shall be treated as one Warrant for this purpose) shall be
rounded down to an aggregate number of whole Warrant Shares.
7. (a) In case of any merger of or consolidation with the Company with or
into another entity at any time while this Warrant is unexpired and
not exercised in full (other than a merger or consolidation which is
a Triggering Event or which is covered by Section 7(b) hereof),
Holder shall have the right thereafter to receive upon exercise of
this Warrant the kind and amount of shares of stock and other
securities or property, including cash, or any combination thereof,
receivable upon such consolidation or merger by a Holder of the
number of shares of Common Stock for which this Warrant might have
been exercised immediately prior to such consolidation or merger; and
appropriate provision shall be made with respect to the rights and
interests thereafter of Holder, to the end that all the provisions of
this Warrant (including without limitation the adjustments in Section
6 hereof) shall thereafter be applicable, as nearly as practicable,
to such stock or other securities thereafter deliverable upon
exercise of this Warrant.
(b) In case of any reclassification or change of the shares of Common
Stock issuable upon exercise of this Warrant (at any time while this
Warrant is unexpired and not exercised in full) (other than a change
in par value or from no par value to a specified par value, or as a
result of a subdivision or combination, but including any change in
the shares into two or more classes or series of shares), or in case
of any merger or consolidation of another entity with or into the
Company in which the Company is the continuing corporation and in
which there is a reclassification or change (including a change to
the right to receive shares of stock or other securities or property,
including cash) of the shares of Common Stock (other than a change in
par value, or from no par value to a specified par value, or as a
result of a subdivision or combination, but including any change in
the shares into two or more classes or series of shares), Holder
shall have the right thereafter to receive upon exercise of this
Warrant the kind and amount of shares of stock and other securities
or property, including cash, or any combination thereof, receivable
upon such reclassification, change, merger or consolidation by a
holder of the number of shares of Common Stock for which this Warrant
might have been exercised immediately prior to such reclassification,
change, merger or consolidation. In case of any such transaction,
appropriate provision shall be made with respect to the rights and
interests thereafter of Holder, to the end that all the provisions of
this Warrant (including
<PAGE> 7
without limitation the adjustments in Section 6 hereof) shall
thereafter be applicable, as nearly as practicable, to such stock or
other securities thereafter deliverable upon exercise of this
Warrant.
(c) The above provisions of this Section 7 shall similarly apply to
successive reclassifications and changes of shares of Common Stock
and to successive mergers and consolidations.
8. (a) In the event that, at any time prior to the occurrence of a
Triggering Event, the Company shall effect a recapitalization
resulting in a distribution of cash or property to the holders of the
Common Stock (a "Recapitalization"), then, solely for purposes of
this Section 8: (i) this Warrant shall be deemed to have been
exercised (but shall not actually be exercised), as of immediately
prior to the effectiveness of such recapitalization, for the number
of shares of the Common Stock specified under "Level I" set forth in
Section 3(b) hereof; and (ii) the holder of this Warrant shall be
entitled to participate (to the extent provided in this Section 8) in
such distribution, as well as any distributions of cash or property
to the holders of the Common Stock occurring subsequent to the
Recapitalization but prior to the occurrence of a Triggering Event,
as if the holder of this Warrant were the holder of such shares.
(b) The cash or property that would be distributed to the holder of this
Warrant pursuant to Section 8(a) hereof shall be held by the Company
in a special account, or otherwise segregated from the assets and
property of the Company, and shall be distributed from time to time
to the holder of this Warrant as and to the extent that this Warrant
shall become Vested.
9. The issuance of any Warrant Shares upon the exercise of this Warrant, and
the delivery of certificates or other instruments representing such Warrant
Shares, shall be made without charge to Holder for any tax or other charge
in respect of such issuance. The Company shall not, however, be required to
pay any tax which may be payable in respect of any transfer involved in the
issue and delivery of any certificate in a name other than that of Holder
and the Company shall not be required to issue or deliver any such
certificate unless and until the person or persons requesting the issue
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
Holder shall be responsible for any taxes based on income and any capital
gains taxes payable in connection with the issuance of any Warrant Shares
or any transfer of Warrant Shares by Holder.
10. (a) Holder shall not effect a Disposition of this Warrant or Warrant
Shares, and this Warrant and Warrant Shares shall not be transferable
in whole or in part, other than Permitted Dispositions.
(b) The Warrant Shares issued upon exercise of this Warrant (unless at the
time of exercise such Warrant Shares are registered under the
Securities Act) shall be subject to a stop transfer order and the
certificate or certificates evidencing such Warrant Shares shall bear
the following legend:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
<PAGE> 8
STATE, AND MAY NOT BE TRANSFERRED WITHOUT REGISTRATION UNDER THE
SECURITIES ACT OR STATE SECURITIES LAWS OR AN OPINION OF COUNSEL,
SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED."
11. Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant (and upon surrender of any
Warrant if mutilated), including an affidavit of Holder that this Warrant
has been lost, stolen, destroyed or mutilated, together with an indemnity
against any claim that may be made against the Company on account of such
lost, stolen, destroyed or mutilated Warrant, and upon reimbursement of the
Company's reasonable incidental expenses, the Company shall execute and
deliver to Holder a new Warrant of like date, tenor and denomination.
12. Prior to the exercise of this Warrant, Holder shall not be entitled to any
rights as a stockholder of the Company with respect to the Warrant Shares,
either at law or in equity, including (without limitation) the right to
vote such shares, receive dividends or other distributions thereon or be
notified of stockholder meetings.
13. This Warrant shall be construed in accordance with the laws of the State of
New York applicable to contracts made and performed within such State,
without regard to principles governing conflict of laws.
14. Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be mailed by certified mail, return
receipt requested, or by Federal Express, Express Mail or similar overnight
delivery or courier service or delivered (in person or by telecopy, telex
or similar telecommunications equipment) against receipt to the party to
whom it is to be given:
If to Holder:
16952 Passage Island South
Jupiter, Florida 33477
Fax: (561) 747-0923
If to the Company: with a copy to:
Telex Communications Group, Inc. Dechert Price & Rhoads
9600 Aldrich Avenue South 30 Rockefeller Plaza
Bloomington, Minnesota 55420 New York, New York 10112
Attention: Kris Bruer Attention: Ronald R. Jewell
General Counsel Fax: (212) 698-3599
Fax: 612-887-5588
or to such other address, facsimile number or person's attention as the
party shall have furnished in writing in accordance with the provisions of
this Section 14. Notice to the estate of any party shall be sufficient if
addressed to the party as provided in this Section 14. Any notice or other
communication given by certified mail shall be deemed given at the time of
certification thereof, except for a notice changing a party's address which
shall be deemed given at the time of receipt thereof. Any notice given by
other means permitted by this Section 14 shall be deemed given at the time
of receipt thereof.
<PAGE> 9
15. Whenever the context may require, any pronouns used herein shall be deemed
also to include the corresponding neuter, masculine or feminine forms.
16. This Warrant may be amended only by a written instrument executed by the
Company and Holder. Any amendment shall be endorsed upon this Warrant, and
all future Holders shall be bound thereby.
* * *
In witness whereof, this Warrant has been executed and issued as of the 14th day
of March, 2000.
Dated: March 14, 2000 TELEX COMMUNICATIONS GROUP, INC.
By:
------------------------------
Ned C. Jackson
President
[Seal]
- - -------------------------------------------------------
Christine K. Vanden Beukel
Assistant Secretary
<PAGE> 10
SCHEDULE A TO WARRANT
Certain Definitions
For purposes of this Warrant, the following terms shall have the following
meanings:
"Affiliate" shall mean as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person and, if such Person is an individual, shall mean also any member of the
immediate family (including parents, spouse, children and grandchildren) of such
individual and any trust whose principal beneficiary is such individual or one
or more members of such immediate family and any Person who is controlled by any
such member or trust. As used in this definition, "control" (including, with its
correlative meanings, "controlled by" and "under common control with") shall
mean possession, directly or indirectly, of power to direct or cause the
direction of the management or policies (whether through the ownership of
securities or partnership or other ownership interests, by contract or
otherwise); and any Person which owns directly or indirectly 10% or more of the
securities having ordinary voting power for the election of directors or other
governing body of a corporation or 10% or more of a partnership or other
ownership interest of any other Person will be deemed to control such
corporation or other Person.
"Common Stock" shall have the meaning given such term in Section 1 hereof.
"Company" shall have the meaning given such term in Section 1 hereof.
"Disability" shall mean injury or illness, evidenced by written documentation
from an attending physician, resulting in Woolard being unable to perform the
material and substantial duties of Chairman of the Board of Directors of the
Company for a period of 90 substantially consecutive days.
"Disposition" when used with respect to this Warrant or the Warrant Shares shall
mean the making of any sale, exchange, assignment, hypothecation, gift, security
interest, pledge or other encumbrance, or any contract therefor, any voting
trust or other agreement or arrangement with respect to the transfer of voting
rights (including any proxy or similar arrangement (whether or not revocable))
or any other beneficial interest in this Warrant or any Warrant Shares, the
creation of any other claim thereto or any other transfer or disposition
whatsoever, whether voluntary or involuntary, affecting the right, title,
interest or possession in or to this Warrant or the Warrant Shares.
"Exercise Price" shall have the meaning given such term in Section 1 hereof.
"Exchange Act" shall have the meaning given such term in Section 6(b) hereof.
"For Cause", when used with respect to the removal of Woolard as Chairman of the
Board of Directors of the Company, shall mean that Woolard shall have: (i)
committed a felony, or committed an act of fraud, embezzlement or theft in
connection with his duties with the Company or any of its subsidiaries or in the
course of his service as Chairman of the Board of Directors of the Company or as
an officer of any of its subsidiaries; or (ii) been convicted of a criminal
offense (whether a felony or a misdemeanor) the nature of which renders him
unfit to serve as an officer of the Company or any of its subsidiaries.
<PAGE> 11
2
"Holder" shall have the meaning given such term in Section 1 hereof.
"Indebtedness" shall have the meaning given such term in the Credit Agreement of
Telex Communications, Inc. dated as May 6, 1997 (as amended and in effect from
time to time) and, in the case of the Company, shall include without limitation
all amounts and obligations of Telex Communications, Inc. outstanding under such
Credit Agreement and all amounts and obligations of the Company outstanding
under notes of the Company.
"Permitted Assignee", when used with respect to Greenwich I, LLC or Greenwich
II, LLC, shall have the meaning given such term in Section 3(a)(i) hereof.
"Permitted Charitable Organization" shall mean any organization meeting the
requirements of Section 501(c)(3) of the Internal Revenue Code of 1986, as
amended.
"Permitted Disposition", when used with respect to this Warrant and Warrant
Shares, shall mean any Disposition by Holder of part of this Warrant or Warrant
Shares to any Related Person of Holder, or to a Permitted Charitable
Organization, provided that:
(i) the Person to whom such Disposition is made executes an agreement
satisfactory to the Company whereby such Person agrees to be bound by
the terms and provisions of this Warrant to the same extent as
Holder;
(ii) immediately after such Disposition, Woolard continues to own,
beneficially and of record, more than 50% of this Warrant and the
Warrant Shares; and
(iii) such Disposition may be made without registration under the
Securities Act of 1933, as amended, and applicable state securities
laws, unless an exemption thereunder is available in the opinion of
counsel for the Company.
"Preferred Stock" shall mean the Series A Pay-in-Kind Preferred Stock, par value
$0.01 per share, of the Company.
"Recapitalization" shall have the meaning given such terms in Section 8(a)
hereof.
"Triggering Event" shall have the meaning given such term in Section 3(a)
hereof.
"Triggering Event Valuation" shall have the meaning given such term in Section
3(d) hereof.
"Warrant" shall mean this Warrant and any Warrant or Warrants hereafter issued
as a consequence of the transfer of this Warrant in whole or in part.
"Warrant Shares" shall have the meaning given such term in Section 1 hereof.
"Woolard" shall have the meaning given such term in Section 1 hereof.
<PAGE> 12
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to
transfer the attached Warrant.)
FOR VALUE RECEIVED, hereby sells, assigns, and transfers
unto a Warrant to purchase shares of Common
Stock, $.0005 par value per share, of Telex Communications Group, Inc. (the
"Company"), together with all right, title, and interest therein, and does
hereby irrevocably constitute and appoint attorney to transfer
such Warrant on the books of the Company, with full power of substitution.
Dated:
---------------------------- ------------------------------------
(Signature)
- - ----------------------------------
(Signature Guaranteed)
NOTICE
The signature on the foregoing Assignment must correspond to the name as written
upon the face of this Warrant in every particular, without alteration or
enlargement or any change whatsoever.
To: Telex Communications Group, Inc.
9600 Aldrich Avenue South
Bloomington, Minnesota 55420
Attention: President
<PAGE> 13
FORM OF ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase Warrant
Shares covered by the within Warrant, and tenders payment herewith in the
aggregate amount of $ , by certified or bank cashier's check, and
requests that certificates for such securities be issued in the name of, and
delivered to:
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
(Print Name, Address and Social Security or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the Warrant
Shares covered by the within Warrant be registered in the name of, and delivered
to, the undersigned at the address stated below.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
(Print Name, Address and Social Security or Tax Identification Number)
Dated: Name:
-------------------------- -----------------------------------
(Print)
Address:
----------------------------------------
----------------------------------------
----------------------------------------
----------------------------------------
(Signature)
- - --------------------------------
(Signature Guaranteed
<PAGE> 14
SCHEDULE B TO WARRANT
CALCULATION OF WARRANT SHARES
All calculations shall be based solely upon 4,220,100 shares of Common Stock
presently outstanding and an additional 278,727 shares issuable under certain
options and warrants presently outstanding and exercisable currently or within
six-months after the date hereof; i.e. an aggregate of 4,498,827 shares assumed
for purposes of these calculations.
<TABLE>
<CAPTION>
<S><C>
Calculation at Level I:
- - -----------------------
Where "A" equals the number of underlying Warrant Shares that would be
issuable.
The formula for Level I of this Warrant is:
A = 0.04 x (4,498,827+ A)
or
A = 179,953.08/ 0.96, with the result being that A = 187,451.13
Calculation at Level II.
- - ------------------------
Where "A" equals the number of underlying Warrant Shares that would be
issuable.
"B" equals the Triggering Event Valuation
"C" equal the Level I maximum Triggering Event Valuation (i.e. 550,000)
"D" equals the difference between the Level III minimum Triggering Event Valuation (i.e. 700,000) and
the Level I maximum Triggering Event Valuation (i.e. 550,000), or 150,000
The formula for Level I of this Warrant is:
A = [(((B - C) D) x 0.05) + 0.04] x (4,498,827+ A)
or
A = [(((B - 550,000) 150,000) x 0.05) + 0.04] x (4,498,827+ A)
</TABLE>
For example, if the Triggering Event Valuation is $600 million, then Holder
shall be entitled to receive 270,247.56shares of Common Stock upon the
occurrence of the Triggering Event if this Warrant is then 100% Vested, but
only 135,123.78 shares of Common Stock if this Warrant is then only 50%
Vested.
<PAGE> 15
3
Calculation at Level III:
- - -------------------------
Where "A" equals the number of underlying Warrant Shares that would be
issuable.
The formula for Level III of this Warrant is:
A = 0.09 x (4,498,827+A)
or
A = 404,894.43 / 0.9285, with the result being that A = 444,938.93
<PAGE> 1
EXHIBIT 10.16(a)
------------------------------------------
MEMBER CONTROL AGREEMENT
OF
DRF 12000 PORTLAND LLC
Date: March 16, 2000
------------------------------------------
<PAGE> 2
DRF 12000 PORTLAND LLC
MEMBER CONTROL AGREEMENT
THIS MEMBER CONTROL AGREEMENT is entered into as of the 16th day of
March, 2000, by and among Telex Communications, Inc., a Delaware corporation
("Telex"), and DRF TEL LLC, a Minnesota limited liability company ("DRF"; Telex
and DRF being individually, a "Member" and collectively the "Members").
ARTICLE I
FORMATION OF COMPANY, TRANSFER OF PARTNERSHIP INTERESTS
AND STATEMENT OF AGREEMENT
The parties hereto do hereby agree to become the Members of DRF 12000
Portland LLC, organized under, and whose business is to be conducted to comply
with, the provisions of the Minnesota statutes.
1.1 Name. The name of the Company shall be "DRF 12000 PORTLAND
LLC" and such other proper trade names as the Manager may determine.
1.2. Principal Place of Business. The principal place of business of
the Company shall be located at c/o Frauenshuh Companies, 7101 West 78th Street,
Suite 100, Bloomington, MN 55439, or such other place as the Manager may from
time to time determine. The Manager may in its sole discretion establish
additional places of business and qualify the Company to carry-on business in
other states.
1.3. Designation of Members. The names and addresses of the Members are
set forth in Schedule 1 and each Member's Membership Percentage Interest is set
forth in Schedule 1.
1.4. Term. The Company shall continue to December 31, 2030 unless
sooner terminated as hereinafter provided.
ARTICLE II
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
"Affiliates" means any person or entity described in Section 267(b) of
the Code. For purposes of the foregoing test, the interest of all Members who
have interests in the same entity shall be aggregated with respect to their
interest in the Company and such other entity.
"Capital Account" means the account of a Member which is maintained in
accordance with the provisions of Article IV.
"Code" means the Internal Revenue Code of 1986, as amended, or
corresponding provisions of future law.
1
<PAGE> 3
"Consent" means the written consent to or approval of a decision or
action.
"Distribution" means the distributions to the Members or holders of
Financial Rights of cash or other assets of the Company made from time to time
pursuant to the provisions of this Agreement.
"Financial Rights" means a Member's rights to share in profits and
losses and Distributions with respect to a Membership Interest in accordance
with the terms of this Agreement.
"Governance Rights" means all of a Member's rights as a member in the
Company other than Financial Rights and the right to assign Financial Rights.
"Lease" means that certain lease agreement of even date herewith
between the Company and Telex covering the Property.
"Manager" means a person elected, appointed, or otherwise designated as
a Manager by the Members, and any other person considered elected as a Manager
pursuant to the Act. Until such time as the Members appoint additional managers,
David R. Frauenshuh and Randy T. McKay shall be the sole Managers of the
Company. Any additional Managers or successor Managers shall be appointed by DRF
with the approval of Telex.
"Member" means Telex, DRF, and their respective successors and assigns
as the owner of some Governance Rights in the Company.
"Membership Interest" means a Member's interest in the Company
consisting of the Member's Financial Rights, the Member's right to assign
Financial Rights, the Member's Governance Rights, and the Member's right to
assign Governance Rights.
"Membership Percentage Interest" of a Member means such Member's
percentage for sharing profit and loss and Distributions as initially specified
in Schedule 1.
"Person" means an individual, corporation, partnership, trust or other
legal entity.
"Property" means the real estate and any improvements constructed
thereon described on Exhibit A attached hereto.
ARTICLE III
PURPOSES AND POWERS
3.1 Purposes of the Company. The purposes for which the Company is
formed are solely as follows: (a) to own the Property; (b) to lease the
Property; (c) to manage the Property; (d) to sell, exchange or transfer the
Property; and (e) to do any and all things reasonably necessary or incidental to
the achievement of the foregoing purposes.
3.2 Powers of the Company. In order to carry out its purposes, and not
in limitation thereof, the Company is empowered and authorized to do any and all
acts and things necessary and incidental to or convenient for the furtherance
and accomplishment of its purpose, and for the protection and benefit of the
Company, including, but not limited to, the following:
2
<PAGE> 4
(a) Construct, operate, maintain, improve, buy, acquire, own,
sell, convey, assign, mortgage, refinance, rent or lease any real property and
any personal property (including goodwill) in furtherance of the purposes of the
Company;
(b) Borrow money, issue evidences of indebtedness and otherwise
incur obligations in furtherance of the Company business except as hereinafter
provided, and secure any such indebtedness by mortgage, pledge, or other lien;
provided that no Member shall have any personal liability on any indebtedness
without the express written consent of such Member;
(c) Enter into any partnership, joint venture or other activity
with any other Person in furtherance of the purposes of the Company;
(d) Confess judgment, submit claims or liabilities to arbitration,
make assignments for the benefit of creditors and institute, defend or engage in
legal proceedings of any nature whatsoever relating to the Company; including
proceedings for reorganization, composition, arrangement or relief from Company
obligations; and
(e) Enter into and perform any kind of activity, agreement or
contract of any kind in furtherance of the purposes of the Company.
3.3 Exercise of Powers. All actions of the Company shall be taken
through the Manager, alone, as provided in Article VII, subject to any explicit
limitations contained in this Agreement.
3.4 Voting. Members shall be entitled to vote on all matters as
provided for herein and shall vote in proportion to their respective Membership
Percentage Interest.
3.5 Limitation. Notwithstanding anything in this Agreement to the
contrary, so long as that certain loan from Artesia Mortgage Capital Corporation
the funds from which were used to acquire the Property remains outstanding
pursuant to the note and mortgage given by the Company to evidence and secure
such loan, the Company will not file or consent to the filing of any petition,
either voluntary or involuntary, to take advantage of any applicable insolvency,
bankruptcy, liquidation or reorganization statute, or make an assignment for the
benefit of creditors without the affirmative vote of the Managers of the
Company.
ARTICLE IV
CAPITAL
4.1 Capital Accounts. A separate Capital Account shall be maintained
for each Member. The initial balances in the Capital Account for each Member
shall consist of the initial capital contribution of such Member. Capital
Accounts shall be maintained at all times in accordance with the Code and all
regulations promulgated thereunder. Telex shall make an initial capital
contribution to the Company of $550,000.00, and DRF shall make an initial
capital contribution of $1,108,000.00. Notwithstanding anything to the contrary
in this Agreement and except in the event of a liquidation, DRF shall retain a
minimum of $271,000 (or 3% of the total cost of acquiring the Property, if
greater) of its initial capital contribution in its Capital Account to satisfy
generally accepted accounting principles and the Security and Exchange
Commission requirements for the creating and maintaining of a special
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purpose entity such that the financial statements of the Company shall not be
consolidated with Telex financial statements. The source of funds for such
portion of DRF's initial capital contribution shall not be financed with
non-recourse debt that is collateralized by a pledge of DRF's Membership
Interest or Financial Rights in the Company.
4.2 No Right to Return of Contributions. The Members shall have no
right to the withdrawal or the return of their respective contributions to the
capital of the Company except to the extent a Distribution is treated as a
return of capital pursuant to Section 6.3 and is approved in writing by Telex or
upon liquidation of the Company pursuant to Section 13.2.
4.3 No Interest on Capital. No interest shall be paid by the
Company on the initial or any subsequent contributions to the capital of the
Company.
4.4 Voluntary Loans to Company. The Members may make voluntary loans
to the Company from time to time for any Company purpose, including payment of
fees to Members, as authorized by the Manager. Any such loans shall not be
treated as contributions to the capital of the company for any purpose
hereunder, nor entitle such Member to any increase in his or her share of the
profits and losses and cash distribution of the Company. However, the Company
shall be obligated to such Member for the amount of any such loans, with
interest thereon set at the Prime Rate of interest plus five percent (5%), as
set forth in any agreement creating or evidencing such loan.
4.5 Additional Contributions and Loans by Members.
(a) Except for the initial contribution under Section 4.1 and
as provided in this Section 4.5, no Member shall be obligated to make any
additional contributions to the capital of the Company or to make any loans to
or pay any assessments to the Company, and no Member shall be required to
contribute additional capital solely by virtue of having a negative capital
account.
(b) If required by the Manager, the Members shall advance to
the Company any monies required to pay current expenses, current indebtedness or
any other current financial obligations of the Company which are not funded by
loans to the Company, its gross income or contributions to the capital of the
Company, in proportion to the respective Membership Percentage Interests of the
Members. Such advances shall be deemed "Working Capital Loans". Anything herein
to the contrary notwithstanding, a loan from any affiliate of a Member shall not
be deemed a Working Capital Loan. Requirements for working capital shall be
determined by the Manager and any calls shall be paid within fifteen (15) days
of notice of such call. All Working Capital Loans shall be deemed loans to the
Company and shall be repaid (with interest in the case of advance of
deficiencies only) from the first available funds received by the Company prior
to any other Distributions to Members and, except as provided in Section 4.5(c),
repayment shall be made solely from the assets of the Company and no Member
shall have any liability for the repayment of such Working Capital Loans.
(c) If any Member (the "Non-Contributing Member") is unable or
fails or neglects to advance or contribute its proportionate share of the
required Working Capital Loan, any other Member (the "Contributing Member") may,
but shall not be required to, advance such deficiency or any portion thereof
(the "Advance"). If more than one Member elects to be a Contributing Member,
such Contributing Member shall allocate the Advance between themselves in
proportion to their respective Membership Percentage Interest. (For convenience
of drafting, the remainder of this Section 4.5 uses the
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singular in all cases even though there may be more than one Contributing Member
or Non-Contributing Member.) Any such Advance by a Contributing Member shall
also be considered a loan to the Company but (i) shall bear interest at the rate
equal to five percentage points above the rate publicly announced by Norwest
Bank N.A., Minneapolis, Minnesota or its successor as its "prime rate" or
"reference rate" (the "Prime Rate") on the date such advance is made, (ii)
repayment of such Advance plus interest shall be a personal obligation of the
Non-Contributing Member, and (iii) such Advance plus interest shall be repaid
either from the assets of the Non-Contributing Member or from the portion of all
Company distributions otherwise distributable to the Non-Contributing Member.
(d) If the Advance plus interest has not been repaid from either
the Non-Contributing Member's share of Company distributions or directly by the
Non-Contributing Member within eighteen (18) months after the date of the
Advance, the Non-Contributing Member shall, at the option of the Contributing
Member, assign a portion of its total Membership Interest determined as follows:
(i) the fair market value of the Company assets less Company liabilities shall
be determined by agreement of the parties or by appraisal (using the procedures
provided in Section 4.5 hereof) as of the date upon which the portion of the
Company Interest shall be transferred, (ii) such fair market value shall be
divided by 100 to establish the value of a Membership Percentage Interest of one
percent, and (iii) a Membership Percentage Interest having a value equal to the
amount of the Advance plus accrued interest thereon, plus, if the parties do not
agree, the costs of appraisals shall be deemed assigned to the Contributing
Member from the Non-Contributing Member. Upon such assignment neither the
Non-Contributing Member nor the Company shall be obligated to repay the Advance.
(e) Notwithstanding the provisions of subsections (b), (c) or (d)
above, Telex and its successors and assigns shall not be required to make any
additional capital contributions or loans (including Working Capital Loans) to
the Company, shall not be required to make any payment pursuant to subsections
(c) (ii) and (iii), nor will their Membership Percentage Interest be subject to
reduction under this Article IV.
ARTICLE V
ALLOCATION
The Members agree that the income, gains, credits, losses and
deductions of the Company shall be allocated in accordance with the Code and the
regulations promulgated thereunder as follows:
5.1 Computation of Income, Gains and Losses. All income, gains, losses
deductions and credits of the Company shall be computed as of the end of each
fiscal year in accordance with the accrual method of accounting, which shall be
followed by the Company for federal income tax purposes.
5.2 Allocation of Income and Losses. The income, gains, losses,
deductions and credits of the Company for each fiscal year for book purposes,
whether taxable or nontaxable, other than as provided in Section 5.3, shall be
allocated to each Member's Capital Account in accordance with the following:
(a) First, to Telex all income or gains realized by the Company
until the Company has realized income and gains equal to $558,000 in the
aggregate, and
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(b) Thereafter, to each Member's Capital Account pro rata, in
accordance with its respective Membership Percentage Interest.
5.3 Allocation of Gain or Loss Upon Sale, Exchange or Other
Disposition of All or Substantially All of the Assets of the Company. The gain
or loss realized upon the sale, exchange or other disposition of all or
substantially all the assets of the Company for book purposes, whether taxable
or nontaxable, shall be allocated to each Member's Capital Account pro rata,
in accordance with its respective Membership Percentage Interest.
5.4 Negative Capital Account Balances. If any member has a negative
Capital Account after the liquidation of the Company, he shall not be obligated
to contribute capital in the amount of such deficit.
ARTICLE VI
DISTRIBUTIONS
6.1. Quarterly Distributions. Except as otherwise provided in Sections
6.2, 6.3, and 6.4, Distributions from the Company of income (determined in
accordance with generally accepted accounting principles applied on a consistent
basis) shall be made in such amounts and at such times as determined by the
Manager and approved by Telex, but in any event so long as Telex is not in
default under the Lease, Distributions will be made no less than
quarter-annually. Such Distribution shall be made to each Member ratably in
proportion to its respective Membership Percentage Interest at the time of the
Distribution.
6.2 Sale of Equipment and Excess Land. Distributions of any net
proceeds upon the sale, exchange, or other disposition of equipment and personal
property owned by the Company or a portion of the land owned by the Company
shall be made as follows:
(a) First, to the payment of all debt and liabilities of the
Company against which the Company elects to apply such proceeds,
(b) Then, to any reserves which may be established by the Company
in connection with such sale,
(c) Thereafter, to each Member ratably in proportion to its
respective Membership Percentage Interest at the time of the Distribution.
6.3 Refinancing. Distributions of any net proceeds upon any
refinancing of the debt of the Company shall be made as follows:
(a) First, to the payment of all debt and liabilities of the
Company which is being retired by such refinancing or against which the Company
elects to apply such proceeds,
(b) Then, to any reserves which may be established by the Company
in connection with such refinancing,
(c) Then, to DRF until Distributions from any such refinancing or
refinancings have
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been made to DRF equal to $1,108,000 in the aggregate, subject in any event to
any minimum Capital Account required to be maintained under Section 4.1,
(d) Then, to Telex until Distributions from any such refinancing
or refinancings have been made to Telex equal to the amount distributed to DRF
under (c) above,
(e) Thereafter, to each Member ratably in proportion to its
respective Membership Percentage Interest at the time of the Distribution.
6.4 Sale of All Assets. Distribution of any net proceeds upon the sale
exchange, or other disposition of all or substantially all of the assets of the
Company shall be made in accordance with the provisions of Section 13.2.
6.6 Designation of Character of Distributions. At the time of making
any Distribution to the Members, the Manager shall determine what portion of
such Distribution, if any, is from the income of the Company and what portion of
such Distribution, if any, is a return of the capital of the Company. The
Manager shall advise each Member receiving any such Distributions of such
determination at the time it transmits the annual report to the Members as
provided in Section 9.4.
ARTICLE VII
RIGHTS, POWERS AND DUTIES OF MANAGERS
7.1 Powers of Managers. The Managers shall have all necessary powers
to carry out the purposes and business of the Company, and to take any other
action in that regard. All such powers shall be exercised exclusively through
the Managers. The Managers shall manage the affairs of the Company in a prudent
and businesslike manner for the purposes for which the Company is formed. The
Managers from time to time designate one of the Managers as the chief manager of
the Company and may designate such Manager or another Manager as the treasurer
of the Company. Subject to any limitations which may be adopted by agreement of
the Managers, such Managers will exercise the principal functions of such
positions as set out in Minnesota Statutes, section 322B.673. The Managers from
time to time may also authorize any of the Managers to perform other duties and
carry out other responsibilities as determined by the Managers.
7.2 Special Approval. Notwithstanding anything herein to the contrary,
the Company will not without the prior written consent of both DRF and Telex
(a) sell, assign, transfer, exchange, lease, or otherwise dispose
of the Property or any part thereof or interest therein during the first two
years of the term of the Lease, or
(b) apply for, execute or modify any mortgage, underlying lease,
pledge, encumbrance or other security agreement affecting the Property or any
interest therein until the sixth year of the term of the Lease; or
(c) apply for, execute or modify any mortgage, underlying lease,
pledge, encumbrance or other security agreement affecting the Property or any
interest therein during or after the sixth year of the term of the Lease if the
refinancing would cause a decrease in the projected income and cash flow to the
Company unless adjustments are made in the allocation of income and allocations
of Distributions in cash to put Telex in the same income and cash flow position
as it would have been
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without such refinancing; or
(d) incur any indebtedness on behalf of the Company (other than
indebtedness incurred for meeting unbudgeted obligations arising in any year in
excess of $25,000 in the aggregate (unless such obligations are incurred in an
emergency) and contractual obligations arising under contracts otherwise
permitted under this Agreement).
7.3 Member or Affiliates Dealing with Company. The Company has entered
into a Management Agreement with Frauenshuh Companies of even date herewith
pursuant to which the Company will pay Frauenshuh Companies a management fee for
services rendered to the Company. The Company may further contract or otherwise
deal with a Member or any person affiliated with a Member only in the ordinary
course of business of the Company, and only on terms which are no more favorable
to such Member or person affiliated with the Member than would be obtained in a
comparable arm's-length transaction with an unrelated third party. Except as
otherwise approved by the Members, no Manager or Member shall be entitled to
receive compensation for services provided as a Manager or Member of the
Company, but accounting expenses and other expenses reasonably incurred by the
Managers or any Member in the operation of the Company will be reimbursed by the
Company.
7.4 Other Activities of Members. The Members and their affiliates may
engage in and possess an interest for their own account in other business
ventures of every nature and description, regardless whether in competition with
the Company, independently or with others, including, but not limited to, the
ownership, financing, leasing, operation, management, syndication, brokerage,
investment in and development of real estate; and neither the Company nor any
Member shall, by virtue of this Agreement, have any right in and to such
independent venture or any income or profit derived therefrom.
7.5 Indemnification: Liability of Member. The Company shall indemnify,
defend and hold the Members harmless against any claim, liability or expense
(including attorney's fees) incurred by him in connection with the ownership,
organization, operation, management or liquidation of the Company, its business
or property, except liabilities which are the specific and express
responsibility of the Member under this Agreement and except further for the
gross negligence and bad faith of any Member. Neither the Company nor any
Members shall have any claim against any Member by reason of any act or omission
of any Member for which act or omission indemnification is provided in the
preceding sentence.
ARTICLE VIII
TITLE TO COMPANY PROPERTY
8.1 All property owned by the Company shall be owned by the Company as
an entity and, insofar as permitted by applicable law, no Member shall have any
ownership interest in any Company property in his, her or its individual name or
right, and each Member's Membership Interest shall be personal property for all
purposes.
ARTICLE IX
BOOKS OF ACCOUNT; REPORTS AND FISCAL MATTERS
9.1. Books; Place; Access. The Company shall maintain accurate books
of account using generally accepted accounting principles consistently applied.
The books of account and the records
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shall be kept at the principal office of the Company, and all Members or their
legal counsel or accountant may inspect the Company books and records upon
reasonable notice, and at the expense, of any Member during ordinary business
hours. If at any time Telex or its successor or assign is required to either
consolidate the Company with its financial statements or provide separate
statements of the Company, the Company will provide Telex or such successor or
assign within 55 days after the end of quarter with quarterly financial
statements determined on a Federal income tax basis. If requested by Telex, the
Company at Telex's cost will have the annual financial statements prepared in
accordance with generally accepted accounting principles and audited by an
accountant selected by Telex.
9.2. Bank Accounts. The Manager shall select one or more depositories
for the funds of the Company, and all Company funds shall be deposited in such
account or accounts. Such funds shall be deposited or invested in such manner as
shall be determined by the Manager. Such funds shall not be commingled with
funds of any other limited liability company, limited partnership or other
entity managed or advised by the Manager. All withdrawals from any of such bank
accounts shall be made by the duly authorized Manager.
9.3 Tax Matters. The Manager shall appoint a Member to serve as the Tax
Matters Partner for federal income tax purposes and such Member may make and
revoke any tax election which may be made by the Company, in its sole
discretion. Until such time as the Manager appoints another Member, the Tax
Matters Partner shall be DRF.
9.4 Tax Information. Within seventy-five (75) days after the end of
each fiscal year the Manager shall deliver to each Member adequate tax
information relating to the Company's operations to enable each Member to
complete and timely file all federal, state and local tax returns for which he
may be liable. In addition, the Manager shall provide quarterly and year-end
earnings information to Telex, as required by Telex, for timely reporting and
filing with various regulatory agencies.
ARTICLE X
BUY - SELL PROVISIONS
10.1 Buy - Sell. After March 1, 2002, any Member (the actual Member
being herein called the "Electing Member"), may initiate the buy - sell
provisions of this Article X at any time.
10.2 Notice and Value. The Electing Member shall give written notice to
the other party of its intent to exercise its right pursuant to this Article X.
Such Buy - Sell Notice ("the Buy - Sell Notice") shall set forth a value for
each 1% Membership Interest of the Company net of any prepayment premium and
closing costs arising in connection with such sale. The receiving party shall
have the option to either sell all but not less than all of its Membership
Interest to the Electing Member or to purchase all but not less than all of the
Membership Interest of the Electing Member at the value set forth in the Buy -
Sell Notice. The receiving party shall have sixty (60) working days to respond
in writing ("the Response Notice") and shall indicate its election to either
purchase or sell.
10.3 Closing and Payment. Any closing for the purchase of a Member's
Interest pursuant to this Article X shall occur within sixty (60) days after
receipt of the Response Notice by the Electing Member. The purchase price for
such Member's Interest shall be paid in full in immediately available funds at
closing. If the selling Member or any of its principals or investors have
guaranteed any loans or mortgages of the Company, then as a condition of the
purchase of such Member's Interest under this Article X, such guaranties either
will be released at closing or the purchasing Member will pay off such loans or
mortgages at closing. The closing shall occur at a location agreed upon by both
parties or in the
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event the parties cannot agree on a location, then at the offices of the company
as set forth herein.
10.4 Limitations.
(a) For purposes of this Article X, if Telex is in default under
the Lease at the time of exercise of the right to be the Electing Member and
such default is not cured within the notice or cure period provided therefor
under the Lease, any effective exercise of this right by Telex as Electing
Member shall, at the option of DRF, be terminated.
(b) If DRF has exercised its right hereunder to purchase the
interest of Telex and at the time of the closing of the purchase of Telex'
interest Telex is in default under the Lease, the purchase price otherwise
payable to Telex hereunder shall be applied first to cure any default under the
Lease, and any remaining purchase price shall be paid to Telex.
ARTICLE XI
WITHDRAWAL, TRANSFER AND SUBSTITUTION OF MEMBERS
11.1 Covenant Not to Withdraw, Transfer or Dissolve. Except as
otherwise permitted by this Agreement, each Member hereby covenants and agrees
not to (a) withdraw or attempt to withdraw from the Company, (b) exercise any
power under the Act to dissolve the Company, or (c) transfer all or any portion
of his Membership Interest. Further, each Member hereby covenants and agrees to
continue to carry out the duties of a Member hereunder until the Company is
dissolved and liquidated pursuant to Article XIII hereof.
11.2 Permitted Transfers.
(a) A Member may transfer all or any part of his interest in the
Company at any time to (1) an Affiliate of such Member, (2) any other Member or
(3) to any person who is approved by all of the other Members.
(b) A transferee of a Membership Interest from a Member hereunder
shall be admitted as a Member with respect to such interest if, but only if, (1)
at the time of such transfer, such transferee is an Affiliate of the
transferring Member, (2) at the time of such transfer, such transferee is
otherwise a Member, or (3) the admission of such transferee as a Member is
approved by all of the other Members.
(c) A transferee who acquires a Membership Percentage Interest
from a Member hereunder by means of a transfer that is permitted under Section
11.2, but who is not admitted as a Member, shall have no authority to act for or
bind the Company, to inspect the Company's books, or otherwise to be treated as
a Member. Such transferee shall be entitled only to allocations and
Distributions with respect to such Membership Percentage Interest in accordance
with this Agreement.
11.3 Prohibited Transfers. Any purported transfer of any Membership
Interest held by a Member that is not permitted by Section 11.2 shall be null
and void and of no effect whatever; provided that, if the Company is required to
recognize a transfer that is not so permitted (or if the Company, in its sole
discretion elects to recognize a transfer that is not so permitted), the
interest transferred shall be strictly limited to the transferor's rights to
allocations and Distributions as provided by this Agreement
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with respect to the transferred interest, which allocations and Distributions
may be applied (without limiting any other legal or equitable rights of the
Company) to satisfy the debts, obligations, or liabilities for damages that the
transferor or transferee of such interest may have to the Company.
11.4 Termination of Status as Member. A Member shall cease to be a
Member upon the first to occur of (1) such Member's death, permanent disability,
or mental incompetence, (2) the bankruptcy of a Member, or (3) the involuntary
transfer by operation of law of such Member's Membership Interest. If a Member
ceases to be a Member for any reason hereunder, such Person shall continue to be
liable for all debts and obligations of the Company that the Member was liable
for by reason of being a Member. A Person shall not be liable as a Member for
the debts and obligations of the Company except to the extent such liability
arises solely by reason of being a Member of the Company and, in any event,
shall not be liable for Company debts and obligations arising after such Person
ceases to be a Member. Any debts, obligations, or liabilities to the Company of
any Person who ceases to be a Member shall be collectible by any legal means and
the Company is authorized, in addition to any other remedies at law or in
equity, to apply any amounts otherwise distributable or payable by the Company
to such Person to satisfy such debts, obligations, or liabilities.
11.5 Purchase by Surviving Member. In the event a Member ceases to be a
Member pursuant to Section 11.4 and the business of the Company is continued
without dissolution under Section 13.1, the remaining Member shall acquire such
terminated Member's Financial Rights in the Company in the following manner:
(a) The acquiring Member shall give written notice to the
terminated Member identifying the price that the acquiring Member is willing to
pay for the interest of the terminated Member in the Company, and shall identify
a date at least 60 days after the date of the notice for closing the purchase
and sale transaction.
(b) Within 30 days after the date the terminated Member receives
such notice of exercise from the acquiring Member, the terminated Member shall
respond in writing to the acquiring Member, either accepting the terms contained
in acquiring Member notice, or demanding appraisal pursuant to subsection (c).
If the terminated Member fails to respond within such time, the terminated
Member shall be deemed to have accepted the price proposed by the acquiring
Member in its notice.
(c) If the terminated Member elects appraisal of its interest in
the Company, the price of its interest to be purchased by the acquiring Member
shall be equal to the net proceeds which would be distributed to the terminated
Member if the Company dissolved and was liquidated after selling its assets at a
price determined by an appraisal conducted by a qualified MAI appraiser with
experience appraising real property in the area in which the property to be
appraised is located.
(d) If, for any reason, the price cannot be so ascertained in time
for the purchase and closing as specified in this Section, the parties shall, in
good faith, make their best estimate of what the purchase price would be in
accordance with the foregoing, and closing shall be made on that estimate as a
tentative price. When the price is finally ascertained, it shall be compared to
the tentative price, and any overage shall promptly be refunded by the
terminated Member, or any deficiency shall promptly be paid by the acquiring
Member. In all cases, such adjustment shall be made within 10 days after the
price is finally ascertained.
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(e) If this option is exercised, the closing of the purchase shall
be ats a time and place agreeable to the parties, but in any event no later than
90 days after the giving of the required notice. Upon the closing, the purchase
price shall be paid in cash or by wire transfer or cashier's check.
(f) The appraiser shall be selected by agreement of the parties.
If the parties cannot agree upon the appraiser, the parties shall each name an
appraiser who meets the qualifications set forth above, and the value shall be
the average of the two appraisals. In issuing the assignment to the appraiser,
the appraiser shall be instructed to determine the market value of all of the
assets of the Company taking into account the status of the Lease and any debt
financing after the event giving rise to the termination of the terminated
Member's interest.
ARTICLE XII
BREACH OF AGREEMENT
12.1 If any Member ("Defaulting Member") should default in his
performance of any obligation arising under this Agreement (including without
limitation the transfer of any Membership Interests in violation of Article XI),
any other Member or Members ("Nondefaulting Members") may enforce the specific
performance of this Agreement and/or may pursue any other remedies at law or at
equity. The Defaulting Member shall be liable to the Company for all costs and
expense (including attorneys' fees) in connection with such default and the
exercise of any remedies set forth herein.
ARTICLE XIII
TERMINATION AND LIQUIDATION
13.1 Events Causing Liquidation. The Company will dissolve, liquidate
and its business will not be continued upon the happening of any of the
following events:
(a) Upon written consent of all Members;
(b) Upon the expiration of the term of the Company as specified in
Section 1.4 unless such term is extended by amendment to this Agreement;
(c) Upon the sale, exchange or other disposition of all or
substantially all of the assets of the Company;
(d) The insolvency or bankruptcy of the Company;
(e) On the occurrence of any event which, under the laws of the
State of Minnesota and notwithstanding the terms of this Agreement, shall
terminate the Company and require it to be liquidated.
Notwithstanding the foregoing, upon the occurrence of any event that would
otherwise cause the dissolution of the Company, under this Agreement, the Act or
otherwise, the Company shall promptly send a notice of such fact to each Member.
If the Members holding at least a majority of the outstanding Membership
Interests (excluding the interests of any Person who has ceased to be a Member)
or if Telex in its sole discretion shall consent to the continuation of the
business of the Company without
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dissolution, then the Company shall not dissolve and shall not be required to be
wound up.
13.2 Distribution on Liquidation. Upon an event of liquidation, the
business of the Company shall be wound up, the Manager shall take full account
of the Company assets and liabilities, and all assets shall be liquidated as
promptly as is consistent with obtaining the fair value thereof. If any assets
are not sold, gain or loss shall be allocated to the Members in accordance with
Article VI as if such assets had been sold at their fair market value at the
time of liquidation. If any assets are distributed to a Member, rather than
sold, the Distribution shall be treated as a Distribution equal to the fair
market value of the asset at the time of the liquidation. The assets of the
Company shall be used and distributed in the following order of priority:
(a) To the payment of all debts and liabilities of the Company,
including all fees due the Members and their Affiliates, and including any loans
or advance that may have been made by the Members to the Company, in the order
of priority as provided by law;
(b) To the establishment of any reserves reasonably deemed
necessary by the Manager or the Person winding up the affairs of the Company for
any contingent liabilities or obligations of the Company;
(c) To DRF in an amount equal to $1,108,000 (less any amounts
which have been paid to DRF under Section 6.3(c) in respect of any Distributions
made from the proceeds of a refinancing or refinancings;
(d) To Telex in an amount equal to the amount distributed to DRF
under (c) above; and (e) To the extent of any balance remaining to each Member,
ratably in proportion to its respective Membership Percentage Interest.
ARTICLE XIV
AMENDMENT OF AGREEMENT
14.1 Written Amendment. This Agreement may be amended only by a written
agreement signed by all of the Members.
14.2 Amendment of Articles. In the event this Agreement shall be
amended pursuant to this Article XIV, the Manager shall amend the Articles of
Organization to reflect such change, if the Company's legal counsel deems such
amendment of the Articles of Organization to be necessary.
ARTICLE XV
MISCELLANEOUS
15.1 Notice. All notices, offers, demands, certificates or other
communications required or permitted under this Agreement shall be in writing,
signed by the Person giving the same. Notice shall be treated as given when
personally received, delivered by courier service, or (except in the event of a
mail strike) when sent by certified or registered mail, postage prepaid, return
receipt requested, to a Member at the address as shown from time to time on the
records of the Company. Any Member may specify a different address by notice to
the Manager.
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15.2 Partition. The Members agree that the Company properties are not
and will not be suitable for partition. Accordingly, each of the Members hereby
irrevocably waives any and all rights that he may have to maintain any action
for partition of any Company property.
15.3 Consent and Waiver. No consent under and no waiver of any
provision of this Agreement on any one occasion shall constitute a consent under
or waiver of any other provision on said occasion or on any other occasion, nor
shall it constitute a consent or waiver unless it is in writing and signed by
the party against whom such consent or waiver is sought to be enforced.
15.4 Governing Law. This Agreement and the rights of the parties
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Minnesota.
15.5 Number and Gender. Wherever from the context it appears
appropriate, each term stated in either the singular or the plural shall include
the singular and the plural and pronouns stated in either the masculine, the
feminine or the neuter gender shall include the masculine, feminine and neuter.
15.6 Interpretation. All references herein to Articles, Sections and
subsections refer to Articles, Sections and subsections of this Agreement. All
Article and Section headings are for reference purposes only and shall not
affect the interpretation of this Agreement.
15.7 Severability. If any provision of this Agreement or the
application of such provision to any Person or circumstances, shall be held
invalid, the remainder of the Agreement, or the application of such provision to
Persons or circumstances other than those to which it is held invalid, shall not
be affected thereby.
15.8 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement binding
on all Members. Each Member shall become bound by this Agreement only upon the
execution of the Agreement by all the Members.
15.9 Necessary Instruments. The Members covenant and agree that they
shall execute any further instruments and shall perform any acts which are or
may become necessary to effectuate and to carry out the terms and conditions of
this Agreement.
15.10 Binding Effect. This Agreement shall bind the Members and their
respective successors and assigns. However, nothing in this Section shall be
construed to permit a transfer of this Agreement or of a Membership Interest in
violation of Article XI hereof.
15.11 Entire Agreement. This Agreement sets forth the entire
understanding between the parties, there being no terms, conditions, warranties
or representations other than those contained herein.
14
<PAGE> 16
IN WITNESS WHEREOF, this Agreement has been executed as of the date set forth in
the first paragraph of this Agreement.
TELEX COMMUNICATIONS, INC. DRF TEL LLC,
a a Minnesota limited liability company
-------------------------
By: By:
----------------------- ----------------------------
Ned C. Jackson Randy T. McKay
Its: President and CEO Its: Manager
15
<PAGE> 17
SCHEDULE 1
NAMES AND ADDRESSES AND MEMBERSHIP PERCENTAGE INTERESTS OF
DRF 12000 PORTLAND LLC
Telex Communications, Inc. 50%
Prior to May 1, 2000:
9600 Aldrich Avenue South
Minneapolis, MN 55420
From and After May 1, 2000:
12000 Portland Avenue South
Burnsville, MN 55337
DRF TEL LLC 50%
c/o Frauenshuh Companies
7101 West 78th Street, Suite 100
Bloomington, MN 55439
1-1
<PAGE> 1
EXHIBIT 10.16(b)
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DRF 12000 PORTLAND LLC
LEASE
WITH
TELEX COMMUNICATIONS, INC.
(DATED: MARCH 16, 2000)
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<PAGE> 2
LEASE AGREEMENT
THIS AGREEMENT, made this 16th day of March, 2000 between DRF 12000
PORTLAND LLC, a Minnesota limited liability company ("Landlord") and TELEX
COMMUNICATIONS, INC., a Delaware corporation ("Tenant").
RECITALS:
1. Landlord desires to purchase the Premises to be leased to Tenant, in
accordance with the terms and subject to the conditions of this Lease.
2. Tenant desires to lease from Landlord the Premises in accordance
with the terms and subject to the conditions contained in this Lease.
FOR AND IN CONSIDERATION of the mutual covenants contained in this
Lease, Landlord and Tenant (the "parties") agree as follows:
Section 1. Property Acquisition. Landlord shall purchase certain
improved real estate having an address of 12000 Portland Avenue South,
Burnsville, Minnesota 55337-1535, and lease same to Tenant and Tenant shall
lease from Landlord the site described in Exhibit A (the "Property"), which
includes a building of approximately 114,100 square feet ("Building"). The
Property, together with the Building and all other improvements thereon, shall
be the "Premises". Provided, however, it is an express condition precedent to
Tenant's obligations hereunder that Landlord have good and clear, marketable
title to the Premises prior to commencement of the term of the lease.
Section 2. Existing Improvements. (a) It is expressly acknowledged and
agreed by Tenant that no representations or warranties of any kind have been
made by Landlord with respect to the Premises and Landlord shall deliver the
Premises in "as is" "where is" condition "with all faults" and without
warranties express or implied, and that Landlord shall have no obligation to
make any repairs, improvements, changes or modifications to the Premises or any
improvements thereon or thereto as a condition of Tenant's occupancy of the
same, but nothing herein shall obviate Landlord's obligation to provide the
services set out in Section 8. Any alterations or additions to the existing
improvements to prepare the Premises for Tenant's initial occupancy, including
without limitation, distributing of utilities and HVAC within the Premises,
demising partitions, fixtures, etc., shall be at Tenant's sole cost and expense,
subject to payment by Landlord of the cash allowance provided below and any
funds available therefor in the Capital Reserve maintained under Section 35.
Such alterations or additions shall be constructed in a good and workmanlike
manner substantially in accordance with all applicable statutes, ordinances and
building codes, governmental rules, regulations, and orders including without
limitation, the Americans with Disabilities Act.
(b) Tenant shall indemnify and defend Landlord against and save
Landlord and the
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<PAGE> 3
Premises, and any portion thereof, harmless from all losses, costs, damages,
expenses, liabilities and obligations, including, without limitation, reasonable
attorneys' fees resulting from the assertion, filing, foreclosure or other legal
proceedings with respect to any mechanic's lien or other lien for labor,
services, materials, supplies, machinery fixtures or equipment furnished to the
Premises by or on behalf of Tenant.
(c) Landlord will pay to Tenant a cash allowance in the amount of
$500,000.00, of which
(i) $200,000 is designated for construction of an anechoic
chamber, and
(ii) $300,000 is designated for other changes or improvements
made to the Premises by Tenant to prepare the Premises for Tenant's
occupancy.
If all of the funds designated for either category are not used for such
category, such excess funds shall upon completion of such work be available to
cover costs in the other category, provided that the total cash allowance shall
in no event exceed the total cost to Tenant of all such work. Such cash
allowance shall be paid in installments as Tenant's work progresses. During
construction of Tenant's work, Tenant shall submit to Landlord not more than
once in any calendar month a request for payment and Tenant's sworn statement
(with a sworn construction statement and supporting lien waivers from Tenant's
contractors) in form acceptable to Landlord which identifies those of Tenant's
designers, contractors, subcontractors, workers and suppliers who are entitled
to payment for work performed and materials and equipment supplied by them on
the Premises to the date of Tenant's application. The amount of each installment
of the cash allowance paid by Landlord shall be limited to the value of the
labor, materials and equipment supplied by Tenant's agents to the date of such
sworn statement, less the aggregate amount of all prior payments of such cash
allowance. In no event, however, shall the total of all installments exceed the
cash allowance. If an event of default is not continuing under this Lease and to
the extent Tenant has timely submitted the proper documentation to support a
given installment, Landlord shall pay such installment upon the earlier of 30
days of submittal of such documentation or the date payment therefor is
disbursed by the holder of the mortgage on the Premises or its title insurer. If
Landlord reasonably determines that additional documentation is necessary,
Landlord shall promptly notify Tenant of the discrepancy or omission in such
documentation and may withhold payment of such portion as shall not be
adequately supported until the discrepancy or omission is corrected to the
reasonable satisfaction of Landlord.
(d) In addition to the cash allowance payable under (c), Landlord on
the Commencement Date will deposit the sum of $100,000 in an interest-bearing
escrow account, which sum (including accrued interest) will be used to replace
the EMS system for the Premises at such time as Landlord and Tenant may
reasonably determine, but in any event when the existing system becomes
impractical to operate or repair.
Section 3. Initial Term. The initial term of the Lease (the "Initial
Term") shall
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commence March 16, 2000 or such later date as Landlord acquires title to the
Property (the "Commencement Date") and shall extend for ten (10) years (plus any
partial month if the Commencement Date is other than the first day of a month;
the end of such period being the "Expiration Date"), unless earlier terminated
pursuant to the terms of this Lease.
Section 4. Renewal of Initial Term. Provided Tenant is not in default
under the terms of this Lease beyond the period allowed for cure, Landlord
grants Tenant the option to renew the Initial Term for three (3) renewal terms
(each, a "Renewal Term") of five (5) years each, exercised by written notice to
Landlord given not less than eighteen (18) months prior to the Expiration Date.
The Base Rent for any such Renewal Term shall be as set forth in Section 5.
(Initial Term and any Renewal Term or Terms shall herein collectively be
referred to as the "Term".)
Section 5. Base Rent and Operating Cost. (a) Base Rent. In
consideration of the leasing of the Premises, Tenant shall pay to Landlord for
the Premises as base monthly rent ("Base Rent") the following:
<TABLE>
<CAPTION>
Period Monthly Rent
------ ------------
<S> <C>
Through the 60th full calendar month of the $ 90,666.67
Initial Term
After the 60th full calendar month of the $ 98,221.08
Initial Term
First Renewal Term $106,404.92
Second Renewal Term $115,236.50
Third Renewal Term $124,801.08
</TABLE>
payable in advance on the first day of each month during the Term, with the
first installment of Base Rent due on the Commencement Date. If the Commencement
Date falls on other than the first day of a month, the Base Rent for the first
month of the Initial Term shall be pro-rated.
(b) Operating Cost.
(i) Prior to the Commencement Date and prior to each calendar
year thereafter Landlord shall compute and deliver to Tenant a good
faith estimate of the Operating Cost for such calendar year and the
monthly payments as would fully recover the estimated Operating Cost in
such calendar year. If at any time in such calendar year there is a
material change in Landlord's estimate of the Operating Cost, Landlord
may compute and deliver to Tenant an updated statement. The estimated
Operating Cost shall
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<PAGE> 5
be paid by Tenant to Landlord in advance and without further notice on
or before the Commencement Date and on or before the first day of each
calendar month thereafter during the Term in monthly installments, each
based on Landlord's most current statement. If the Commencement Date
falls on other than the first day of a month, the payment of the
estimated Operating Cost for the first month of the Initial Term shall
be pro-rated.
(ii) Within a reasonable period after the end of each calendar
year, Landlord shall give written notice to Tenant of the actual
Operating Cost for that calendar year. If the actual Operating Cost for
any calendar year during the Term exceeds the estimated Operating Cost
paid by Tenant for the calendar year, Tenant shall pay to Landlord a
sum equal to the difference between the actual Operating Cost for the
year and the estimated Operating Cost paid by Tenant for the year. If
the estimated Operating Cost paid by Tenant for any calendar year
during the Term exceeds the actual Operating Cost for the calendar
year, Landlord shall pay to Tenant a sum equal to the difference
between the estimated Operating Cost paid by Tenant for the year and
the actual Operating Cost for the year. Tenant shall pay to Landlord
any amount due under this Section within 30 days after delivery of the
annual notice, but failure to so notify Tenant within a reasonable
period after any calendar year for which any amount is due shall not
release Tenant from paying nor diminish Tenant's obligation to pay such
amount. At Tenant's option, Landlord shall pay Tenant any amount due
under this Article within 30 days after delivery of the annual notice
or credit such amount against the next payments coming due under this
Lease. If this Lease does not begin or end at the first day of a
calendar year, the amount payable for any such Operating Cost
adjustment will be adjusted accordingly.
(iii) Tenant may at Tenant's cost examine Landlord's books
relating to the Operating Cost if requested within 100 days of receipt
of Landlord's notice of the actual Operating Cost for any year. Such
examination shall be made during normal business hours upon reasonable
prior written notice to Landlord. The actual Operating Cost and any
Operating Cost adjustment set out in Landlord's notice of the actual
Operating Cost for any year shall be considered as final and binding on
Tenant except to the extent of any written exception delivered to
Landlord within 180 days of Tenant's request to examine Landlord's
books. The written exception shall specify the items of Operating Cost
or calculation of the Operating Cost adjustment to which exception is
made and the reason for such exception. No examination of Landlord's
books or written exception made by Tenant shall extend the due date of
any Operating Cost adjustment or any other amount due under this Lease.
(iv) If Tenant's examination reveals that the actual Operating
Cost for any period has been overstated, Tenant shall provide Landlord
with a copy of the results of its examination and Landlord shall
promptly reimburse Tenant the difference between the amount paid by
Tenant and the amount actually due. In addition, if such examination
reveals that actual Operating Cost for any year has been overstated by
4% or more,
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<PAGE> 6
Landlord shall promptly reimburse Tenant the reasonable cost of such
examination. If Tenant's examination reveals that the actual Operating
Cost for any year has been understated, Tenant shall promptly pay
Landlord the difference between the amount due and the amount paid by
Tenant.
(v) If Landlord disputes the results of Tenant's examination,
Landlord and Tenant shall negotiate in good faith in an attempt to
resolve the dispute. If Landlord and Tenant do not resolve the dispute
within 60 days of Landlord's receipt of the results of Tenant's
examination, the dispute will be resolved by a mutually acceptable
nationally-recognized accounting firm. Landlord and Tenant shall bear
equally the cost of the services of such accounting firm. If Landlord
disputes the results of Tenant's examination, then notwithstanding
Section 5(b)(iv) Landlord shall not be required to reimburse Tenant for
any overstated amount or cost of examination until the dispute is
resolved, and the amount of the overstatement or understatement as
determined by such resolution shall govern the amount to be reimbursed
by Landlord or paid by Tenant.
(vi) For purposes of this Section, the "Operating Cost" for
any calendar year will be all reasonable costs of Landlord (net of
rebates and discounts actually received) attributable to the ownership,
maintenance, operation and repair of the Premises pursuant to this
Lease attributable to such year as determined by standard accounting
practices, including but not limited to (A) all taxes, installments of
special assessments (and interest thereon), fees, levies, and other
governmental charges, general and special, ordinary and extraordinary,
payable during such calendar year which are assessed, levied, charged
or imposed upon or on account of all of any part of the Premises, (B)
the cost of maintenance, operation, repair and replacement of the
parking areas, roads, sidewalks, landscaping, drainage and exterior
lighting facilities on or about the Premises, (C) the cost of
maintenance, operation, repair and replacement of equipment and
facilities providing heating, cooling, ventilation, electrical and
plumbing services in the Building, (D) the cost of maintenance,
operation, repair and replacement of any elevator equipment in the
Building, (E) the cost of maintenance, repair and replacement of
exterior glass and exterior doors, including cleaning the exterior
surface of exterior window glass, (F) the cost for any additional
services provided by Landlord under the terms of this Lease, (G) the
cost of such insurance as may be provided by Landlord under the terms
of this Lease, and (H) the amount of any management fees and expenses
payable by Landlord for management of the Premises not to exceed the
competitive cost or rate for such service. Operating Cost shall include
any employment costs (including pension and benefits) for persons
employed by Landlord or its manager in performing any of the foregoing
maintenance, operation, repair or replacement work (or pro rata portion
thereof if the employee is assigned to other properties in addition to
the Premises), the cost of transportation of such employees in
connection with such work, the cost of all supplies and materials used
in performing such work, the cost of any utilities or services provided
to or in the Premises which are not paid by Tenant, the cost of
maintenance and service agreements for equipment serving the Premises
such as exterior window cleaning and elevator
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maintenance, and the cost of any equipment leased or rented in
connection with such work. Capital expenditures for any repairs,
modifications, alterations, changes and replacements which cost less
than $25,000 for the project (whether under one contract or several
trade contracts) will be included in Operating Cost for the year in
which such expenditures are incurred. Capital expenditures for any work
which exceed such amount will be drawn from the Capital Reserve
maintained under Section 35 to the extent of funds available, and any
amounts in excess thereof will amortized over the useful life or
pay-back period (whichever is shorter) at an interest rate equal to
Landlord's cost of funds and the amortized amount for each year will be
included in the Operating Cost for such year. Operating Cost excludes,
however, (A) depreciation, (B) principal and interest on debt, (C)
finders' fees and real estate brokers' commissions, (D) financing and
refinancing costs, (E) cost of repairs due to casualty or condemnation
which are reimbursed by third parties, (F) any cost due to Landlord's
breach of this Lease, (G) any income, estate, inheritance, or other
transfer tax and any excess profit, franchise, or similar taxes on
Landlord's business, (H) any amount for any item or service paid to
Landlord or an affiliate of Landlord to the extent it exceeds the
competitive cost or rate for such item or service, (I) costs of
operation of the business of the entity which constitutes Landlord or
preservation of Landlord's interest in the Premises, such as by way of
illustration and not limitation the cost of internal accounting and
legal matters, the sale or mortgaging of the Premises, any legal
disputes with any employee relating to his or her employment, or any
legal disputes with any holder of a mortgage on the Premises relating
to its mortgage, as distinguished from costs of management, operation,
maintenance and repair of the Premises, (J) amounts otherwise included
in Operating Cost to the extent they are reimbursed (after deduction of
the out-of-pocket cost of collection of such reimbursement) by
insurance or otherwise, or (K) interest and penalties resulting from
failure to pay any item included in Operating Cost when due and
payable.
(c) If, at any time during the term of this Lease, any method of
taxation shall be such that there shall be levied, assessed or imposed on
Landlord, or on the Base Rent or other amounts payable under this Lease, or on
the Premises, or any portion thereof, a capital levy, gross receipts or sales
tax or other tax on the rents received therefrom, or a franchise tax, or an
assessment, levy or charge measured by or based in whole or in part upon such
tenants, Tenant covenants to pay and discharge the same, it being the intention
of the parties hereto that the rent to be paid hereunder shall be paid to
Landlord absolutely net without deduction or charge of any nature whatsoever
foreseeable or unforeseeable, ordinary or extraordinary, or of any nature, kind
or description, except as in this Lease otherwise expressly provided. Nothing in
this Lease contained shall require Tenant to pay any Municipal, State or Federal
capital levy, estate, succession, income, inheritance or transfer taxes of
Landlord, or corporation franchise taxes imposed upon any corporate owner or
management company of the fee of the Premises.
(d) If this Lease is terminated prior to the Expiration Date for
reasons other than Tenant's default and if the effective date of termination is
other than the last day of a month, Base Rent and other charges due hereunder
shall be pro-rated to the date of termination based on a
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<PAGE> 8
thirty-day month, and Landlord shall refund to Tenant any Base Rent or other
charges paid but unearned as of the termination date.
(e) Base Rent and any other charges which are required herein to be
paid to Landlord directly, shall be paid to Landlord at the address set forth in
Section 30 or at such other address as Landlord may from time to time designate.
(f) In the event of any default by Tenant in payment of any amounts
payable under this Lease, such amounts shall be deemed rent for the sole purpose
of affording Landlord all rights against Tenant under law for default in such
payment as in the case of arrears of rent.
Section 6. Use. The Premises shall be used only for lawful purposes.
Tenant shall not use the Premises, or allow its use in any manner which
materially violates any rule, order, statute, ordinance, requirement dealing
with the occupancy of the Premises or its use as approved by applicable
governmental authorities, or restrictive covenant applicable thereto, or which
would make void or voidable any insurance with respect to the Premises or which
would cause structural injury to the improvements.
Section 7. Alterations. (a) During the Initial Term and any Renewal
Term, Tenant shall not make structural or exterior alterations to the Premises
without Landlord's prior written consent said consent not to be unreasonably
withheld, delayed or conditioned, but Tenant shall have the right, without
Landlord's consent to make nonstructural alterations to the interior of the
Premises ("Alterations") provided same do not materially adversely affect the
value of the Premises in Landlord's reasonable opinion. Landlord hereby consents
to the Alterations shown on plans for the anechoic chamber prepared by
Electro-Voice, Inc., dated January 14, 2000, and the internal remodeling plans
dated March 1, 2000, initialed by the parties. In making any Alterations, Tenant
shall do the following:
(i) Notify Landlord at least fifteen days prior to
commencement of the Alterations;
(ii) Comply with all applicable local, state or federal laws,
regulations, codes or ordinances affecting such Alterations and the
Premises including without limitation the Americans with Disability
Act, as amended from time to time;
(iii) Not suffer or permit any mechanic's lien or other lien
to be filed against the Premises, or any portion thereof, by reason of
work, labor, skill, services, equipment or materials supplied or
claimed to have been supplied to the Premises at the request of Tenant,
or anyone holding the Premises, or any portion thereof, through or
under Tenant. If any such mechanic's lien or other lien shall at any
time be filed against the Premises, or any portion thereof, Tenant
shall cause the same to be discharged of record within thirty (30) days
after the date of filing the same. If Tenant shall fail to discharge
such mechanic's lien or liens or other lien within such period, then,
in addition to any other
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right or remedy of Landlord, Landlord may, but shall not be obligated
to, discharge the same by paying to the claimant the amount claimed to
be due or by procuring the discharge of such lien as to the Premises by
deposit in the court having jurisdiction of such lien, the foreclosure
thereof or other proceedings with respect thereto, of a cash sum
sufficient to secure the discharge of such lien, or in such other
manner as is now or may in the future be provided by present or future
law for the discharge of such lien as a lien against the Premises. Any
amount paid by Landlord, or the value of any deposit so made by
Landlord, together with all costs, fees and expenses in connection
therewith (including reasonable attorney's fees of Landlord), together
with interest thereon at the Maximum Rate of Interest set forth in
Section 19 hereof, shall be repaid by Tenant to Landlord on demand by
Landlord and if unpaid may be treated as rent as provided in Section
5(f). Tenant shall indemnify and defend Landlord against and save
Landlord and the Premises, and any portion thereof, harmless from all
losses, costs, damages, expenses, liabilities, suits, penalties,
claims, demands and obligations, including, without limitation,
reasonable attorney's fees resulting from the assertion, filing,
foreclosure or other legal proceedings with respect to any such
mechanic's lien or other lien.
All materialmen, contractors, artisans, mechanics, laborers and any other person
now or hereafter furnishing any labor, services, materials, supplies or
equipment to Tenant with respect to the Premises, or any portion thereof, are
hereby charged with notice that they must look exclusively to Tenant to obtain
payment for the same. Notice is hereby given that Landlord shall not be liable
for any labor, services, materials, supplies, skill, machinery, fixtures or
equipment furnished or to be furnished to Tenant upon credit, and that no
mechanic's lien or other lien for any such labor, services, materials, supplies,
machinery, fixtures or equipment shall attach to or affect the estate or
interest of Landlord in and to the Premises, or any portion thereof. In the
event of the filing of a mechanic's lien, Tenant shall have the right to post
security with Landlord as reasonably determined by Landlord, so that Tenant may
dispute said lien; provided, however, in no event shall a foreclosure action be
commenced on said lien without Tenant either (i) paying off said lien or (ii)
complying with the statutory procedure such that the lien is removed from the
Premises.
(b) Tenant's trade fixtures, furnishings and equipment in the Premises,
shall remain Tenant's property for all purposes, except as otherwise agreed in
advance in writing by Tenant and Landlord. On or before the Expiration Date (or
as appropriate the date the last Renewal Term expires), Tenant shall remove its
trade fixtures, furniture and equipment from the Premises and surrender the
Premises to Landlord in good order and condition, ordinary wear and tear and
damage from the elements or other insured casualty excepted only.
(c) Tenant has notified Landlord that it intends to construct an
addition to the existing improvements on the Premises for purposes of adding a
facility known as an "Anechoic Chamber" which will affect the structure and
exterior of the improvements. Landlord, subject to review and approval of the
Plans and Specifications for said "Anechoic Chamber" (which approval will not be
unreasonably withheld or delayed) agrees that Tenant may make such
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addition to the Premises, provided the quality of the construction of
the improvements is similar to the quality of the construction of the Building
and architecturally compatible.
Section 8. Landlord Services. Subject to participation by Tenant by
payment of Operating Cost, Landlord shall provide as promptly and as
expeditiously as reasonably possible during Tenant's occupancy of the Premises
the following services in a good and skillful manner in accordance with
applicable law and the standards for similar buildings in the community:
(i) all necessary maintenance, repair and replacement of the
foundations, exterior walls, floor slabs, roof and other structural
elements of the Building,
(ii) maintenance, repair and replacement of all parking areas,
roads, sidewalks, landscaping, drainage, and exterior lighting
facilities on the Premises (including removal of snow from parking,
roadway and walking surfaces, and mowing and upkeep of the lawn and
other landscaped areas),
(iii) maintenance, operation, repair and replacement of all
equipment and facilities providing heating, cooling, ventilation,
electrical and plumbing services in the Building,
(iv) maintenance, operation, repair and replacement of any
elevator equipment within the Building,
(v) maintenance, repair and replacement of the exterior glass
and exterior doors of the Building, including cleaning of exterior
surface of exterior window glass,
(vi) repairs, modifications, alterations, changes and
replacements required by any governmental authority or insurance
carrier which do not result from Tenant's specific use or intended use
of the Premises, and
(vii) such other additional services as Landlord and Tenant
may mutually agree in writing.
(b) Prior to each calendar year, Landlord will submit to Tenant for
Tenant's approval Landlord's budget for the operation of the Premises for such
year. It is the intent of Landlord and Tenant that Landlord's cost of operating
the Premises will be competitive with buildings of similar age, condition and
use in the community. Tenant's approval will not be unreasonably withheld,
delayed or conditioned so long as such budget will reasonably maintain the
Building in a commercially reasonable condition for similar buildings in the
community.
(c) Landlord shall not be liable in damages or otherwise if any service
provided by Landlord or any other supplier is interrupted or terminated because
of necessary repairs, installations or improvements or any cause beyond the
control of Landlord, nor shall any such event be
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<PAGE> 11
construed as an eviction of Tenant, work an abatement of rent, or relieve Tenant
from fulfilling any obligation of the Lease. However, to the extent the Premises
are rendered unusable by Tenant in its business by reason of any such event
within the control of Landlord for more than two consecutive business days after
notice from Tenant, the Base Rent shall thereafter be equitably reduced until
the Premises are again rendered usable. If any of the equipment or machinery
used by Landlord in supplying the services breaks down or for any cause ceases
to function properly, Landlord shall use reasonable diligence to make the
necessary repair or replacement.
(d) Landlord shall be entitled to cooperate voluntarily in any
reasonable manner with the efforts of any governmental agency or utility
supplier in reducing energy or other resource consumption or in coordinating
other services.
Section 9. Maintenance of Premises. (a) Except for the services
provided by Landlord under Section 8,Tenant at its sole cost and expense,
throughout the term of this Lease, shall take good care of the interior portions
of the Building (including any additions or outbuildings hereafter erected or
installed on the Property) and any leasehold improvements therein, and shall
keep the same in good order and condition, and shall make and perform all
repairs and maintenance thereof and all necessary repairs thereto. When used in
this Section, "repairs" shall include all necessary replacements, renewals,
alterations, additions and betterment. All repairs made by Tenant shall be at
least equal in quality to the original work and shall be made by Tenant in
accordance with all laws, ordinances and regulations whether heretofore or
hereafter enacted. The necessity for or adequacy of maintenance and repairs
shall be measured by the standards which are appropriate for improvements of
similar construction and class, provided that Tenant shall in any event make all
repairs necessary to avoid any structural damage or other damage or injury to
the Premises.
(b) Tenant shall accomplish all maintenance for which it is responsible
as soon as practicable; provided, however, that Tenant shall have any essential
maintenance performed immediately if a hazardous or emergency situation exists.
(c) Tenant, at its sole cost and expense, shall provide janitorial
services, cleaning of the interior surface of exterior window glass and all
interior window glass, refuse collection and removal, and utilities in
connection with its use of the Premises. Tenant shall be billed directly by the
applicable utility and service companies and pay for all utilities and other
services furnished to the Premises including the costs of utility deposits.
Except for the services provided by Landlord under Section 8, Landlord shall not
be required to furnish any services or facilities or to make any repairs or
alterations in, about or to the Premises or any improvements hereafter erected
thereon.
(d) Tenant shall not do or suffer any waste or damage, disfigurement or
injury to the Premises, or any improvements hereafter erected thereon, or to the
fixtures or equipment therein, or permit or suffer any overloading of the floors
or other use of the Premises that would place an
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<PAGE> 12
undue stress on the same or any portion thereof beyond that for which the same
was designed.
Section 10. Signs. Tenant, at its sole cost and expense, shall have the
right to place exterior signs on the Premises subject to any and all applicable
laws, codes or ordinances, or restrictive covenants. Tenant shall be solely
responsible for maintaining in good condition its signs and shall remove them
and repair any damage caused by such removal on or before the Expiration Date
(or the expiration date of the last Renewal Term, as applicable). Tenant during
the Term of this Lease and Tenant's occupancy of the Premises shall have the
right to name the Building, subject to all applicable laws, ordinances,
statutes, regulations and restrictive covenants.
Section 11. Landlord's Right of Access. (a) Landlord and its authorized
representatives shall have the right to enter the Premises following notice to
Tenant during Tenant's regular business hours and at all other reasonable times
for the purpose of (i) determining whether the Premises are in good condition
and whether Tenant is complying with its obligations under this Lease, (ii)
performing any maintenance or repairs for which Landlord is responsible under
this Lease, or (iii) posting "for rent" signs during the last twelve months of
(y) the Initial Term if the Renewal Term is not exercised or (z) the last
Renewal Term. Landlord agrees that its access to the Premises shall be subject
to reasonable rules of Tenant regarding security of the Premises and Tenant's
business, including providing Tenant with adequate notice of desire for access,
agreeing to require its employees and other visitors to the Premises to execute
agreements upon entry to the Premises, agreeing to reasonable requirements of
confidentiality and nondisclosure of matters viewed within the Premises (to the
extent all visitors with similar access to the Premises are required to execute
such agreements) and allowing all access to be pursuant to Tenant escorted
visits, if required by Tenant.
(b) Landlord shall conduct its activities in the Premises in a manner
that will cause the least possible interference with Tenant's business
operations, and Base Rent shall abate for any period in excess of 48 hours
during which Tenant is deprived of beneficial occupancy of the Premises as a
result of Landlord's presence in the Premises except when Landlord's presence is
a result of the act or omission of Tenant, its agents, employees or contractors.
Section 12. Tenant's Indemnity. Tenant shall indemnify and hold
Landlord harmless from and against all claims, actions, demands, judgments,
damages, liabilities and expenses, including reasonable attorneys' fees, for
death of or bodily injury to any person or for loss of, damage to or destruction
of any property arising from Tenant's use of the Premises, except for any such
claims, actions, demands, judgments, damages, liabilities or expenses arising
from the acts or omissions of Landlord, its agents, employees or contractors.
Section 13. Insurance. (a) During the term of this Lease, Landlord
shall obtain and continuously maintain in full force and effect the following
insurance coverage:
(i) Commercial public liability insurance against any loss,
liability or damage
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on, about or relating to the Premises, or any portion thereof, with
limits of not less than Five Million Dollars ($5,000,000.00) single
limit coverage on an occurrence basis (which may be provided by
umbrella).
(ii) Boiler and pressure vessel (including, but not limited
to, pressure pipes, steam pipes and condensation return pipes)
insurance, provided the Premises contain a boiler or other pressure
vessel or pressure pipes, in an amount reasonably satisfactory to
Landlord.
(iii) Property insurance in an amount equal to the greater of
(y) Landlord's mortgage or (z) an amount equal to the full replacement
cost of Building and other improvements constructed, installed or
located on the Premises, for the benefit of Landlord, its managing
agent and Tenant, against (i) loss or damage by fire; (ii) loss or
damage from such other risks or hazards now or hereafter embraced by an
"Extended Coverage Endorsement", including, but not limited to,
windstorm, hail, explosion, vandalism, riot and civil commotion,
ordinance, damage from vehicles, smoke damage, water damage and debris
removal; (iii) loss for flood if the Premises is in a designated flood
or flood insurance area; and (iv) loss from so-called explosion,
collapse and underground hazards; (v) loss of rents coverage for twelve
(12) months and (vi) loss or damage from such other risks or hazards of
a similar or dissimilar nature which are now or may hereafter be
customarily insured against with respect to improvements similar in
construction, design, general location, use and occupancy to the
Building and other improvements on the Premises. Landlord or Landlord's
Mortgagee shall be named loss payee and said Mortgagee shall be
provided with a standard Mortgagee's clause as to said coverage. If a
sprinkler system shall be located in the Building or other
improvements, sprinkler leakage insurance in form and amount reasonably
satisfactory to Landlord may be procured.
(iv) Such other insurance as may be required under the
Landlord's Mortgage or otherwise approved by Tenant.
(b) During the term of this Lease Tenant, at its sole cost and expense,
but for the mutual benefit of Landlord, its Mortgagee and Tenant, shall obtain
and continuously maintain in full force and effect:
(i) Commercial public liability insurance with contractual
liability and personal injury coverage insuring Tenant, Landlord,
Landlord's managing agent, and any other parties reasonably requested
by Landlord from all claims, demands or actions for injuries to or
death of any person or damage to or loss of any property in or about
the Premises with coverage of not less than $5,000,000, combined single
limit (which may be provided by umbrella or excess liability insurance
for amounts in excess of $1,000,000).
(ii) Workers' compensation insurance within statutory limits
covering
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Tenant's employees in the Premises, including employers' liability up
to a limit if at least $500,000.
The insurance set forth in this Section shall be maintained by Tenant at not
less than the limits set forth herein until reasonably required to be changed
from time to time by Landlord, in writing, whereupon Tenant covenants to obtain
and maintain thereafter such protection in the amount or amounts so required by
Landlord. Tenant agrees that the policies required to be carried by Tenant under
the Lease shall be primary over the Landlord's insurance.
(b) Each policy required under this Section 13 shall have attached
thereto (i) an unqualified endorsement that such policy shall not be canceled or
materially changed without at least thirty (30) days prior written notice to
Landlord and Tenant, and (ii) an unqualified endorsement to the effect that the
insurance shall not be invalidated by any act or neglect of any person. All
policies of insurance shall be written in companies reasonably satisfactory to
Landlord and Tenant and licensed in the state in which the Premises are located,
and shall be written in such form and shall be distributed in such companies as
shall be reasonably satisfactory to Landlord and Tenant. Such policies (or
acceptable certificates of insurance) shall be delivered to Landlord and Tenant
upon commencement of the term; and prior to expiration of such policy, a new
policy (or certificates of insurance acceptable to Landlord), shall be delivered
to Landlord and Tenant.
(c) Tenant shall elect whether or not to maintain insurance coverage
upon Tenant's business and upon all personal property of Tenant or the personal
property of others kept, stored or maintained on the Premises against loss or
damage by fire, windstorm or other casualties or causes for such amount as
Tenant may desire, and Tenant agrees that any such policies shall contain a
waiver of subrogation clause as to Landlord. Tenant hereby waives, releases,
discharges and agrees to indemnify and defend Landlord, its agents and employees
from and against all claims whatsoever arising out of loss, claim, expense or
damage to or destruction of any such personal property or to Tenant's business
notwithstanding that such loss, claim, expense or damage may have been caused by
Landlord, its agents or employees, and Tenant agrees to look to the insurance
coverage only in the event of such loss.
(d) Upon expiration of the term of this Lease, the unearned premiums
upon any of Tenant's insurance policies or certificates thereof lodged with
Landlord by Tenant shall be payable to Tenant, provided that Tenant shall not
then be in default in keeping, observing or performing the terms and conditions
of this Lease.
Section 14. Waiver of Subrogation. Landlord and Tenant waive and
release each other of and from any and all rights of recovery, claim, action or
cause of action, against each other, their agents, officers and employees, for
any loss or damage that may occur to the Premises, improvements to the Building
or personal property within the Building, by reason of fire or the elements
regardless of cause or origin, including negligence of Landlord or Tenant or
their agents, officers and employees. Because this paragraph will preclude the
assignment of any
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<PAGE> 15
claim mentioned in it by way of subrogation or otherwise to an insurance company
or any other person, the parties agree immediately to give to each insurance
company which has issued to it policies of insurance covering risks of direct
physical loss, written notice of the terms of the mutual waivers contained in
this Section 14, and to have the insurance policies properly endorsed, if
necessary, to prevent the invalidation of the insurance coverages by reason of
the mutual waivers contained in this paragraph, and to secure from their
respective insurers waivers of the insurers' subrogation rights. Landlord and
Tenant mutually waive their respective rights of recoveries against each other
for any loss insured by fire, extended coverage and other property insurance
policies existing for the benefit of either of them.
Section 15. Casualty. In case of damage to or destruction of the
Building or other improvements after the Commencement Date of this Lease, by
fire or other insurable casualty, Landlord shall promptly restore, repair,
replace and rebuild the same as nearly as possible to the condition that the
same were in immediately prior to such damage or destruction. Tenant shall
forthwith give Landlord written notice of such damage or destruction upon the
occurrence thereof and specify in such notice, in reasonable detail, the extent
thereof. Subject to receipt by Landlord of insurance proceeds covering all Base
Rent and other charges due from Tenant, the Base Rent and Operating Cost shall
abate ratably for the period of time that the Premises is untenantable, in whole
or in part (based upon the portion of the Premises that is untenantable). Such
restoration, repairs, replacements, rebuilding, changes and alterations,
including the cost of temporary repairs for the protection of the Premises, or
any portion thereof, ending with the completion thereof are sometimes
hereinafter referred to as the "Restoration". In the event the insurance
proceeds are inadequate to restore the Building and other improvements, Landlord
may terminate this Lease by written notice to Tenant given within 90 days
following the damage or destruction unless Tenant agrees in writing within 30
days thereafter to pay for any shortfall and provides evidence reasonably
acceptable to Landlord of the availability of such funds. Landlord shall not be
responsible for damages to Tenant's personal property or trade fixtures, and
Tenant shall bear the cost to repair or replace those items.
If fire or other casualty shall render the whole or any material
portion of the Premises untenantable, and the Premises can reasonably be
expected to be made tenantable within two hundred seventy (270) days from the
date of such event, Landlord shall repair and restore the Premises to as near
their condition prior to the fire or other casualty as is reasonably possible
within such two hundred seventy (270) day period (subject to delays for causes
beyond Landlord's reasonable control) and notify Tenant that it will be doing
so, such notice to be mailed within thirty (30) days from the date of such
damage or destruction, and this Lease shall remain in full force and effect, but
the Base Rent and Operating Cost for the period during which the Premises are
untenantable shall be abated pro rata (based upon the portion of the Premises
which is untenantable), provided Landlord receives from Tenant proceeds from the
loss of rents insurance set forth in Section 13(a)(iii)(v) sufficient to cover
all Base Rent and other charges due hereunder.
If the Premises cannot reasonably be expected to be made tenantable
within two hundred
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<PAGE> 16
seventy (270) days from the date of such event, either Landlord or Tenant, by
notice in writing to the other, mailed within thirty (30) days from the date of
such damage or destruction, may terminate this Lease effective upon a date
within thirty (30) days from the date of such notice.
Section 16. Condemnation. (a) If, during the term of this Lease, the
entire Premises shall be taken as the result of the exercise of the power of
eminent domain (hereinafter referred to as the "Proceedings"), this Lease and
all right, title and interest of Tenant hereunder shall cease and come to an end
on the date of vesting of possession in the condemning authority Landlord shall
be entitled to and shall receive the total award made in such Proceedings,
Tenant hereby assigning any interest in such award, damages, consequential
damages and compensation to Landlord and Tenant hereby waiving any right Tenant
has now or may have under present or future law to receive any separate award of
damages for its interest in the Premises, or any portion thereof, or its
interest in this Lease.
(b) If, during the Initial Term of this Lease, or any extension or
renewal thereof, less than the entire Premises, but more than ten percent (10%)
of the floor area of the Building, or more than twenty percent (20%) of the
parking area of the Premises, shall be taken in any such Proceedings, and
Landlord is unable to replace such parking area with additional parking
contiguous to the Premises, or restore said floor area whatever the use may be,
this Lease shall, upon delivery of possession to the condemning authority
pursuant to the Proceedings, terminate as to the portion of the Premises so
taken, and Tenant may, at its option, terminate this Lease as to the remainder
of the Premises. Tenant shall not have the right to terminate this Lease
pursuant to the preceding sentence unless the business of Tenant conducted in
the portion of the Premises taken cannot reasonably be carried on with
substantially the same utility and efficiency in the remainder of the Premises.
Such termination as to the remainder of the Premises shall be effected by notice
in writing given not more than sixty (60) days after the date of delivery of
possession to the condemning authority pursuant to the Proceedings, and shall
specify a date not more than sixty (60) days after the giving of such notice as
the date for such termination. Upon the date specified in such notice, the term
of this Lease, and all right, title and interest of Tenant hereunder, shall
cease and come to an end. The Tenant may not terminate this Lease, as in this
Section provided, at any time that Tenant is in default in the performance of
any of the terms, covenants or conditions of this Lease on its part to be
performed, and any termination upon Tenant's part shall become effective only
upon compliance by Tenant with all such terms, covenants and conditions to the
date of such termination. In the event that Tenant elects not to terminate this
Lease as to the remainder of the Premises, the rights and obligations of
Landlord and Tenant shall be governed by the provisions of Section 16 (c)
hereof.
(c) If ten percent (10%), or less, of the floor area of the Building,
or twenty percent (20%), or less, of the parking area of the Premises, shall be
taken in such Proceedings, or if more than ten percent (10%) of the floor area
of the Building or more than twenty percent (20%) of the parking area of the
Premises is taken (but less than the entire Premises) and this Lease is not
terminated as in Section 16 (b) hereof provided, this Lease shall, upon vesting
or possession in the condemning authority pursuant to the Proceedings, terminate
as to the parts so taken.
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<PAGE> 17
Landlord agrees to promptly restore that portion of the Building and other
improvements on the Premises not so taken to a complete architectural and
mechanical unit for the use and occupancy of Tenant as in this Lease provided
and Tenant will be responsible at Tenant's cost for restoration of Tenant's
trade fixtures and equipment therein.
(d) Notwithstanding any of the foregoing, Tenant shall have, the
limited right to prove in the Proceedings and to receive any separate award
which may be made for damages to or condemnation of Tenant's trade fixtures and
equipment, the unamortized cost of any improvements made to the Premises by
Tenant at Tenant's cost (it being understood however, that Landlord will be
entitled to the full award for any improvements covered by the cash allowance
provided under Section 2(c) or by the Capital Reserve provided under Section 35
or otherwise included in the Operating Cost under Section 5(b)), and for moving
expenses paid for by Tenant, so long as such claims by Tenant do not reduce
Landlord's award below what it would be absent such claim, and provided further
that any first mortgage against the Property shall be paid in full prior to any
collection of damages by Tenant. (Said mortgage shall in no event be for an
amount greater than 80% of the appraised value at the time of placing said
mortgage against the Property unless approved by Tenant).
(e) In the event of any termination of this Lease, or any part thereof,
as a result of any such Proceedings, Tenant shall pay to Landlord all Base Rent
and other charges payable hereunder with respect to that portion of the Premises
so taken in such Proceedings with respect to which this Lease shall have
terminated justly apportioned to the date of such termination. From and after
the date of delivery of possession pursuant to such Proceedings, Tenant shall
continue to pay the Base Rent and other charges payable hereunder, as in this
Lease provided, to be paid by Tenant, subject to an abatement of a just and
proportionate part of the Base Rent and any amounts payable into the Capital
Reserve under Section 35 according to the extent and nature of such taking as
provided for in Section 16 (c) and (f) hereof in respect to the Premises
remaining under this Lease after such taking.
(f) In the event of a partial taking of the Premises under Section 16
(c) hereof, or a partial taking of the Premises under Section 16 (b) hereof,
followed by Tenant's election not to terminate this Lease, the fixed Base Rent
payable hereunder during the period from and after the date of delivery of
possession pursuant to such Proceedings to the termination of this Lease shall
be reduced to an amount equal to the product of the Base Rent provided for
herein multiplied by the number of usable square feet of space in the Premises
after such taking and after the same has been restored to a complete
architectural unit, and the amounts payable into the Capital Reserve will be the
amounts set out in Section 35 multiplied by a fraction the numerator of which is
the usable square feet of the building remaining under this Lease and the
denominator of which is 114,100 square feet.
Section 17. Default. The occurrence of any one or more of the following
events (the "Events of Default") shall constitute a default and breach of this
Lease by Tenant:
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(i) The abandonment of the Premises by Tenant (vacation not
being deemed to be abandonment unless there is failure to perform the
obligations of Tenant required by this Lease).
(ii) Failure by Tenant to make any payment of Base Rent, or
any other charges or payment required to be made by Tenant under this
Lease when due where such failure continues for a period of fifteen
(15) days after written notice by Landlord to Tenant;
(iii) The failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or
performed by Tenant, other than as described in subparagraph (ii)
above, where such failure continues for a period of thirty (30) days
after written notice by Landlord to Tenant; provided, however, that if
the nature of Tenant's obligation which it has failed to perform is
such that more than thirty (30) days are reasonably required for its
cure, then it shall not be deemed an Event of Default if Tenant
commences such cure within the 30 day period and diligently prosecutors
the cure to completion;
(iv) The making by Tenant of an assignment for the benefit of
its creditors, or the filing by or against Tenant of a petition to have
Tenant adjudged a bankrupt, or a petition or reorganization or
arrangement under any law relating to bankruptcy (unless, in the case
of a petition filed against Tenant, the same is dismissed within 90
days), or the appointment of a trustee or a receiver to take possession
of substantially all of Tenant's assets located in the Premises or of
Tenant's interest in this Lease, where possession is not restored to
Tenant with in 90 days, or the attachment, execution or other judicial
seizure of substantially all of Tenant's assets located in the Premises
or of Tenant's interest in this Lease, or such seizure is not
discharged within the 90 days.
(v) If default shall be made by Tenant, by operation of law or
otherwise, under the provisions of Section 27 hereof relating to
assignment, sublease, mortgage or other transfer of Tenant's interest
in this Lease or in the Premises or in the income arising therefrom.
Section 18. Landlord's Remedies. If an Event of Default occurs, at any
time after the occurrence, with or without additional notice or demand and
without limiting Landlord's rights or remedies as a result of the Event of
Default, Landlord may do the following:
(i) Upon any termination of this Lease, Tenant shall quit and
peaceably surrender the Premises, and all portions thereof, to
Landlord, and Landlord, upon or at any time after any such expiration
or termination, may, without further notice, enter upon and reenter the
Premises, and all portions thereof, and possess and repossess itself
thereof, by summary proceeding, ejectment or otherwise, and may
dispossess Tenant and remove Tenant and all other persons and property
from the Premises, and all portions
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thereof, and may have, hold and enjoy the Premises and the right to
receive all rental and other income of and from the same.
(ii) At any time, or from time to time after any such
termination, Landlord may relet the Premises, or any portion thereof,
in the name of Landlord or otherwise, for such term or terms (which may
be greater or less than the period which would otherwise have
constituted the balance of the term of this Lease) and on such
conditions (which may include market concessions or free rent) as
Landlord, in its sole discretion, may determine and may collect and
receive the rents therefor. Landlord shall in no way be responsible or
liable for any failure to relet the Premises, or any part thereof, or
for any failure to collect any rent due upon any such reletting.
(iii) No such termination of this Lease or retaking of
possession shall relieve Tenant of its liabilities and obligations
under this Lease (as if this Lease had not been so terminated), and
such liabilities and obligations shall survive any such termination. In
the event of any such termination, whether or not the Premises, or any
portion thereof, shall have been relet, Tenant shall pay to Landlord a
sum equal to the Base Rent and any other charges required to be paid by
Tenant, up to the time of such termination of this Lease or retaking of
possession by Landlord, less net proceeds as described in (b) below, if
any, and thereafter Tenant, until the end of what would have been the
term of this Lease in the absence of such termination, shall be liable
to Landlord for, and shall pay to Landlord, as and for agreed current
damages for Tenant's default:
(a) The equivalent of the amount of the Base Rent and
other charges which would be payable under this Lease by
Tenant if this Lease were still in effect, less
(b) The net proceeds of any reletting effected
pursuant to the provisions of Section (ii) hereof after
deducting all of Landlord's expenses in connection with such
reletting, including, without limitation, all repossession
costs, reasonable and customary brokerage commissions, legal
expenses, reasonable attorney's fees, reasonable alteration
costs, and reasonable expenses of preparation of the Premises,
or any portion thereof, for such reletting.
Tenant shall pay such current damages in the amount determined in
accordance with the terms of Section (iii), as set forth in a written
statement thereof from Landlord to Tenant (hereinafter called the
"Deficiency"), to Landlord in monthly installments on the days on which
the Base Rent would have been payable under this Lease if this Lease
were still in effect, and Landlord shall be entitled to recover from
Tenant each monthly installment of the Deficiency as the same shall
arise.
(iv) At any time after any such termination or retaining of
possession, in addition to any monthly Deficiencies as set forth in
Section (iii) accruing through the date
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of such demand, Landlord shall be entitled to recover from Tenant, and
Tenant shall pay to Landlord, on demand, as and for damages for
Tenant's default, an amount equal to the excess, if any, of the then
present worth of the aggregate of the Base Rent and any other charges
to be paid by Tenant hereunder from and after the date of such demand
for the unexpired portion of the term of the Lease (assuming this Lease
had not been so terminated), over the then present worth of the then
aggregate fair and reasonable fair market rent of the Premises for the
same period. In the computation of present worth, a discount at the
rate of the prime rate of interest plus 2% (the prime rate shall be the
costs charged by Norwest Bank Minnesota N.A. to its most credit-worthy
customers, or the successors in interest to Norwest Bank Minnesota
N.A.) per annum shall be employed. If the Premises, or any portion
thereof, be relet by Landlord for the unexpired term of this Lease, or
any part thereof, before presentation of proof of such damages to any
court, commission or tribunal, the amount of rent reserved upon such
reletting shall, prima facie, be the fair and reasonable fair market
rent for the part or the whole of the Premises so relet during the term
of the reletting. Nothing herein contained or contained in Section
(iii) shall limit or prejudice the right of Landlord to prove for and
obtain, as damages by reason of such expiration or termination, an
amount equal to the maximum allowed by any statute of rule of law in
effect at the time when, and governing the proceedings in which, such
damages are to be proved, whether or not such amount be greater, equal
to or less than the amount of the difference referred to above.
(v) No failure by Landlord or by Tenant to insist upon the
performance of any of the terms of this Lease or to exercise any right
or remedy consequent upon a breach thereof, and no acceptance by
Landlord of full or partial rent from Tenant or any third party during
the continuance of any such breach, shall constitute a waiver of any
such breach or of any of the terms of this Lease. Landlord agrees to
mitigate damages arising out of Tenant's default to the extent
commercially reasonable. No waiver of any breach shall affect or alter
this Lease, but each of the terms of this Lease shall continue in full
force and effect with respect to any other then existing or subsequent
breach of this Lease. No waiver of any default of Tenant herein shall
be implied from any omission by Landlord to take any action on account
of such default, if such default persists or is repeated and no express
waiver shall affect any default other than the default specified in the
express waiver and that only for the time and to the extent therein
stated. One or more waivers by Landlord shall not be construed as a
waiver of a subsequent breach of the same covenant, term or condition.
(vi) In the event of any breach or threatened breach by Tenant
of any of the terms contained in this Lease, Landlord shall be entitled
to seek to enjoin such breach or threatened breach and shall have the
right to invoke any right or remedy allowed at law or in equity or by
statute or otherwise as though entry, reentry, summary proceedings and
other remedies were not provided for in this Lease. Each remedy or
right of Landlord provided for in this Lease, or now or hereafter
existing at law or in equity or by statute or otherwise, and the
exercise or the beginning of the exercise by Landlord of any one or
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<PAGE> 21
more of such rights or remedies shall not preclude the simultaneous or
later exercise by Landlord of any or all other rights or remedies.
Section 19. Interest on Late Payments. Unpaid installments of Base
Rent, or other sums due to Landlord shall bear interest from the date due at the
rate of 5% over the prime rate of interest charged by Norwest Bank Minnesota,
N.A. or its successor, from time to time (charged to its most credit-worthy
customer) or at the highest lawful interest rate in the jurisdiction in which
the Premises are located, whichever is less.
Section 20. Quiet Enjoyment. Provided it has paid all Base Rent and
other charges due hereunder and is not otherwise in default beyond the period
allowed for cure herein, Tenant shall at all times during the Initial Term and
any Renewal Term peaceably and quietly enjoy the Premises without disturbance by
Landlord or any person claiming through Landlord.
Section 21. Subordination and Attornment. (a) Provided any Mortgagee
agrees to grant nondisturbance protection to Tenant as long as Tenant is not in
default beyond the period allowed for cure herein, this Lease and all rights of
Tenant therein, and all interest or estate of Tenant in the Premises, or any
portion thereof, shall be subject and subordinate to the lien of any first
mortgage, first deed of trust, security instrument or other document of like
nature held by such Mortgagee, hereinafter referred to as "Mortgage", which at
any time may be placed upon the Premises, or any portion thereof, by Landlord,
and to any replacement, renewals, amendment, modifications, extensions or
refinancing thereof, and to each and every advance made under such Mortgage.
Tenant agrees at any time hereafter, and from time to time on demand of
Landlord, to execute and deliver to Landlord any instruments, releases or other
documents that may be reasonably required for the purpose of subjecting and
subordinating this Lease to the lien of any such Mortgage, provided however, it
is agreed, nevertheless, that so long as Tenant be not in default in the payment
of Base Rent and other amounts due under this Lease and the performance and
observance of all other covenants, conditions, provisions, terms and agreements
to be performed and observed by Tenant under this Lease after the expiration of
any applicable cure period, that such subordination agreement or other
instrument, release or document shall not interfere with, hinder or molest
Tenant's right to quiet enjoyment under this Lease, nor the right of Tenant to
continue to occupy the Premises, and all portions thereof, and to conduct its
business thereon in accordance with the covenants, conditions, provisions, terms
and agreements of this Lease. The lien of any such Mortgage shall not cover
Tenant's trade fixtures or other personal property located in or on the
Premises.
(b) In the event of any act or omission of Landlord constituting a
default by Landlord, Tenant shall not exercise any remedy until Tenant has given
Landlord and any Mortgagee of the Premises a prior thirty (30) day written
notice to remedy such act or omission and such time shall have elapsed following
the giving of such notice; provided, however, if such act or omission cannot,
with due diligence and in good faith, be remedied within such thirty (30) day
period, the Landlord and Mortgagee shall be allowed such further period of time
as may be reasonably necessary provided that it commence remedying the same with
due diligence and in good faith
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<PAGE> 22
within said thirty (30) day period. Nothing herein contained shall be construed
or interpreted as requiring any Mortgagee to remedy such act or omission.
(c) If any Mortgagee (provided said Mortgagee's security interest is
subordinate to the Lease or said Mortgagee has agreed not to disturb Tenant's
possession of the Premises and/or its interest in the Lease provided Tenant is
not in default beyond the period allowed for all herein) shall succeed to the
rights of Landlord under this Lease or to ownership of the Premises, whether
through possession or foreclosure of the delivery of a deed to the Premises,
then, upon the written request of such Mortgagee so succeeding to Landlord's
rights hereunder, Tenant shall attorn to and recognize such Mortgagee as
Tenant's Landlord under this Lease, and shall promptly execute and deliver any
instrument that such Mortgagee may reasonably request to evidence such
attornment (whether before of after making of the mortgage). In the event of any
other transfer of Landlord's interest hereunder, upon the written request of the
transferee and Landlord, Tenant shall attorn to and recognize such transferee as
Tenant's Landlord under this Lease and shall promptly execute and deliver any
instrument that such transferee and Landlord may reasonably request to evidence
such attornment.
Section 22. Sale of Premises by Landlord. If Landlord sells the
Premises, it shall be relieved of all liability under any and all of its
covenants and obligations contained in this Lease and arising out of any act,
occurrence or omission occurring after the consummation of such sale; provided,
however, that the purchaser of the Premises shall be deemed without further
agreement between the parties, or between the parties and any such purchaser, to
have assumed and agreed to carry out all of the covenants and obligations of the
Landlord arising after the closing under this Lease.
Section 23. Broker's Commission. Landlord and Tenant represent each to
the other that United Properties was used by Tenant in connection with this
Lease. Landlord shall be responsible for payment of the commission. Landlord and
Tenant agree to indemnify one another from and against any claims, demands and
actions brought to recover a brokerage commission or any other damages by any
broker engaged by the other.
Section 24. Estoppel Certificate. (a) Either party may request and
receive from the other party, upon not less than 15 business days prior written
notice an executed statement in writing, (i) certifying that this Lease is
unmodified and in full force and effect (or if modified, stating the nature of
the modification and certifying that this Lease as so modified is in full force
and effect) and the date to which Base Rent is paid in advance, if any, (ii)
acknowledging that there are not, to the attesting party's knowledge, any
uncured defaults on the part of the other party, or specifying such defaults if
any are claimed, and (iii) such other matters reasonably requested to be stated
therein. Any such statement may be relied upon by a prospective purchaser of the
Premises or any of Landlord's or Tenant's lenders having an interest in the
Premises.
(b) In the event that Tenant is a corporation, Tenant shall, deliver to
Landlord without charge upon ten (10) days prior written request the following
instruments and documents:
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(i) Certificate of Good Standing in the state of incorporation
of Tenant and in the state in which the Premises are located issued by
the appropriate state authority and bearing a current date.
(ii) A copy of Tenant's Articles of Incorporation and By-Laws,
and any amendments or modifications thereof certified by the Secretary
or Assistant Secretary of Tenant.
(iii) Such other certifications or statements as may be
reasonably required provided Landlord shall not request information
which is not otherwise disclosed as a publicly held company.
Section 25. INTENTIONALLY OMITTED
Section 26. Holding Over. If Tenant remains in possession of the
Premises after the Expiration Date (or after the expiration date of any of the
Renewal Terms, such occupancy shall be a tenancy from month-to-month at a Base
Rent equal to one and one-half times the Base Rent payable during the last month
of the Initial Term (or the applicable Renewal Term), and subject to all other
amounts payable and other terms and conditions of this Lease.
Section 27. Assignment and Subletting. (a) Tenant shall not transfer,
assign, or otherwise alienate its interest in and to the Premises without first
obtaining the written consent of Landlord, which consent shall not be
unreasonably withheld. Any assignment, mortgage, pledge, hypothecation,
encumbrance, or license of this Lease or of Tenant's leasehold interest in the
Premises without the prior written consent of Landlord shall be null and void.
For purposes of this Section, a merger, consolidation or other reorganization of
Tenant or the sale or transfer of a controlling percentage of the stock of
Tenant for all or substantially all of the assets of Tenant shall not be deemed
to be a transfer, assignment, subletting or other alienation of Tenant's
interest in and to the Premises, provided the remaining entity under the Lease
has a tangible net worth greater than or equal to the tangible net worth of
Tenant immediately prior to said merger, consolidation or other reorganization.
Subject to the provisions of Section 27(c) herein, Tenant may sublet all or a
portion of the Premises provided Tenant remains fully liable under the Lease.
(b) Notwithstanding anything contained in Section 27 to the contrary,
Landlord reserves the right to refuse to give its consent to any assignment,
subletting or transfer of Tenant's interest in the Premises unless Tenant
remains fully liable for the performance of the Tenant's covenants and
obligations under this Lease.
(c) Tenant will reimburse Landlord for any costs and legal fees
reasonably incurred by Landlord in connection with any proposed transfer or
sublease. Tenant will also pay over to Landlord upon receipt 50% of any rent or
other consideration received by Tenant in connection with any such sublease
which (after deducting the out-of-pocket cost to Tenant, if any, in
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effecting the sublease, including reasonable alteration costs, commissions and
legal fees) is in excess of the Base Rent and Operating Cost for the comparable
period (or, if the sublease is for less than all of the Premises, in excess of
the pro rata portion of the Base Rent and Operating Cost for the comparable
period) and 50% of any consideration received by Tenant in connection with any
other transfer or this Lease (after deducting the out-of-pocket cost to Tenant,
if any, in effecting the transfer).
Section 28. Tenant agrees to look solely to Landlord's interest in the
Premises for the recovery of any judgment against Landlord, it being agreed that
Landlord, or Landlord's partners (general or limited), members, shareholders,
managers or officers shall never be personally liable for any such judgment.
Section 29. Financial Information. Tenant agrees to provide to
Landlord, within the later of one hundred twenty-five (125) days after the end
of each fiscal year of Tenant or five (5) days after the date said filing is
made to the SEC, a financial statement, prepared in accordance with generally
accepted accounting principles and audited by an independent, certified public
accountant. In addition, Tenant agrees to provide to Landlord, from time to
time, any other unaudited financial information as Landlord may reasonably
request provided such financial information of Tenant should be limited to such
information of Tenant otherwise made publicly available.
Section 30. Further Assurances. Each party agrees that is will take
such actions, provide such documents, do such things and provide such further
reassurances as may reasonably be requested by the other party during the term
of this Lease.
(a) All section headings and captions used in this Lease are purely for
convenience and shall not affect the interpretation of this Lease.
(b) All Exhibits described in this Lease shall be deemed to be
incorporated in and made a part of this Lease, except that if there is any
inconsistency between this Lease and the provisions of any Exhibit the
provisions of this Lease shall control.
(c) This Lease shall be deemed entered into within and shall be
governed by and interpreted in accordance with the laws of the state where the
Premises are located, and the parties submit to the jurisdiction of any
appropriate court within that state for adjudication of disputes arising from
this Lease.
(d) Except as otherwise provided, this Lease shall not be modified
except by written agreement signed on behalf of Tenant and the Landlord by their
respective authorized officers.
(e) This Lease supersedes all prior understandings, representations,
negotiations and correspondence between the parties, constitutes the entire
agreement between them with respect to the matters described, and shall not be
modified or affected by any course of dealing, course of performance or usage of
trade.
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(f) If any provision of this Lease is held to be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall in no way be affected or impaired.
(g) The failure of either party at any time to require performance by
the other of any provision of this Lease shall in no way affect that party's
right to enforce such provision, nor shall the waiver by either party of any
breach of any provision of this Lease be taken or held to be a waiver of any
further breach of the same provision or any other provision.
(h) This Lease may be executed in any number of counterparts and each
fully executed counterpart shall be deemed an original.
(i) All notices, approvals, requests, consents and other communications
given pursuant to this Lease shall be in writing and shall be deemed to have
been duly given when sent by confirmed facsimile transmission, or delivered by
Courier, or sent by U.S. mail or Federal Express delivery addressed as follows:
If to Landlord: DRF 12000 Portland LLC
c/o Frauenshuh Companies
7101 West 78th Street, Suite 100
Bloomington, MN 55439
Attn: Randy T. McKay
Facsimile: (952)829-3481
If to Tenant:
Prior to May 1, 2000: Telex Communications, Inc.
9600 Aldrich Avenue South
Minneapolis, MN 55420
Attn: General Counsel
Facsimile: (952)886-3754
Upon From and after
May 1, 2000: Telex Communications, Inc.
12000 Portland Avenue South
Burnsville, MN 55337
Attn: General Counsel
Facsimile: (952)886-3754
Section 31. Compliance with Environmental Laws. (a) Landlord warrants
and represents to Tenant that, to the best of Landlord's knowledge based solely
on a Phase I Environmental Assessment performed by Environmental Strategies
Corporation dated May 27, 1999 for Emerson Electric Co. of the Fisher-Rosemount
Systems, Inc. facility in Burnsville, Minnesota
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("Audit) and except for any matters disclosed in said Audit, the Premises are in
full compliance with all applicable environmental laws, rules, requirements,
orders, directives, ordinances and regulations of the United States of America
or any state, city or municipal government or lawful authority having
jurisdiction or affecting the Premises (collectively "Environmental Laws").
Landlord shall name Tenant as additional insured on any policy of environmental
insurance maintained by Landlord on the Premises.
(b) Except as set forth in Section 31(c), Landlord shall defend,
indemnify and save Tenant, its officers, shareholders, security holders and
affiliates, directors, agents and employees, harmless from and against all
claims, obligations, demands, actions, proceedings and judgments, loss, damage,
liability and expense (including reasonable attorneys' fees and expenses) which
any one or more of them may sustain in connection with any non-compliance with
any environmental condition affecting the Premises.
(c) Tenant shall at Tenant's own cost and expense, timely comply with
all applicable, rules, requirements, orders, directives, ordinances and
regulations arising from Tenant's use and occupancy of the Premises, including
but not limited to the Environmental Laws, and shall indemnify, defend, save and
hold harmless Landlord, its directors, officers, agents and employees from and
against any and all claims, demands, losses and liabilities (including
reasonable attorneys' fees) resulting from any violation of the Environmental
Laws when caused by Tenant's use and occupancy of the Premises.
(d) The provisions of this Section 31 shall survive the expiration or
earlier termination of this Lease.
(e) Subject to Landlord's obligations specifically set forth in Section
31 hereof, Tenant shall, throughout the term of this Lease, and at Tenant's sole
cost and expense, promptly comply or cause compliance with or remove or cure any
violation of any and all present and future laws (including requirements of the
Americans with Disabilities Act, as modified from time to time), ordinances,
orders, rules, regulations and requirements of all Federal, State, Municipal and
other governmental bodies having jurisdiction over the Premises and the
appropriate departments, commissions, boards and officers thereof, and the
orders, rules and regulations of the Board of Fire Underwriters where the
Premises are situated, or any other body now or hereafter constituted exercising
lawful or valid authority over the Premises, or any portion thereof, or the
sidewalks, curbs, roadways, alleys, entrances or railroad track facilities
adjacent or appurtenant thereto, or exercising authority with respect to the use
or manner of use of the Premises, or such adjacent or appurtenant facilities,
and whether the compliance, curing or removal of any such violation and the
costs and expenses necessitated thereby shall have been foreseen or unforeseen,
ordinary or extraordinary, and whether or not the same shall be presently within
the contemplation of Landlord or Tenant or shall involve any change of
governmental policy, or require structural or extraordinary repairs, alterations
or additions by Tenant and irrespective of the costs thereof.
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(f) Tenant, at its sole cost and expense, shall comply with all
agreements, contracts, easements, restrictions, reservations or covenants, if
any, set forth in Exhibit "A" attached, or hereafter created by Tenant or
consented to, in writing, by Tenant or requested, in writing, by Tenant. Tenant
shall also comply with, observe and perform all provisions and requirements of
all policies of insurance at any time in force with respect to the Premises and
required to be obtained and maintained under the terms of Section 13 hereof and
shall comply with all development permits issued by governmental authorities
issued in connection with development of the Premises.
(g) The following terms and conditions regarding environmental matters
and the Premises are included in this Lease:
(i) For the purpose of this Lease, the phrase "Regulated
Materials" shall include, but shall not be limited to, those materials
or substances defined as "hazardous substances", "hazardous materials",
"hazardous waste", "toxic substances", "toxic pollutant" or other
similar designations under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. 9601, et
seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C.
6901, et seq., the Hazardous Materials Transportation Act, 49 U.S.C.
1801, et seq., or regulations promulgated pursuant thereto. "Tenant's
Regulated Materials" shall mean those Regulated Materials, brought
onto, created, stored at, handled, or generated at the Premises by or
on behalf of Tenant, its agents, employees, contractors (other than
Landlord), subtenants, assignees, suppliers or other invitees.
"Landlord's Regulated Materials" shall mean all other "Regulated
Materials". Also the phrase "Governmental Agency or Agencies" means any
federal, state, local or foreign government, political subdivision,
court, agency or other entity, body, organization or group exercising
any executive, legislative, judicial, quasi-judicial, regulatory or
administrative function of government.
(ii) Tenant hereby covenants to Landlord and its Mortgagee
that:
(1) Tenant shall (x) comply and shall cause all
occupants of the Premises to comply with all federal, state
and local laws, rules, regulations and orders with respect to
the discharge, generation, removal, transportation, storage
and handling of Tenant's Regulated Materials, (y) remove any
Tenant's Regulated Materials (other than supplies and
materials used in the ordinary course of its business and for
which all applicable laws, ordinances, rules and regulations
are complied with) immediately upon discovery of the same, and
(z) pay or cause to be paid all costs associated with such
removal;
(2) Tenant shall keep the Premises free of any lien
imposed pursuant to any state or federal law, rule, regulation
or order in connection with the existence of Tenant's
Regulated Materials on the Premises;
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(3) Tenant shall not install or permit to be
installed on the Premises any Tenant's Regulated Material
including, but not limited to, asbestos, asbestos-containing
materials, urea formaldehyde insulation or any other chemical
or substance which has been determined to be a hazard to
health and environment other than supplies and materials used
in the ordinary course of its business and for which use all
applicable laws, ordinances, rules and regulations are
complied with;
(4) Tenant shall not cause or permit to exist as a
result of an intentional or unintentional act or omission on
the part of Tenant or any occupant of the Premises, a
releasing, spilling, leaking, pumping, emitting, pouring,
emptying or dumping of any Tenant's Regulated Materials onto
the Premises or into surrounding waters or other lands; and
(5) Tenant shall promptly provide a copy of any
summons, citation, directive, letter or other communication
which it receives from any Government Agency or Agencies
concerning any Regulated Matters on the Premises.
(iii) It shall constitute an Event of Default hereunder and
the Landlord shall be entitled to exercise all remedies available to it
under Section 18 of the Lease and hereunder if:
(1) Tenant shall fail to comply with the covenants
contained in Section 31(g)(ii) hereof within thirty (30) days
after Landlord mails notice to Tenant hereof or fails to
commence such compliance within such time and diligently
continue such compliance to completion;
(2) any Tenant Regulated Materials are hereafter
found to exist on the Premises or in its soil or groundwater
in violation of the environmental laws referenced in Section
31(g)(i) herein, and Tenant shall fail within seventy-five
(75) days after Landlord mails notice to Tenant thereof, to
commence and diligently pursue such actions as are necessary
to remove the same from the Premises; or
(3) any summons, citation, directive, letter or other
communication, written or oral, shall be issued by any
Governmental Agency or Agencies concerning the matters
described in Subparagraph 31(b) above and Tenant fails to cure
the condition occasioning the same within the time limit set
forth in this Subparagraph (g)(iii)(1) and (2). In the event
Tenant fails to comply with the terms of this Section 31, the
Tenant hereby grants Landlord and its employees and agents an
irrevocable and non-exclusive license to enter the Premises in
order to inspect, conduct testing and remove Tenant Regulated
Materials. All costs of
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such inspection, testing and removal related to Tenant
Regulated Materials shall be due and payable from Tenant as
Additional Rent hereunder upon demand. Landlord's entry into
the Premises shall be subject to the advance notice
requirement set forth in this Lease.
(iv) The representations, covenants and indemnifications given
by Tenant to Landlord and Landlord to Tenant in this Section 31 shall
be a separate agreement between the parties, and shall survive any
termination of the Lease.
(v) Landlord hereby covenants to Tenant that Landlord shall
comply with all federal, state and local laws, rules, regulations and
orders with respect to the discharge, generation, removal,
transportation, storage and handling of Regulated Materials.
Section 32. Contingency. This Lease is contingent upon Tenant's
assignment to Landlord of the Purchase and Sale Agreement between Tenant and
Fisher-Rosemount Systems, Inc. ("Seller"). Either Landlord or Tenant may
terminate this Lease by written notice delivered to the other party in the event
such Purchase and Sale Agreement has not been assigned to Landlord and the
assignment consented to by Seller, such that Landlord is in the position to
close by the date provided for closing therein, as such date may be extended
with the consent of Seller.
Section 33. Reduction in Premises. On not less than 120 days' prior
written notice, Landlord at its discretion may remove that portion of the land
shown on Exhibit B (the "Deleted Portion") and any improvements thereon from the
Premises leased under this Lease. If the Deleted Portion is removed from the
Premises, Landlord at no cost to Tenant will create any cross-easement
agreements as may be necessary to provide for utility, driveway, and pedestrian
access arrangements as may be required by code or reasonably necessary for
operation of the remaining Premises and any improvements on the Deleted Portion,
subject to the approval of Tenant which approval will not be unreasonably
withheld or delayed. Such cross-easement agreements will include a covenant or
other assurance reasonably acceptable to Tenant that the Deleted Premises will
be developed and used in a manner which will be compatible with Tenant's use of
the Premises. Upon removal of the Deleted Portion from the Premises, Tenant will
have no rights or obligations in respect of the Deleted Portion except as may be
provided in such cross-easement agreements and this Lease will continue as a
lease of the remaining Premises only for the same Base Rent and on the other
terms and conditions set out in this Lease.
Section 34. Security Deposit. Upon Landlord's purchase of the Property,
Tenant shall deposit with Landlord the sum of $250,000 in cash and $400,000 in
the form of an irrevocable Letter of Credit in form acceptable to Landlord and
drawn on a financial institution acceptable to Landlord, as and for a "Security
Deposit" for the full and faithful performance by Tenant of each and every term,
provision, covenant and condition of this Lease. On the first day of each month,
Tenant will deposit an additional $9,500 of cash into the Security Deposit. The
amount of the Letter of Credit held by Landlord or Landlord's Mortgagee shall be
reduced each six months by $1.00 for each $1.00 of any such additional cash
deposits made during the preceding six months
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of the Term until the Letter of Credit is reduced to zero. The Security Deposit
in cash and Letter of Credit shall in no event exceed $1,150,000. The cash
portion of such Security Deposit shall be maintained by or on behalf of Landlord
and/or Landlord's Mortgagee in a separate interest-bearing account reasonably
acceptable to Tenant, and shall not be commingled with Landlord's other
accounts. The Letter of Credit portion of the Security Deposit shall be issued,
at Landlord's request, either in the name of Landlord, or Landlord's Mortgagee
and shall be held by either Landlord or an escrow agent, in which case Tenant
agrees it will execute any documentation necessary to effectuate the intent of
this Section 34. In the event that Tenant fails to pay any Base Rent or other
amounts payable under this Lease within three days of the due date, or in the
event Tenant defaults beyond the period allowed for cure in the Lease in respect
to any of the other terms, provisions, covenants and conditions of this Lease,
Landlord may use, apply or retain the whole or any part of the security so
deposited for the payment of any such amounts or for any sum which Landlord may
expend or be required to expend by reason of Tenant's default, including, but
not limited to, any damages or deficiency may accrue before or after reentry by
Landlord. Tenant shall be entitled to any interest on the Security Deposit,
payable quarterly, if the Security Deposit is in cash. It is expressly
understood and agreed that such deposit is not an advance rental deposit or a
measure of Landlord's damages in case of Tenant's default. Upon application of
any part of the deposit by Landlord as provided herein, Tenant shall pay to
Landlord on demand the amount so applied in order to restore the security
deposit to its original amount. Any application of the deposit by Landlord shall
not be deemed to have cured Tenant's default by reason of which the application
is made.
Tenant hereby grants to Landlord a security interest in the Security
Deposit to secure all of Tenant's obligations to Landlord in connection with the
Lease, including without limitation, any claims in favor of Landlord arising out
of rejection of the Lease in bankruptcy. Tenant acknowledges that Landlord may
assign the Security Deposit to Landlord's Mortgagee and consents to said
assignment.
In the event of a bona fide sale of the Building of which the Premises
are a part, Landlord shall have the right to transfer the Security Deposit to
its vendee for the benefit of Tenant, and thereafter Landlord shall be released
of all liability for the return of such deposit and Tenant agrees to look to
said vendee for the return of its security deposit. It is agreed that this
provision shall apply to every transfer or assignment made of the security
deposit to any new landlord.
This Security Deposit shall not be assigned or encumbered by Tenant. It
is expressly understood that the reentry of the Premises by Landlord for any
default on the part of Tenant prior to the expiration of the term of this Lease
shall not be deemed a termination of this Lease so as to entitle Tenant to
recover the security deposit, and the security deposit shall be retained and
remain in the possession of Landlord until the end of the term of this Lease,
except as set forth below.
Actions by Landlord against Tenant for breach of this Lease shall in no
way be limited or restricted by the amount of this security deposit and resort
to such deposit shall not waive any
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other rights or constitute an election of remedies which Landlord may have. If
Tenant has fulfilled all of its obligations under the Lease through the Initial
Term and renews the Lease for the First Renewal Term, the Security Deposit will
be reduced to an amount equal to one monthly installment of the Base Rent and
other charges then due under this Lease, and the remaining amounts in the
Security Deposit (including accrued interest) will be returned to Tenant. If the
Lease is not renewed for the First Renewal Term, the Security Deposit will be
retained by Landlord and used to pay all costs of operating and maintaining the
Premises, marketing the Premises for sale or lease, making repairs and
improvements to the Premises, to prepare the Premises for sale or lease, and
paying any other costs reasonably incurred in selling or reletting the Premises.
Upon sale or lease of all or substantially all of the Premises, Landlord will
pay to Tenant any portions of such Security Deposit which have not been used for
such purposes. If Tenant performs all of its obligations under this Lease
through the First Renewal Term and any subsequent Renewal Terms, any amounts
remaining in the Security Deposit (including accrued interest) will be returned
to Tenant at the expiration of this Lease following any adjustment of Operating
Cost for the last year of the Term.
Section 35. Capital Reserve. In addition to the other amounts payable
by Tenant under this Lease, Tenant shall pay to the Landlord (or as otherwise
directed by Landlord in writing) on or before the first day of each month during
the Term the sum of One Thousand Nine Hundred One and 67/100 Dollars
($1,901.67), to be deposited by Landlord or Landlord's Mortgagee in an
interest-bearing account (the "Capital Reserve") for payment of repairs of the
Building and other improvements on the Premises, extraordinary maintenance,
equipment repairs or replacements, or other capital items pertaining to the
Premises. Such account shall at all times be the property of the Tenant, subject
to the rights of the Landlord under this Lease. Landlord shall at all times have
a first security interest in the Capital Reserve, and the Tenant agrees to
execute any financing statement or other documentation requested by the Landlord
to evidence or perfect such security interest. Interest earned from the
investment of sums held in the Capital Reserve shall remain in, and be added to,
such account. Landlord shall have the right to withdraw funds from the Capital
Reserve at any time for the purposes described in this Section, provided that so
long as Tenant is not in default of this Lease no such funds will be used for
any capital item not approved by Tenant directly or by approval of the budget,
which approval will not be unreasonably withheld or delayed. Funds will be
released from the Capital Reserve in accordance with any procedures required by
Landlord's Mortgagee. At expiration or earlier termination of this Lease,
Landlord shall be entitled to withdraw funds from the Capital Reserve sufficient
to cover the unamortized portion of any capital expenditures made by Landlord
which under the terms of Section 5(b) are amortized over the useful life or pay
back period included in Operating Cost, and to cover any other capital
expenditures which are required to be made to the Premises to bring the Premises
to first-class order and condition. If Landlord and Tenant do not agree as to
the capital expenditures required to bring the Premises to first-class order and
condition, they shall mutually select a contractor or other party engaged in the
business of conducting physical inspections of property for purchase or sale and
the report of such inspector shall be determinative of the capital expenditures
required. If Tenant has paid all of the Base Rent and other amounts owing under
this Lease and is not otherwise in default, upon expiration of this Lease any
balance remaining in the
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Capital Reserve after such withdrawals shall be paid over to Tenant.
Section 36. Option to Purchase. At any time from and after March 1,
2002, and prior to the expiration of the Initial Term, and provided Tenant is
not in default under this Lease and the Lease term has not expired or been
terminated, and provided further that, so long as Tenant is a member of the
entity constituting the Landlord, neither of the members of the Landlord has
given notice exercising its right to acquire the interests of the other member
in such entity, Tenant shall have the option to purchase the Premises on the
following terms and contingencies:
(a) Tenant may give written notice to Landlord of its exercise
of its rights under this Section. Such notice shall identify the price that
Tenant is willing to pay for the Premises (which price shall in no event be less
than $11,000,000 net of closing costs and prorations, plus any prepayment
premium arising in connection with such purchase), and shall identify a date at
least 60 days after the date of the notice for closing the purchase and sale
transaction.
(b) Within 30 days after the date Landlord receives such
notice of exercise from Tenant, Landlord shall respond in writing to Tenant,
either accepting the terms contained in Tenant's notice, or demanding appraisal
pursuant to subsection (c). If Landlord fails to respond within such time,
Landlord shall be deemed to have accepted the price proposed by Tenant in its
notice.
(c) If Landlord elects appraisal of Premises, the purchase
price of the Premises will be determined by an appraisal conducted by a
qualified MAI appraiser with experience appraising real property in the area in
which the property to be appraised is located.
(d) If this option is exercised, the closing of the purchase
shall be at a time and place agreeable to the parties, but in any event no later
than 90 days after the giving of the required notice. Upon the closing, the
purchase price shall be paid in cash or by wire transfer or cashier's check. If
any member of the Landlord or any of its principals or investors have guaranteed
any loans or mortgages on or in respect of the Premises, then as a condition of
the purchase of the Premises under this Section such guaranties either will be
released at closing or the Tenant will pay off such loans and mortgages at
closing.
(e) The appraiser shall be selected by agreement of the
parties. If the parties cannot agree upon the appraiser, the parties shall each
name an appraiser who meets the qualifications set forth above, and the value
shall be the average of the two appraisals. In issuing the assignment to the
appraiser, the appraiser shall be instructed to determine the market value of
the Premises assuming (i) the Lease would remain in full force and effect for 10
years from the closing date; (ii) the existing debt would remain in place (and
accordingly the Landlord would have no obligation to pay any prepayment
premium); and (iii) the minimum market value of the Property is at least
$11,000,000 net of closing costs and prorations, plus any prepayment premium
arising in connection with such purchase.
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IN WITNESS WHEREOF, the parties have signed this Lease on the date first above
written.
LANDLORD: DRF 12000 PORTLAND LLC
A MINNESOTA LIMITED LIABILITY COMPANY
By:
----------------------------------
Title: Manager
TENANT: TELEX COMMUNICATIONS, INC.
A DELAWARE CORPORATION
By:
- - -------------------------------------------
Title:
---------------------------
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STATE OF MINNESOTA }
}SS.
COUNTY OF HENNEPIN }
The foregoing instrument was acknowledged before me this 16th day of
March, 2000, by Randy T. McKay, Manager of DRF 12000 PORTLAND LLC, a Minnesota
limited liability company, organized and existing under the laws of the State of
Minnesota, on behalf of the limited liability company.
------------------------------------
Notary Public
STATE OF }
}SS.
COUNTY OF }
The foregoing instrument was acknowledged before me this 16th day of
March, 2000, by , the , of TELEX
-------------------- -----------------
COMMUNICATIONS, INC., a corporation organized and existing under the laws of the
State of Delaware, on behalf of the corporation.
------------------------------------
Notary Public
-33-
<PAGE> 35
EXHIBIT A
LEGAL DESCRIPTION
Parcel A:
That part of Lot One (1), Block One (1), in Dicomed First Addition, according to
the recorded plat thereof, lying south of the Northerly line of First Addition
to Pleasant View Memorial Gardens.
Torrens Property
Parcel B:
That part of Lot One (1), Block One (1), in Dicomed First Addition, according to
the recorded plat thereof, except that part lying south of the Northerly line of
First Addition to Pleasant View Memorial Gardens.
Together with easements contained in Sanitary and Storm Easement Agreement filed
December 22, 1987, as Document No. 820775.
Abstract Property
Parcel C:
That part of Lot 5, Block 1, Riverwood Industrial Park Plat 5 as platted and of
record in the Office of the County Recorder, Dakota County, Minnesota, lying
Southwesterly of the following described line and its Southeasterly extension:
Commencing at the Southwest corner of said Lot 5; thence North 00 degrees 13
minutes 17 seconds West, bearing assumed, along the West line of said Lot 5, a
distance of 80.00 feet to the point of beginning of the line to be described:
Thence South 73 degrees 04 minutes 49 seconds East, a distance of 50.00 feet to
the Northwesterly right-of-way line of Portland Avenue, as platted in said
Riverwood Industrial Park Plat 5 and there terminating.
Abstract Property
Dakota County, Minnesota
Abstract and Torrens Property
<PAGE> 1
EXHIBIT 10.17
REAL ESTATE PURCHASE AGREEMENT
THIS AGREEMENT is made in consideration of the mutual covenants, promises
and agreements contained herein, by and between JOSEPH H. BALDIGA, CHAPTER 7
TRUSTEE OF ARROW AUTOMOTIVE INDUSTRIES, INC., Case No. 98-47636-HJB (Bankr. D.
Mass.), having a business address of Mirick, O'Connell, DeMallie & Lougee, 100
Front Street, Worcester, MA 01608 ("Seller") and TELEX COMMUNICATIONS, INC., a
Delaware corporation, having its principal place of business located at 9600
Aldrich Avenue South, Minneapolis, MN 55420 ("Purchaser"). The term "Bank" as
used herein shall mean BANKBOSTON, N.A., the Debtor's mortgagee, having a
business address of 100 Federal Street, Boston, MA 22110. The term "Debtor" as
used herein shall mean Arrow Automotive Industries, Inc. The Bank is a signatory
hereto solely because it holds a first mortgage lien on the Premises, as
described below, pursuant to a certain recorded real estate mortgage dated
December 29, 1993, as amended.
It is hereby mutually agreed:
1. SALE. Seller shall sell, and Purchaser shall purchase, subject to
and upon the following terms and conditions, all of Debtor's right, title and
interest in that certain real estate located at One Arrow Drive, Morrilton,
Conway County, Arkansas 72110, as more particularly identified in the legal
description attached hereto and incorporated herein as EXHIBIT "A" (the
"Premises"), together with: (i) all of Debtor's right, title and interest in
improvements located thereon; all of Debtor's right, title and interest in the
furniture, fixtures and equipment located thereon and used in connection
therewith (including without limitation all electrical, heating, lighting,
plumbing and air conditioning equipment and fixtures); all easements, rights and
privileges appurtenant thereto; (ii) transferable licenses, permits,
authorizations, certificates of occupancy and other approvals with respect to
the Property in effect as of the Closing Date; (iii) transferable warranties,
<PAGE> 2
2
plans and specifications, tests and studies, and development rights that exist
as of the Closing Date relating to the Property; and (iv) all right, title and
interest of Debtor in and to any land lying in the bed of any street, road,
highway or avenue, open or closed, in front of, adjoining or any part of the
Premises to the centerline thereof, including all right, title and interest of
Seller in and to any award made or to be made from and after the Closing Date in
lieu thereof for damage to the Premises or any part thereof by reason of any
change or grade of any such street, road, highway or avenue (all of the
foregoing are collectively referred to hereinafter as the "Property").
At Closing, the final survey of the Premises, if any, also containing a
metes and bounds description, to be obtained pursuant to Section 3 hereof shall
be designated EXHIBIT "A-1" and substituted in place of EXHIBIT "A" hereto and
become the description of the real property component of the Property.
2. CONDITION OF PROPERTY; LIABILITY OF SELLER AND SELLER'S
REPRESENTATIVES.
(a) The property is being sold "As Is", "Where Is", and with all
"Faults", without any representation and warranty whatsoever as to its physical
condition, fitness for any particular purpose, merchantability, the extent of
Debtor's or Seller's interest in the Property, or any other warranty, express or
implied. Seller and Purchaser agree that Seller and Bank have only limited
knowledge of the condition of the Property, and Seller and Bank do not make, and
shall not be obligated to make, any representations or warranties of any kind,
express or implied, with respect to the environmental status or condition of the
Property, provided, however, that Bank represents that subsequent to entering
into the loan transaction with Debtor it has not independently made or hired
others to make an investigation into the structural or environmental condition
of the Premises, nor has it operated the business of the Debtor, to wit, the
remanufacturing of automotive parts.
<PAGE> 3
3
Purchaser is purchasing the Property based solely on Purchaser's independent
investigations and inspections of the Property and not in reliance on any
representations provided by Seller or Bank. as to the condition of the Property.
Seller has made no agreement to alter, repair or improve the Property. In the
event of a Closing hereunder, Purchaser waives any right whatsoever to rescind
or reform this Agreement, otherwise waives any claims which it now or hereafter
has or may have against Seller or Bank relating to the Property prior to the
Closing Date and covenants not to sue Seller or Bank with respect to any matter
arising from the past, present or future environmental conditions of the
Property. The provisions of this section shall survive the Closing.
(b) It is understood and agreed that, with respect to the Property being
sold by Seller, Seller is acting solely in Seller's capacity as Chapter 7
Trustee of the Debtor. All of the obligations of Seller under or in connection
with this Agreement are (i) obligations of Seller solely in the capacity in
which he stands as a Chapter 7 Trustee of the Debtor, and (ii) chargeable solely
to the assets of the subject bankruptcy estate and not to Seller personally.
Seller in his legal or any other capacity shall have no personal liability or
obligation whatsoever in connection with this Agreement, the transaction
described in this Agreement, or any related document or agreement except in the
case of intentional acts or gross negligence.
(c) Seller and Purchaser acknowledge the existence of certain environmental
conditions on the Property previously identified in that certain Phase II
Environmental Site Assessment prepared at the direction of Debtor by
Professional Services Industries, Inc., dated June 16, 1999, regarding certain
"above-ground storage tanks" and the "liquid hazardous waste handling and
storage area" identified therein, copies of which have been provided to the
Arkansas Department of Pollution Control and Environmental Quality ("ADPCE")
regarding their findings, as well as that
<PAGE> 4
4
certain limited subsurface assessment of the Property conducted in September
1998 by Clayton Environmental Consultants, Inc. With respect to the conditions
and circumstances identified and described in the above-referenced reports, as
well as any direction, response or action determined necessary by the ADPCE,
Seller and Bank agree to reasonably cooperate with Purchaser's efforts to
qualify for protection under the State of Arkansas Brownfields Act, provided
however, that Seller and Bank shall not be required (i) to incur any
out-of-pocket costs in doing so, other than costs normally incurred instant to
the sale of industrial property, including without limitation, professionals' or
attorneys' fees and expenses, or (ii) to perform any additional environmental
testing or remediation. In the event Purchaser, in good faith and prior to the
end of the Due Diligence Period as defined below (unless extended as provided
herein), is not satisfied with the remediation or indemnification available or
likely to become available to Purchaser under the Arkansas Brownfields Act or
other similar or related programs of the State of Arkansas following the
Closing, Purchaser shall have the right and option to terminate this transaction
as set forth in Section 10(h) hereof.
3. PURCHASE PRICE. The purchase price for the Property shall be One
Million Eight Hundred Thousand and 00/100 Dollars ($1,800,000.00) which shall be
paid in lawful money of the United States ("Purchase Price"), as follows:
(a) Purchaser shall pay to Seller as earnest money, Ninety Thousand and
00/100 Dollars ($90,000.00) (the "Initial Deposit") upon the execution and
delivery of this Agreement by Seller, to be held in an interest-bearing escrow
account by Hart Corporation, Seller's broker ("Hart"). Hart shall acknowledge
receipt of such sum and any additional sums by a separate letter to Purchaser,
Seller and Bank and shall execute an escrow agreement reasonably satisfactory to
Purchaser, Seller and Bank.
<PAGE> 5
5
(b) Upon the expiration of the period determined by Section 10(f) hereof
without Purchaser's termination of this Agreement, Purchaser shall pay to Seller
forthwith an additional sum of Ninety Thousand and 00/100 Dollars ($90,000.00)
(the "Additional Deposit"), which, together with the Initial Deposit, shall
thereupon become non-refundable to the benefit of Seller and shall be applicable
to and credited against the Purchase Price at Closing. The term "Deposit" as
used herein shall mean collectively the Initial Deposit and the Additional
Deposit
(c) Purchaser shall pay to Seller the balance of the Purchase Price due
hereunder of One Million Six Hundred Twenty Thousand and 00/100 Dollars
($1,620,000.00), less adjustments and expenses provided for herein, in good
funds, at the Closing, as defined below, by wire transfer or by certified check
or bank check of a domestic bank reasonably satisfactory to Seller.
(d) Purchaser shall pay (i) all of Purchaser's title insurance costs
(including the premiums for an owner's policy if Purchaser chooses to obtain
such insurance), (ii) recording fees in connection with the transfer of the
title to the Property to Purchaser, (iii) the cost of any survey or other plan
required or desired by Purchaser, (iv) the cost of any environmental or
engineering studies, reports or the like required or desired by Purchaser, (v)
Purchaser's counsel fees, and (vi) any other costs or transfer taxes
customarily, or by law required to be, paid by a buyer for the purchase of real
property in Arkansas. The Seller shall pay (i) Seller's counsel fees, (ii)
Seller's costs as agreed to hereunder, and (iii) any other costs or transfer
taxes customarily, or by law required to be, paid by a seller of real property
in Arkansas.
4. TITLE DEED AND SURVEY.
(a) The Property is to be conveyed by a good and sufficient Trustee's
quitclaim deed running to Purchaser or to Purchaser's nominee, as
<PAGE> 6
6
designated in writing delivered by Purchaser to Seller at least three
days prior to the Closing Date as defined below (provided that no consideration
shall be paid to Purchaser for such designation and Purchaser shall be a
principal owner, member, partner, or beneficiary of such nominee), and said deed
shall convey a good and clear record and marketable title thereto, free from
liens and encumbrances, except:
(i) provisions of existing building, zoning,
environmental, health and subdivision control laws, rules and
regulations;
(ii) such taxes for the then current year as are not due
and payable on the date of the delivery of such deed;
(iii) any liens for municipal betterments existing or
hereafter assessed which may be payable in installments after
the date of this Agreement;
(iv) easements, covenants and restrictions of record;
and
(v) any matter which an accurate survey or inspection
of the Property would reveal.
(b) Within fifteen (15) days from the Effective Date hereof, Purchaser
shall, at its option, use its best efforts to obtain a boundary survey of the
Premises from a licensed surveyor reasonably acceptable to Purchaser's title
insurance company referred to in Section 5 hereof and deliver copies thereof to
Seller and Purchaser's title insurance company. If the survey shows the
dimensions of the Property to be substantially smaller than as set forth on
EXHIBIT "A"; or shows easements, encroachments or other conditions which
adversely affect the Property, including any improvements, then Purchaser,
within thirty (30) days from the Effective Date hereof, shall have the right
upon notice to Seller and Bank (i) to terminate this Agreement, whereupon the
Deposit and interest thereon, if
<PAGE> 7
7
any, shall be refunded to Purchaser, or (ii) to close this transaction without
reduction in the Purchase Price. If Purchaser does not object to the survey
within the time specified above, Purchaser will be deemed to have waived all
matters of survey.
5. TITLE INSURANCE. Within fifteen (15) days from the Effective Date
hereof, Purchaser shall, at its option, use its best efforts to obtain an
owner's title insurance commitment to issue a title insurance policy (Form 1992
ALTA-B) insuring Purchaser's fee simple interest in the Property in the amount
of the Purchase Price. The title insurance commitment will contain exceptions
only for real estate taxes and assessments for the current fiscal year which are
not yet due and payable, the matters set forth in Section 4(a)-(e) above, and
any other exceptions Purchaser may approve in writing (the "Commitment"). If the
Commitment contains exceptions not acceptable to Purchaser, then Purchaser shall
so notify Seller and Bank of such exceptions within thirty (30) days of the
Effective Date. Seller or Bank may elect to resolve or remove such exceptions
within twenty (20) days of such notice. Purchaser shall also have the right to
resolve or remove such exceptions at its expense, but there shall be no
obligation of Purchaser to do so. If Seller and Bank are unwilling or unable to
resolve or remove such exceptions to Purchaser's satisfaction either within the
time specified or by obtaining a bankruptcy court order as contemplated by this
Agreement, Purchaser shall have the right upon notice to Seller and Bank to
terminate or close as set forth in Section 4 hereof. If Purchaser does not
notify Seller of its objections within the time specified above, Purchaser will
be deemed to have waived all objections to the status of title as shown in the
Commitment other than objections which may be resolved or removed by Seller
obtaining the bankruptcy court order identified above.
6. BANKRUPTCY COURT APPROVAL. Seller, with the Bank's cooperation
and assent, shall use his best efforts to seek and obtain
<PAGE> 8
8
Bankruptcy Court approval to execute, deliver and perform under this Agreement
pursuant to 11 U.S.C. ss.363, Fed. R. Bankr. P. 2002 and MLBR 6004-1 and 2002-5,
inclusive of sending the appropriate notice of the proposed private sale of
estate property on all required parties, and requesting that such notice provide
no more than twenty (20) days from the date of service thereof for the filing of
objections or any higher offer(s) to purchase the Property. In addition to the
notice of sale provision, Seller, with the Bank's cooperation and assent, shall
file with the Bankruptcy Court, and use his best efforts to seek approval for, a
Motion for Authority to Sell the Property containing the following protections
for Purchaser as offeror:
(i) the notice of sale shall require that any counteroffer(s), to
qualify at the sale, must be timely filed with the Court by a
deadline to be established and must exceed the Purchase Price
by at least $125,000,00; and
(ii) in the event Purchaser is not the successful bidder for the
Property, irrespective of price, and the Property is sold to
another entity unrelated to Purchaser, Purchaser shall be
entitled to reimbursement of Purchaser's documented and
reasonable expenses identified in Section 3(d) hereof
incurred in connection with Purchaser's negotiations relating
to and preparation to close this transaction and its due
diligence investigations, all to a maximum payment of
$125,000.00.
7. ADJUSTMENTS. (a) Water and sewer use charges (in either case only
if a lien on the Property), (b) fuel, if any, prepaid by Seller or Debtor, (c)
cost of utilities (if a lien on the Property), and (d) real estate taxes and
other municipal charges and betterments shall be apportioned as of the Closing
Date and the net amount thereof shall be added to or deducted from, as the case
may be, the Purchase Price payable by Purchaser at the Closing.
<PAGE> 9
9
If the amount of said taxes is not known on the Closing Date, they shall be
apportioned on the basis of the taxes assessed for the preceding fiscal year,
with a reapportionment as soon as the new tax rate and valuation can be
ascertained; and, if the taxes which are to be apportioned shall thereafter be
reduced by abatement, the amount of such abatement, less the reasonable cost of
obtaining the same, shall be apportioned between the parties, provided that
neither party shall be obligated to institute or prosecute proceedings for an
abatement. Seller has the right to seek an abatement and Purchaser agrees to
cooperate with Seller in prosecuting the abatement application. Any abatement
received for the Property for the period prior to the Closing Date shall belong
to Seller and if such abatement is applied to real estate taxes payable by
Purchaser or if such abatement is paid to Purchaser as the then owner of the
Property, Purchaser shall pay to Seller the amount of such abatement. The
provisions of this section shall survive the Closing Date.
8. BROKER AND COMMISSION. Seller warrants to Purchaser that he has no
knowledge of any brokers/agents authorized to be employed by Seller and entitled
to any commission in connection with the sale contemplated hereby other than
Hart Corporation and its affiliate. Purchaser warrants to Seller and Bank that
it has no knowledge of any brokers/agents authorized to be engaged by Purchaser
other than The Formarc Company, Inc., and its affiliate Casey F. Griffin.
9. CLOSING.
(a) The Closing (or as the case may be "Closing Date") of the purchase and
sale contemplated herein shall occur at the offices of Seller, or such other
time and place as shall be mutually agreed upon, on or before fifteen (15) days
following the later to occur of:
(i) the termination of the Due Diligence Period or any due diligence
extension described in Section 10(f) hereof; and
<PAGE> 10
10
(ii) the entry of an order by the Bankruptcy Court in the Chapter 7
case of Arrow Automotive Industries, Inc. approving the sale of
the Property to Purchaser.
(b) For a pre-closing procedure, at least two (2) days prior to the Closing
Date, Seller will deliver to Purchaser copies of the documents identified and
described in subpart (c) below. The original of said documents shall be
delivered to Purchaser at the Closing.
(c) At the Closing Seller shall deliver to Purchaser the following:
(i) A fully executed deed, as described above, conveying Debtor's
right, title and interest in and to the Property in recordable
form;
(ii) Subject to it being in form and content reasonably satisfactory to
Seller and Purchaser's title insurance company, and subject to the
reasonable cooperation of Bank insofar as it has knowledge of the
activities, if any, of parties supplying goods and services to the
Premises during the relevant period, an affidavit enabling
Purchaser's title insurance company to issue its final title
insurance policy without exceptions for mechanic's or
materialmen's liens;
(iii)A bill of sale conveying Debtor's right, title and interest in and
to the personal property, if any, located on the Premises;
(iv) To the extent actually known and available to Seller, an
assignment of all the Debtor's interest in warranties and
guaranties from contractors, subcontractors, suppliers,
manufacturers or distributors, if any, relating to the
construction or maintenance of the improvements or fixtures
located or used in connection with the Property;
(v) A certified copy of the order of the Bankruptcy Court approving
this Agreement (with such modifications as
<PAGE> 11
11
Purchaser shall have agreed to) and authorizing the conveyance of
the Property to Purchaser subject thereto; and
(vi) An affidavit with respect to compliance with the Foreign
Investment and Real Property Tax Act (Internal Revenue Code
Section 1445, as amended, and any regulations issued thereunder).
10. CONDITIONS TO CLOSING.
The Purchaser's obligation to close is contingent upon and subject to the
satisfaction on, and as of, the Closing Date, of each of the following
conditions (any of which may be waived in whole or in part in writing by
Purchaser on or prior to the Closing):
(a) Except as may be otherwise expressly provided for in Sections 4 or 5,
or on the Survey, there shall be no zoning laws, setback requirements, deed
restrictions, ordinances, regulations, leases, easements, rights or other legal
requirements, deficiency in or lack of access, ingress or egress to, drainage or
other difficulties, which prohibit or materially impair the full use of the
Property by Purchaser for reasonable industrial purposes;
(b) The Property as of the Closing Date shall be in substantially the same
condition as it is on the Effective Date, as defined below, reasonable wear and
tear excepted;
(c) Purchaser shall have applied to the Arkansas Department of Environmental
Quality for, and the Premises and Purchaser, upon acceptance of the conveyance
of title to the Premises contemplated herein, shall be approved to receive a
Closure Letter stating that (i) no remediation of an existing environmental
condition on the Premises shall be required and (ii) the Premises shall be
eligible and approved for designation under the Brownfields Program of the State
of Arkansas, to receive statutory and regulatory protections and benefits
thereunder based upon the Closure Letter and the environmental condition of the
Premises as of the Closing Date.
<PAGE> 12
12
Purchaser shall have diligently executed all petitions, submitted all requested
information in its possession, custody or control, and done all other reasonable
acts necessary to obtain the Closure Letter and Brownfields Program
participation from the Arkansas Department of Environmental Quality;
(d) Purchaser shall have applied for and shall reasonably anticipate being
able to obtain, all licenses, zoning or zoning changes, variances, special use
permits, building or other permits necessary and material for its reasonable
industrial use of the Property. In the event any of the foregoing are necessary
to Purchaser's use of the Property, Purchaser shall diligently execute all
petitions, attend all hearings and do all other reasonable acts necessary to
obtain all such permits, and Seller agrees to cooperate with Purchaser in all
such acts, provided, however, that Purchaser shall bear all expenses incidental
thereto;
(e) There shall be no adverse change in the status of title from that shown
in the title insurance commitment as approved by Purchaser;
(f) From and after the effective date of this Agreement, which shall be the
date on which Seller executes and delivers the same to Purchaser by facsimile or
otherwise (the "Effective Date"), and for a period not to exceed sixty (60) days
thereafter (the "Due Diligence Period"), Purchaser shall be permitted to
conduct:
(i) Physical inspections of the interior and exterior of any buildings
and any improvements upon the Premises accompanied by such experts
or such other persons as Purchaser shall deem appropriate or
necessary; and
(ii) Building and/or site inspections, including environmental surveys
and reports, to determine whether, or to what extent, the Premises
is in compliance with federal, state and local environmental
statutes. Any subsurface investigation shall
<PAGE> 13
13
only be conducted by or on behalf of Purchaser, after the parties
enter into a mutually satisfactory site access agreement, which
shall identify the engineers to be involved (who shall have
adequate insurance, as identified below, and be reasonably
acceptable to Seller and Bank for the scope of the work) and the
known scope of the work, and upon at least three (3) days prior
notice to Seller and Bank, with Seller and/or Bank, or their
respective representatives, having the right to be present, which
right shall not unreasonably interfere with Purchaser's or its
agent's conduct of its due diligence investigation. Purchaser
shall provide Seller and Bank with a copy of all such due
diligence reports it receives. Purchaser shall use its best
efforts to repair and/or restore to the pre-investigation
condition any damage or alteration to the Property arising or
resulting from the conduct of such due diligence investigation,
including, without limitation, building inspections and
environmental testing. Purchaser shall indemnify and hold Seller
and Bank harmless from any damages, loss, costs or expenses,
including reasonable legal fees, to any persons or property,
including the Property, arising or resulting from the conduct of
such due diligence investigation.
Seller and Purchaser may agree to extend the Due Diligence Period for up to an
additional thirty (30) days in the event an extension is necessary or advisable
in connection with Purchaser's negotiations with the State of Arkansas to
complete the necessary investigations to qualify for protection under the
Arkansas Brownfields Act as referenced in Section 2(c) above (the "Due Diligence
Extension"). The Due Diligence Extension shall be solely
<PAGE> 14
14
with respect to the Arkansas Brownfields Act and Purchaser will be deemed to
have approved all other due diligence, title and survey matters.
(g) Seller shall provide to Purchaser within three (3) days after the
signing of this Purchase and Sale Agreement, any information that has not
already been provided to Purchaser regarding tests, reports and studies related
to the Property, including without limitation, any written environmental reports
dated within five (5) years, in Seller's or Bank's actual possession and
control, without any duty on Seller or Bank of inquiring of third persons,
including the Debtor. Purchaser acknowledges and agrees, however, that any and
all such reports, inspections, plans or other information regarding the Property
are delivered to it without warranty or representation of any name or nature.
Upon the request of Purchaser, Seller and Bank agree to promptly provide to
Purchaser or Purchaser's designee such releases and consents, or other similar
authorizations, to release copies of any such written environmental reports in
the possession or control of third parties, and to provide their reasonable
cooperation to Purchaser to obtain access to any such reports hereafter,
provided, however, that neither Bank nor Seller shall be under any obligation to
bring legal action to compel the delivery of any such reports, including
reports, if any, that may be in the possession of former officers, directors,
employees, agents or attorneys of the Debtor.
(h) In the event that the results of any such investigations or
inspections indicate matters unsatisfactory to Purchaser, then Purchaser, if
acting in good faith, shall have the right to terminate this Agreement by
sending written notice thereof to Seller and Bank by certified mail to be
delivered within three (3) days after the termination of the Due Diligence
Period (as extended, if at all). Should no notice of termination be given by
Purchaser to both Seller and Bank, Purchaser will be deemed to have waived all
such due diligence matters, Purchaser shall pay the Additional Deposit,
<PAGE> 15
15
and the Deposit shall become non-refundable and be credited toward the Purchase
Price at Closing.
(i) Following the Closing, Purchaser shall be able to take possession of the
Property forthwith.
(j) For purposes of this Section 10, Purchaser shall deliver to Seller and
Bank satisfactory evidence that it maintains, and any independent contractors
engaged by Purchaser to conduct such physical or environmental inspections or
tests requiring entry onto the Property, maintains commercial general liability
insurance coverage, including coverage for personal injury ($2,000,000) and
property damage ($100,000), naming Seller and Bank as additional insureds.
11.WARRANTIES. Seller represents to Purchaser that, to his
best knowledge, information and belief:
(a) No person, corporation, firm or entity other than Purchaser, as of the
Effective Date, shall have any right, or option, to acquire the Property or be
entitled to possession of all or any part thereof, other than as a counteroffer
in connection with the Bankruptcy Court sale procedures described above; and
(b) Except for Bank's foreclosure proceedings instituted with respect to
the Property, neither Seller nor Bank is engaged in or threatened with any
claim, controversy, legal action, arbitration, non-insured workman's
compensation claim, governmental investigation or other proceeding whether or
not before any court or administrative agency, any adverse determination of
which might materially affect the Property as it is presently being used, and
Seller is not in violation of any laws, judgments, orders, decrees, regulations,
or rules of any court or governmental authority applicable to him or Debtor with
respect to the Premises. Bank covenants that, while it reserves the right to
continue foreclosure proceedings against Debtor, it will not cause the Premises
to be sold during the term of this Agreement and will
<PAGE> 16
16
cooperate with the Seller in respect to his efforts to secure a Bankruptcy Court
order authorizing the sale of the Property to the highest bidder free and clear
of its mortgage lien with its rights to attach to the proceeds of sale subject
to any agreements with the Seller heretofore or hereafter approved by the
Bankruptcy Court.
12. DEFAULT AND TERMINATION.
(a) In event that Purchaser defaults and Seller has not defaulted, the Bank
shall be entitled to receive the Deposit and interest earned thereon, if any, as
agreed upon liquidated damages, and the parties shall be relieved from any
further liability hereunder.
(b) In the event Seller defaults and Purchaser has not defaulted, Purchaser
shall be entitled to compel Seller to convey the Property by a suit for specific
performance and to recover all costs incidental to such suit, including
reasonable attorney's fees.
(c) As an alternative to 12(b) above, in the event Purchaser has not
defaulted and any one or more of the following events occurs, Purchaser shall be
entitled to declare this Agreement terminated by giving notice to Bank and
Seller and upon such declaration and notice Purchaser shall be entitled to
receive the Deposit and interest earned thereon, if any, and the parties shall
be relieved from any further liability hereunder:
(i) At the Closing, Seller shall materially fail to fulfill all
of his obligations hereunder;
(ii) Purchaser shall not have become the successful bidder at the
bankruptcy sale contemplated herein; and
(iii) Purchaser elects to terminate this Agreement pursuant to
either Sections 2(c),4(b), 5, 10(h) or 13 hereof.
(d) In the event that Seller has been unable to obtain a Bankruptcy Court
order approving the sale, which order shall not be stayed pending an appeal, if
any, on or before the later of March 31, 2000 or ten days following
<PAGE> 17
17
the end of any Due Diligence Period or Extension, then either Seller, Bank or
Purchaser shall be entitled to declare this Agreement terminated by giving
notice to Bank and Seller and upon such declaration Purchaser shall be entitled
to receive the Deposit and interest earned thereon, if any, and the parties
shall be relieved from any further liability hereunder. Nothing in this Section
12 shall limit Purchaser's right to receive its break-up fees and expenses to
the extent required by Section 6 hereof and if otherwise approved by the
Bankruptcy Court.
13. RISK OF LOSS. Bank shall maintain in full force and effect all casualty
insurance policies currently covering the Property until midnight on the last
day of Closing. The risk of loss or damage to the Property from fire, flood,
windstorm or other insured casualty until delivery of the deed contemplated
hereby is assumed by Seller and Bank. Risk of loss or damage to the Property
upon and after delivery of the deed is assumed by Purchaser. If, before the
Closing, any condemnation (taking by eminent domain) proceeding is or has been
commenced with respect to the Property or any casualty results in material
damage to the Property or improvements thereon, Purchaser shall have the option
of either terminating this Agreement or of completing the purchase contemplated
herein. In event Purchaser shall elect to terminate this Agreement, Purchaser
shall be entitled to the return of the Deposit and interest earned thereon, if
any, and the parties shall be relieved from any further liability hereunder. If,
however, Purchaser shall elect to complete this transaction, there shall be no
reduction in the Purchase Price and Purchaser shall be entitled, in the case of
fire or other casualty, to receive at Closing an assignment of all insurance
proceeds, or in the case of condemnation effective after the Closing, to receive
the entire award for the Premises or the portion thereof so taken. Seller, in
such event, shall execute and deliver to Purchaser at the Closing all proper
instruments for the assignment and collection of such proceeds and awards.
<PAGE> 18
18
14. BINDING EFFECT. This Agreement shall be binding upon all of the parties
hereto and their respective successors and assigns.
15. ENTIRE AGREEMENT. This Agreement and its Exhibits constitute the entire
agreement of the parties except for the letter in Section 2 regarding receipt of
the Deposit, and no other statement or representation shall be considered a part
of this Agreement, or binding upon the parties, unless the same shall be
contained herein.
16. NOTICES. Any notice, request, demand, instruction or other
communication hereunder shall be in writing and shall be deemed to have been
duly given if delivered in person or sent by first class, registered or
certified mail, postage fully prepaid, or by a nationally recognized overnight
carrier, or by facsimile (which term shall be deemed to include telex or
telecopy), addressed as follows:
To Seller:
Joseph H. Baldiga, Esq.
Chapter 7 Trustee
Mirick, O'Connell, DeMallie & Lougee, LLP
100 Front Street
Worcester, MA 01608
(Fax: (508) 791-8502)
To Bank:
BankBoston, N.A. With a copy to:
100 Federal Street
Boston, MA 02110 Guy B. Moss, Esq.
Attn: Dana R. DiMartinis Bingham Dana LLP
(Fax: (617) 434-4775) 150 Federal Street
Boston, MA 02110-1726
(Fax: (617) 951-8736)
<PAGE> 19
19
To Purchaser: With a copy to:
Telex Communications, Inc. George R. Arrants, Jr., Esq.
9600 Aldrich Avenue, South Wimberly Lawson & Seale, PLLC
Minneapolis, MN 55420 Suite 601, NationsBank Center
Attn: Roger Gaines 550 Main Avenue
P. O. Box 2231
Knoxville, TN 37901-2231
(Fax: (865) 546-1001)
The addresses for the purpose of this paragraph may be changed by giving notice
as provided herein. Notice shall also be deemed to have been given upon receipt
of actual knowledge by any means of the information contained in said notice.
17. TIME IS OF THE ESSENCE. Time is of the essence of this Agreement.
18. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, any one or all of which shall constitute the agreement of the
parties.
19. CAPTIONS. The captions contained herein are for purposes of
identification and convenience only and shall not be considered in construing
this Agreement.
20. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Arkansas.
21. OFFER AND ACCEPTANCE. This Agreement has been executed first by
Purchaser and shall be deemed to be a continuing offer by Purchaser to purchase
until February 4, 2000, at 7:00 p.m., Minneapolis, Minnesota time. Seller may
accept this offer only by executing this Agreement without any alteration
whatsoever and returning it to Purchaser or to Purchaser's counsel (including
return of a copy by facsimile transmission if followed up by regular mail) prior
to any revocation by Purchaser by said date and time. If an executed and
unaltered acceptance hereof is not actually received by Purchaser by said date
and time (or if a facsimile transmission is not so
<PAGE> 20
20
received and thereafter the original not received within a reasonable time),
said offer shall be deemed withdrawn and revoked.
IN WITNESS WHEREOF each of the parties hereto has signed this Agreement on
the date shown to the right of their respective signatures. This Agreement
shall, for all purposes, be deemed to be fully executed on the latest of the
dates of execution shown below.
PURCHASER: SELLER:
TELEX COMMUNICATIONS, INC. JOSEPH H. BALDIGA, ESQ.,
TRUSTEE OF ARROW AUTOMOTIVE
INDUSTRIES, INC.
BY: BY:
------------------------- -------------------------
ROGER GAINES JOSEPH H. BALDIGA,
CHAPTER 7 TRUSTEE
ITS:
-------------------------
DATE: TIME: .M. DATE TIME: .M.
--------------- --------- --------------- ---------
BANKBOSTON, N.A., A NATIONAL BANK
BY:
-------------------------
ITS:
-------------------------
DATE: TIME: .M
--------------- ----------
hereby assents and agrees to receive the benefits of this Agreement and to be
bound by Sections 2(a),2(c), 9(c)(ii), 10(f), 10(g), 11(b), 12(a) and 13 hereof.
<PAGE> 21
21
EXHIBIT "A"
PROPERTY LEGAL DESCRIPTION
ARROW PROPERTY DESCRIPTION
TRACT 1: A tract of land situated in the NW 1/4 SW 1/4 and the NE 1/4 SW 1/4 and
the SE 1/4 SW1/4 of Section 7, T6N, R16W, Conway County, Arkansas and more
particularly described as follows: Beginning at the Southeast corner of the NW
1/4 SW 1/4 , Section 7 and run thence North 88 degrees 39 minutes 00 seconds
West along the South line of said NW 1/4 SW 1/4 a distance of 660.0 feet to a
point; thence North 4 degrees 56 minutes 40 seconds East a distance of 998.78
feet to the South right of way line of Interstate #40; thence South 65 degrees
19 minutes 20 seconds East along said right of way line a distance of 374.95
feet) to point; thence South 62 degrees 35 minutes 00 seconds East along said
right of way line a distance of 498.34 feet to a point; thence South 55 degrees
58 minutes 00 seconds East along said right of way line a distance of 303.81
feet to a point; thence South 48 degrees 37 minutes 20 seconds East along said
right of way a distance of 326.45 feet to a point; thence South 33 degrees 35
minutes 20 seconds East along said right of way line a distance of 261.80 feet
to a point; thence South 45 degrees 47 minutes 20 seconds East along said right
of way line a distance of 184.97 feet to a point; thence South 1 degree 27
minutes 20 seconds West a distance of 308.53 feet to a point; thence North 88
degrees 44 minutes 20 seconds West a distance of 986.09 feet, to a point; thence
North 1 degee 27 minutes 40 seconds East along the West line of said SE 1/4 SW
1/4 a distance of 395.0 feet to the point of beginning.
TRACT 2: Situated in Section 7, T6N, R16W, commencing at the Southwest corner of
the NW 1/4 SW 1/4 in a county road; thence North along said road 9.5 feet
measured North 1 degree 09 minutes 53 seconds East 8.40 feet) to the point of
beginning; thence North along said raod 1284.65 feet to the South right of way
line of I-40 Highway; thence along said South right of way line South 70 degrees
45 minutes 30 seconds East 361.48 feet); thence continue along the right of way
line South 66 degrees 50 minutes East 428.19 feet; thence South 3 degrees 33
minutes 30 seconds West 1003 feet to a point in an old existence fence, said
point being 5.58 feet South of the Southwest corner of Arrow Automotive
Industries present property; thence West 672.35 feet along the Old existing
fence to the point of beginning.
less and except the following described property:
Part of the Northeast Quarter of the Southwest Quarter (PT. NE 1/4 SW 1/4) (6.66
acres) and Part of the Southeast Quarter of the Southwest Quarter (PT. SE 1/4 SW
1/4) (8.11 acres), All lying in Section 7, T-6-N, R-6-W, Conway County, Arkansas
and being more particularly described as follows:
Commencing at the Southwest Corner (SW Cor.) of the NE 1/4 SW 1/4 of said
Section 7 and run thence South 88 degrees 44 minutes 36 seconds East along the
South line of the said NE 1/4 SW 1/4 for 60.00' feet to the Point of Beginning
(P.O.B.); Thence running North 51 degrees 30 minutes 47 seconds East for 88.73'
feet to a Fence Corner; Thence run North 00 degrees 09 minutes 26 seconds East
for 153.43' feet to a point; Thence run North 24 degrees 49 minutes 04 seconds
East for 49.22' feet to a point; Thence run North 01 degrees 15 minutes 46
seconds East for 397.36' feet to a point on the Southerly Right of Way line
Interstate #40; Thence running along said Right of Way line the following
Bearings and Distances: South 62 degrees 35 minutes 00 seconds East for 54.28'
feet; Thence South 56 degrees 04 minutes 25 seconds East for 303.63' feet;
Thence South 48 degrees 43 minutes 40 seconds East for 326.29' feet; Thence
South 34 degrees 04 minutes 12 seconds East for 261.14' feet; Thence South 45
degrees 49 minutes 50 seconds East for 184.93' feet to a point; Thence leaving
said Southerly Right of Way line run South 00 degrees 56 minutes 02 seconds West
for 301.91' feet to a point on the Northerly Right of Way line of Arkansas State
Highway #95 "Spur"; Thence run along said Northerly Right of Way line North 88
degrees 23 minutes 49 seconds West for 880.04' feet; Thence run along a curve in
said Right of Way line a Chord Bearing and Distance of North 42 degrees 07
minutes 01 seconds West for 97.53' feet to a point; Thence running along the
Easterly right of Way line, of said Highway #95 "Spur" the following Bearings
and Distances: North 06 degrees 27 minutes 28 seconds East for 108.94' feet;
Thence North 07 degrees 00 minutes 26 seconds East for 98.68' feet; Thence North
01 degrees 11 minutes 28 seconds East for 103.02' feet to the Point of Beginning
(P.O.B.), containing 14.77 acres and is subject to all assessments, Public or
Private which may exist thereon.
<PAGE> 22
22
EXHIBIT "A-1"
SURVEY
Picture
<PAGE> 1
EXHIBIT 21
Subsidiaries of Registrant
<TABLE>
<S> <C>
Jurisdiction of
Incorporation
Audio Consultants Co., Ltd. Hong Kong
Dynacord France S. A. France
Evi Audio (Aust) PTY Limited Australia
Evi Audio France S. A. France
Evi Audio GmbH Germany
Evi Audio Holdings (Deutschland) GmbH Germany
Evi Audio (Hong Kong) Ltd. Hong Kong
Evi Audio Japan, Ltd. Japan
Klark Teknik Group (UK) PLC England
Saguaro Electronica, S.A. de C. V. Mexico
Shuttlesound Limited England
TCI Exports Limited Barbados
Telex Communications AG Switzerland
Telex Communications International, Ltd. Delaware, U.S.
Telex Communications, Ltd. Ontario, canada
Telex Communications, S.A. de C.V. Mexico
Telex Communications (SEA) PTE, Ltd. Singapore
Telex Holdings (UK) Ltd. England
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,239
<SECURITIES> 0
<RECEIVABLES> 61,616
<ALLOWANCES> (2,178)
<INVENTORY> 66,573
<CURRENT-ASSETS> 143,915
<PP&E> 118,483
<DEPRECIATION> (73,435)
<TOTAL-ASSETS> 261,998
<CURRENT-LIABILITIES> 94,778
<BONDS> 312,207
0
0
<COMMON> 3,139
<OTHER-SE> (157,596)
<TOTAL-LIABILITY-AND-EQUITY> 261,998
<SALES> 343,659
<TOTAL-REVENUES> 343,659
<CGS> 219,399
<TOTAL-COSTS> 112,601
<OTHER-EXPENSES> (6,674)
<LOSS-PROVISION> 858
<INTEREST-EXPENSE> 36,689
<INCOME-PRETAX> (18,356)
<INCOME-TAX> 4,064
<INCOME-CONTINUING> (22,420)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,420)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
