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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period
ended June 30, 2003 Commission File No. 333-27341
TELEX COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 38-1853300
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12000 PORTLAND AVENUE SOUTH, BURNSVILLE, MINNESOTA 55337
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (952) 884-4051
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------- ---------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
-------- ---------
AS OF JULY 31, 2003, TELEX COMMUNICATIONS, INC. HAD OUTSTANDING 4,987,127 SHARES
OF COMMON STOCK, $0.01 PAR VALUE.
THIS DOCUMENT CONTAINS 23 PAGES.
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PART I. --- FINANCIAL INFORMATION
Page(s)
Item 1. Financial Statements
Included herein is the following unaudited financial information:
Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 3
Condensed Consolidated Statements of Operations for the three and six month periods ended
June 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the six month periods ended
June 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 20
PART II. --- OTHER INFORMATION
Page(s)
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2003 2002
----------- ------------
(UNAUDITED) (SEE NOTE)
ASSETS
Current assets:
Cash and cash equivalents $ 3,346 $ 3,374
Accounts receivable, net 49,766 44,644
Inventories 50,613 47,686
Other current assets 7,438 4,710
--------- ------------
Total current assets 111,163 100,414
Property, plant and equipment, net 28,918 28,995
Deferred financing costs, net 1,860 2,659
Goodwill 23,313 23,154
Other assets 2,689 2,656
--------- ------------
$ 167,943 $ 157,878
========= ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Revolving lines of credit $ 21,258 $ 3,916
Current maturities of long-term debt 61,668 17,275
Accounts payable 13,844 10,954
Accrued wages and benefits 10,017 9,562
Other accrued liabilities 9,904 7,896
Income taxes payable 6,407 7,960
--------- ------------
Total current liabilities 123,098 57,563
Long-term debt 105,790 154,630
Other long-term liabilities 15,550 13,693
--------- ------------
Total liabilities 244,438 225,886
--------- ------------
Shareholders' deficit:
Common stock and capital in excess of par 80,180 80,180
Accumulated other comprehensive loss (9,800) (7,029)
Accumulated deficit (146,875) (141,159)
--------- ------------
Total shareholders' deficit (76,495) (68,008)
--------- ------------
$ 167,943 $ 157,878
========= ============
See notes to condensed consolidated financial statements.
Note: The balance sheet at December 31, 2002 has been derived from the Company's
audited financial statements at that date.
3
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(UNAUDITED)
Three months ended Six months ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $ 68,836 $ 68,029 $ 129,711 $ 135,928
Cost of sales 40,243 39,078 75,706 79,770
----------- ----------- ----------- -----------
Gross profit 28,593 28,951 54,005 56,158
----------- ----------- ----------- -----------
Operating expenses:
Engineering 3,597 3,082 7,177 6,009
Selling, general and administrative 19,984 18,337 38,586 35,872
Corporate charges -- 154 -- 541
Amortization of other intangibles 3 30 15 60
Pension curtailment gain (2,414) -- (2,414) --
----------- ----------- ----------- -----------
21,170 21,603 43,364 42,482
----------- ----------- ----------- -----------
Operating profit 7,423 7,348 10,641 13,676
Interest expense 7,363 6,382 14,404 12,532
Other (income) expense, net (113) 124 (196) (1,049)
----------- ----------- ----------- -----------
Income (loss) before income taxes 173 842 (3,567) 2,193
Provision for income taxes 1,168 1,053 2,149 1,880
----------- ----------- ----------- -----------
(Loss) income before cumulative effect of change in accounting (995) (211) (5,716) 313
Cumulative effect of change in accounting -- -- -- (29,863)
----------- ----------- ----------- -----------
Net loss $ (995) $ (211) $ (5,716) $ (29,550)
=========== =========== =========== ===========
Basic (loss) income per common share
(Loss) income before cumulative effect of change in accounting $ (0.20) $ (0.05) $ (1.15) $ 0.15
Cumulative effect of change in accounting -- -- -- (14.26)
----------- ----------- ----------- -----------
Net loss $ (0.20) $ (0.05) $ (1.15) $ (14.11)
=========== =========== =========== ===========
Diluted income (loss) per common share
Income (loss) before cumulative effect of change in accounting $ (0.20) $ (0.05) $ (1.15) $ 0.06
Cumulative effect of change in accounting -- -- -- (5.99)
----------- ----------- ----------- -----------
Net loss $ (0.20) $ (0.05) $ (1.15) $ (5.93)
=========== =========== =========== ===========
Weighted average shares outstanding
Basic 4,987,127 4,165,092 4,987,127 2,094,106
=========== =========== =========== ===========
Diluted 4,987,127 4,165,092 4,987,127 4,987,127
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
Six months ended
-----------------------
June 30, June 30,
2003 2002
--------- ---------
Operating activities:
Net loss $ (5,716) $(29,550)
Adjustments to reconcile net loss to cash flows from operations:
Depreciation and amortization 3,201 3,492
Amortization of finance charges and pay-in-kind interest charge 11,261 8,941
Gain on disposition of assets (98) (1,001)
Cumulative effect of change in accounting -- 29,863
Pension curtailment gain (2,414) --
Change in operating assets and liabilities (7,210) (10,305)
Change in long-term liabilities 50 1,026
Other, net 505 371
-------- --------
Net cash (used in) provided by operating activities (421) 2,837
-------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,574) (1,946)
Proceeds from disposition of assets 792 2,197
Other 111 110
-------- --------
Net cash (used in) provided by investing activities (1,671) 361
-------- --------
FINANCING ACTIVITIES:
Borrowings under revolving lines of credit, net 8,155 1,288
Repayment of long-term debt (6,217) (5,432)
Payments of deferred financing costs -- (242)
-------- --------
Net cash provided by (used in) financing activities 1,938 (4,386)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 126 141
-------- --------
CASH AND CASH EQUIVALENTS:
Net decrease (28) (1,047)
Balance at beginning of period 3,374 3,026
-------- --------
Balance at end of period $ 3,346 $ 1,979
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 2,945 $ 3,552
======== ========
Income taxes $ 4,084 $ 1,918
======== ========
See notes to condensed consolidated financial statements.
5
TELEX COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States (U.S.) for interim financial information, and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the U.S. for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the interim periods are not
necessarily indicative of the results that may be expected for the full
year.
Preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the U.S. requires management to
make estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. Actual results could differ
from those estimates. For further information, refer to the consolidated
financial statements and footnotes included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2002.
Certain 2002 amounts have been reclassified to conform to 2003
presentation.
2. Inventories
Inventories consist of the following (in thousands):
June 30, December 31,
2003 2002
------- ------------
Raw materials $19,795 $19,224
Work in process 8,150 6,840
Finished products 22,668 21,622
------- -------
$50,613 $47,686
======= =======
3. Goodwill
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS
142). The Company completed an initial impairment review of goodwill in the
fourth quarter of 2002. The review resulted in an impairment loss of $29.9
million related to the Professional Audio (formerly known as Professional
Sound and Entertainment) business segment that has been accounted for as a
cumulative effect of change in accounting in accordance with SFAS 142 and
is reflected in the results of operations for the six months ended June 30,
2002. The Company has certain amounts of goodwill denominated in foreign
currencies that fluctuate with movement of exchange rates.
6
The following table presents the changes in carrying value of goodwill by
business segment as of June 30, 2003 (in thousands):
Audio and Wireless
Professional Audio Technology Total
------------------ ------------------- ---------
Balance as of December 31, 2002 $ 17,064 $ 6,090 $ 23,154
Foreign currency translation 159 - 159
--------- -------- --------
Balance as of June 30, 2003 $ 17,223 $ 6,090 $ 23,313
========= ======== ========
4. Debt
Long-term debt consists of the following (in thousands):
June 30, December 31,
2003 2002
-------- -----------
Senior Secured Credit Facility (Revolving Credit Facility) $ -- $ 8,563
Senior Secured Credit Facility (Term Loan Facility):
Term Loan A 14,211 15,606
Term Loan B 47,037 51,655
Tranche A Senior Secured Notes 31,332 27,692
Tranche B Senior Secured Notes 13,922 12,268
Senior Subordinated Discount Notes 57,881 52,981
Senior Subordinated Notes 550 550
Other debt 2,525 2,590
--------- ---------
167,458 171,905
Less - current portion (61,668) (17,275)
--------- ---------
Total long-term debt $ 105,790 $ 154,630
========= =========
5. Income Taxes
The Company recorded an income tax provision of $1.2 million and $2.1
million on pre-tax income of $1.7 million and pre-tax loss of $2.0 million
for the three months and six months ended June 30, 2003, respectively. The
income tax provision for the six months ended June 30, 2003 is comprised of
a U.S. Federal and state income tax benefit of $1.4 million, offset by a
tax valuation allowance adjustment of $1.4 million, and an income tax
provision of $2.1 million attributed to income of certain foreign
subsidiaries. The income tax provision for the six months ended June 30,
2002 is comprised of a U.S. Federal and state income tax benefit of $0.5
million, offset by a tax valuation allowance adjustment of $0.5 million,
and an income tax provision of $1.9 million attributed to income of certain
foreign subsidiaries.
The Company has a deferred tax asset of $14.7 million offset by a tax
valuation allowance of $14.6 million at June 30, 2003 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 sufficient
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.
7
6. Earnings Per Share Data
Effective April 16, 2002, the Company converted all of its outstanding
Series A Preferred Stock and Series B Preferred Stock, totaling 4,987,017
shares, into an equal number of shares of its Common Stock. The conversion
of the Preferred Stock was at the election of the Company with each share
or fractional share of the Series A and Series B Preferred Stock
convertible into one share or equivalent fractional share of Common Stock.
Information presented for the three and six months ended June 30, 2002
includes the effect of the conversion on a diluted basis.
7. Related-Party Transactions
The Company recorded a charge to operations of $0.2 million and $0.5
million for the three months and six months ended June 30, 2002,
respectively, for management services provided by Greenwich Street Capital
Partners, L.P., a related party. The services included, but were not
limited to, developing and implementing corporate and business strategy and
providing other consulting and advisory services. The agreement expired in
May 2002.
The Company is accruing interest, at the rate of 2 percent per month, on
the outstanding management services fee balance. Under the terms of the
Senior Secured Credit Facility, the Company is prohibited from making any
payment, in cash or other property, of the management services fee and the
accrued interest on the unpaid balance until repayment in full of the loans
outstanding under the Senior Secured Credit Facility. The Company had a
balance payable, inclusive of interest, of $2.7 million at June 30, 2003
that is included on the condensed consolidated balance sheet as a component
of other long-term liabilities.
In 2000, the Company relocated its corporate headquarters to a facility
leased from DRF 12000 Portland LLC (the LLC), an entity in which the
Company has a 50% interest. The Company contributed cash of $0.6 million to
the LLC and the investment is accounted for under the equity method. The
Company's allocable share of the LLC income is included as a component of
other income in the condensed consolidated statements of operations. The
LLC financed the purchase of the facility with a mortgage secured by the
facility. At June 30, 2003, the remaining balance on the mortgage was $6.7
million. The annual lease payments to the LLC are $1.1 million for years
one to five and $1.2 million for years six to ten. The Company may renew
the lease at the end of the initial lease term for three renewal terms of
five years each. The lease has been classified as an operating lease and
the Company records the lease payments as rent expense. The Company's
exposure to loss associated with the LLC is its investment in the LLC which
totaled $0.8 million at June 30, 2003. The investment in the LLC is
included in the condensed consolidated balance sheet as a component of
other assets.
Telex has reviewed FASB Interpretation No. 46, "Consolidation of Variable
Interest Entitites, an interpretation of ARB No. 51" (FIN 46), pertaining
to the consolidation of variable interest entities and has determined that
no changes are required to the consolidation procedures currently followed
by the Company.
8. Comprehensive Loss
Comprehensive loss reflects the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. For the Company, comprehensive net loss represents net
income or loss adjusted for foreign currency translation adjustments and
minimum pension liability adjustments. Comprehensive loss is as follows (in
thousands):
8
Three months ended June 30, Six months ended June 30,
-------------------------------------- --------------------------------------
2003 2002 2003 2002
----------------- ----------------- ----------------- -----------------
Net loss $ (995) $ (211) $ (5,716) $ (29,550)
Other comprehensive income:
Foreign currency translation adjustment 1,753 3,485 2,307 3,031
Minimum pension liability (5,078) - (5,078) -
----------------- ----------------- ----------------- -----------------
Comprehensive (loss) income $ (4,320) $ 3,274 $ (8,487) $ (26,519)
================= ================= ================= =================
The components of accumulated other comprehensive loss are as follows (in
thousands):
June 30, December 31,
2003 2002
---- ----
Foreign currency translation $ 1,024 $ 3,331
Minimum pension liability 8,776 3,698
----------- ------------
$ 9,800 $ 7,029
=========== ============
9. Pension Curtailment Gain
In the three month period ended June 30, 2003, the Company amended its US
defined benefit pension plan, eliminating the earning of pay credits after
June 30, 2003 and closing the plan to new participants effective June 30,
2003. The amendments to the pension plan resulted in recognition of a $2.4
million curtailment gain associated with the recognition of previously
unrecognized prior service costs in accordance with SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits."
In conjunction with the curtailment, the Company remeasured the pension
plan's assets and liabilities as of June 30, 2003. The Company recorded an
additional minimum pension liability of $5.1 million as a result of the
remeasurement.
10. Segment Information
The Company has two business segments: Professional Audio (formerly known
as Professional Sound and Entertainment) and Audio and Wireless Technology.
Professional Audio
Professional Audio consists of five product lines within the overall
professional audio market, including: (i) permanently installed sound
systems; (ii) sound products used by professional musicians and sold
principally through retail channels; (iii) sound products used in
professional concerts, recording projects and radio and television
broadcasts; (iv) broadcast communication products, including 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 high
school sports teams; and (v) wired and wireless microphones used in the
education, sports, broadcast, music and religious markets.
9
Audio and Wireless Technology
Audio and Wireless Technology targets six principal product markets
including: (i) digital audio duplication products for the religious,
education and enterprise markets; (ii) military/aviation communication
products for the military and aviation markets; (iii) wireless networking
products serving the original equipment manufacturer, wireless internet
service provider and medical telemetry markets; (iv) land mobile
communication products for the public safety, military and industrial
markets; (v) audio and wireless education products for classroom and
computer based education markets; and (vi) teleconferencing products for
the enterprise, education and government markets.
The following tables provide information by business segment for the three
month and six month periods ended June 30, 2003 and 2002 (in thousands):
Three months ended Six months ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
-------- --------- -------- ---------
Net sales
Professional Audio $ 53,369 $ 53,098 $100,486 $ 101,862
Audio and Wireless Technology 15,467 14,931 29,225 34,066
-------- --------- -------- ---------
$ 68,836 $ 68,029 $129,711 $ 135,928
======== ========= ======== =========
Operating profit (loss)
Professional Audio $ 5,909 $ 4,810 $ 8,735 $ 8,105
Audio and Wireless Technology 182 2,906 1,356 6,689
Corporate 1,332 (368) 550 (1,118)
-------- --------- -------- ---------
$ 7,423 $ 7,348 $ 10,641 $ 13,676
======== ========= ======== =========
Depreciation expense
Professional Audio $ 1,326 $ 1,357 $ 2,631 $ 2,731
Audio and Wireless Technology 182 80 230 191
Corporate 174 234 325 510
-------- --------- -------- ---------
$ 1,682 $ 1,671 $ 3,186 $ 3,432
======== ========= ======== =========
Capital expenditures
Professional Audio $ 655 $ 934 $ 1,199 $ 1,555
Audio and Wireless Technology 71 107 224 208
Corporate 566 162 1,151 183
-------- --------- -------- ---------
$ 1,292 $ 1,203 $ 2,574 $ 1,946
======== ========= ======== =========
Total assets
Professional Audio $123,964 $ 113,570
Audio and Wireless Technology 37,230 35,480
Corporate 6,749 18,615
-------- ---------
$167,943 $ 167,665
======== =========
Corporate operating expenses include unallocated corporate engineering, selling,
general and administrative costs, corporate charges, amortization of other
intangibles and restructuring charges. Corporate identifiable assets relate
principally to the Company's investment in information systems and corporate
facilities, as well as deferred financing costs.
The Company's net sales into each of its principal geographic regions were as
follows (in thousands):
Three months ended Six months ended
----------------------- ---------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
- ----------------------------------- --------- -------- --------
United States $35,234 $ 34,104 $ 66,056 $ 72,222
Europe 19,436 17,916 37,401 33,634
Asia 8,021 10,768 15,448 21,099
Other foreign countries 6,145 5,241 10,806 8,973
------- -------- -------- --------
$68,836 $ 68,029 $129,711 $135,928
======= ======== ======== ========
It is not practical for the Company to disclose revenue by product or service
grouping for financial reporting purposes as the Company's systems do not
reliably compile this information.
Long-lived assets of the Company's U.S. and International operations were as
follows (in thousands):
June 30, 2003 December 31, 2002
------------- -----------------
United States $ 45,464 $ 46,505
International 11,316 10,959
-------- --------
$ 56,780 $ 57,464
======== ========
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations, as well as other sections of this report, contains forward-looking
statements, including, without limitation, statements relating to our 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 Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act. Any such forward-looking
statements involve known and unknown risks and uncertainties and our 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 management, we cannot assure you that such opinions or expectations
will be achieved or accomplished. We do not undertake to update, revise or
correct any of the forward-looking information contained in this report. The
following factors, in addition to those discussed elsewhere in this report, are
representative of those factors that could affect our future results and could
cause such 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 and success of the implementation of changes in our operations to effect
cost savings; (vi) opportunities that may be presented to and pursued by us;
(vii) our financial resources, including our ability to access external sources
of capital; (viii) war; (ix) natural or manmade disasters (including material
acts of terrorism or other hostilities which impact our markets) and (x) such
risks and uncertainties as are detailed from time to time in our reports and
filings with the Securities and Exchange Commission.
The following discussion should be read in conjunction with our condensed
consolidated financial statements and notes thereto contained elsewhere in this
report.
In this report, "Company," "we," "our," "us" and "Telex" refer to Telex
Communications, Inc. With respect to the descriptions of our business contained
in this report, such terms refer to Telex Communications, Inc. and our
subsidiaries.
OVERVIEW
Telex is a leader in the design, manufacture and marketing of sophisticated
audio and wireless communications equipment to commercial, professional and
industrial customers. Telex 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. We offer a comprehensive range of products worldwide for professional
audio systems as well as for audio and wireless product markets, including wired
and wireless microphones, wired and wireless intercom systems, mixing consoles,
signal processors, amplifiers, loudspeaker systems, headphones and headsets,
digital audio duplication products, antennas, land mobile communication systems
and wireless assistive listening systems.
11
Our 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, airline pilots and the hearing impaired in order to facilitate speech or
communications.
Telex has two business segments: Professional Audio (formerly known as
Professional Sound and Entertainment) and Audio and Wireless Technology.
Professional Audio consists of five product lines within the overall
professional audio market, including: (i) permanently installed sound systems;
(ii) sound products used by professional musicians and sold principally through
retail channels; (iii) sound products used in professional concerts, recording
projects and radio and television broadcasts; (iv) broadcast communication
products, including 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
high school sports teams; and (v) wired and wireless microphones used in the
education, sports, broadcast, music and religious markets.
Audio and Wireless Technology targets six principal product markets including:
(i) digital audio duplication products for the religious, education and
enterprise markets; (ii) military/aviation communication products for the
military and aviation markets; (iii) wireless networking products serving the
original equipment manufacturer, wireless internet service provider and medical
telemetry markets; (iv) land mobile communication products for the public
safety, military and industrial markets; (v) audio and wireless education
products for classroom and computer based education markets; and (vi)
teleconferencing products for the enterprise, education and government markets.
We maintain 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, we conduct business in local currency in many countries,
the most significant of which are Germany, the United Kingdom, Japan, Hong Kong,
Singapore, Canada, Australia and France. Exposure to U.S. dollar/Euro and U.S.
dollar/British pound exchange rate volatility is mitigated to some extent by our
ability to source production needs with existing manufacturing capacity in
Germany and Great Britain, and the exposure to the U.S. dollar/Japanese yen
exchange rate volatility is to some extent mitigated by sourcing products
denominated in yen from Japan or through contractual provisions in sales
agreements with certain customers. Nevertheless, we have a direct and continuing
exposure to both positive and negative foreign currency movements.
We report 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 in "accumulated other comprehensive loss" as part of
shareholders' deficit.
12
CRITICAL ACCOUNTING POLICIES
There has been no material change in our Critical Accounting Policies as
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2002.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information regarding
certain items in our condensed consolidated statements of operations, in
thousands:
Three months ended Six months ended
---------------------------------- -------------------------------------
June 30, June 30, % June 30, June 30, %
2003 2002 Change 2003 2002 Change
----------------------- ------ ------------------------- -------
Net sales:
Professional Audio $ 53,369 $ 53,098 0.5% $ 100,486 $ 101,862 -1.4%
Audio and Wireless Technology 15,467 14,931 3.6% 29,225 34,066 -14.2%
-------- -------- ---- --------- --------- -----
Total net sales 68,836 68,029 1.2% 129,711 135,928 -4.6%
-------- -------- ---- --------- --------- -----
Total gross profit 28,593 28,951 54,005 56,158
% of sales 41.5% 42.6% 41.6% 41.3%
Operating profit 7,423 7,348 10,641 13,676
(Loss) income before cumulative effect of
change in accounting (995) (211) (5,716) 313
Cumulative effect of change in accounting -- -- -- (29,863)
-------- -------- --------- ---------
Net loss $ (995) $ (211) $ (5,716) $ (29,550)
======== ======== ========= =========
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED JUNE 30, 2002
Net sales. Net sales increased $0.8 million, or 1.2%, from $68.0 million for the
three months ended June 30, 2002 to $68.8 million for the three months ended
June 30, 2003. Our net sales strengthened in the second quarter of 2003 compared
to the second quarter of 2002 as the U.S. professional audio marketplace
experienced higher spending and increased concert tour activity. We also
experienced higher military and federal government sales activity. Net sales
decreased $6.2 million, or 4.6%, from $135.9 million for the six months ended
June 30, 2002 to $129.7 million for the six months ended June 30, 2003. Net
sales in the Professional Audio segment decreased slightly for the six month
comparative periods due to lower electronics and microphone product sales while
sales in the Audio and Wireless Technology segment declined significantly due to
the discontinuance of sales of computer audio products, which we exited in the
second quarter of 2003, and hearing instrument products, which we exited in the
first quarter of 2002, and continued sluggishness in the telecommunications and
education markets. Our net sales, excluding the impact of discontinued products,
increased approximately 1.5% for the three months ended June 30, 2003 and
decreased approximately 3.2% for the six months ended June 30, 2003.
Net sales in the Professional Audio segment increased $0.3 million, or 0.5%,
from $53.1 million for the three months ended June 30, 2002 to $53.4 million for
the three months ended June 30, 2003. We generated increased U.S. net sales as
the professional audio marketplace rebounded from a slow economic cycle in the
first quarter of 2003. Increased capital spending and more concert tour activity
in the second quarter of 2003 have resulted in higher net sales. Net sales
decreased $1.4 million, or 1.4%, from $101.9 million for the six months ended
June 30, 2002 to $100.5 million for the six months ended June 30, 2003. Lower
sales of our electronics and microphone product lines were substantially offset
by higher speaker product sales.
13
Net sales in the Audio and Wireless Technology segment increased $0.5 million,
or 3.6%, from $14.9 million for the three months ended June 30, 2002 to $15.4
million for the three months ended June 30, 2003. The increase was primarily due
to the strength of our Talking Book player sales to the Library of Congress. Net
sales decreased $4.9 million, or 14.2%, from $34.1 million for the six months
ended June 30, 2002 to $29.2 million for the six months ended June 30, 2003. Net
sales, excluding sales of computer audio products in both periods and
discontinued hearing instruments products in the six months ended June 30, 2002,
decreased approximately 9%. The decline in net sales is attributed primarily to
lower sales of products to the telecommunications and education markets, in
large part due to the continued sluggishness of the economy and to state and
local government budget issues.
Gross profit. Gross profit decreased $0.4 million, or 1.2%, from $29.0 million
for the three months ended June 30, 2002 to $28.6 million for the three months
ended June 30, 2003. Gross profit decreased $2.1 million, or 3.8%, from $56.1
million for the six months ended June 30, 2003 to $54.0 million for the six
months ended June 30, 2003. Included in the three month period ended June 30,
2003 are impairment charges for inventories and fixed assets, totaling $1.4
million, associated with exiting the computer audio product line. Excluding
these charges, as a percentage of net sales, the gross margin rate increased to
43.9% for the three months ended June 30, 2003 compared to 42.6% for the three
months ended June 30, 2002, and increased to 42.9% for the six months ended June
30, 2003 from 41.3% for the six months ended June 30, 2002. The increase in the
gross margin rate for 2003 from the corresponding periods in 2002 is attributed
primarily to improved manufacturing efficiencies and lower operating costs
resulting from restructuring measures implemented in 2001 and 2002.
The gross margin rate for the Professional Audio segment increased from 41.5%
for the three months ended June 30, 2002 to 44.7% for the three months ended
June 30, 2003. The gross margin rate increased from 40.2% for the six months
ended June 30, 2002 to 43.6% for the six months ended June 30, 2003. The
increase in the gross margin rate for 2003 from the corresponding periods in
2002 is attributed primarily to improved manufacturing efficiencies as a result
of benefits of restructuring measures implemented in 2001 and 2002 and to
increased sales of high-margin products.
The gross margin rate for the Audio and Wireless Technology segment decreased
from 46.4% for the three months ended June 30, 2002 to 30.5% for the three
months ended June 30, 2003. The gross margin rate decreased from 44.6% for the
six months ended June 30, 2002 to 35.0% for the six months ended June 30, 2003.
The gross margin rate, excluding the impairment charges, was 41.1% and 40.6% for
the three month and six month periods ended June 30, 2003, respectively. The
decrease in the gross margin rate for 2003 from the corresponding periods in
2002 is attributed primarily to lower sales of high-margin products and to
manufacturing inefficiencies.
Engineering. Engineering expenses increased $0.5 million, or 16.7%, from $3.1
million for the three months ended June 30, 2002 to $3.6 million for the three
months ended June 30, 2003. Engineering expenses increased $1.2 million, or
19.4%, from $6.0 million for the six months ended June 30, 2002 to $7.2 million
for the six months ended June 30, 2003. The increase in spending for the three
and six month periods in 2003 from the corresponding periods in 2002 is
attributed primarily to spending associated with new product development in the
Professional Audio segment.
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Selling, general and administrative. Selling, general and administrative
expenses increased $1.6 million, or 9.0%, from $18.4 million for the three
months ended June 30, 2002 to $20.0 million for the three months ended June 30,
2003. Selling, general and administrative expenses increased $2.7 million, or
7.6%, from $35.9 million for the six months ended June 30, 2002 to $38.6 million
for the six months ended June 30, 2003. Included in the three months ended June
30, 2003 is a charge of $0.1 million for a reserve for bad debts that may be
uncollectable as we exit the computer audio product line. Excluding this charge,
the increase in expenses in 2003 is attributed mainly to recording an accrual
for legal settlements in the second quarter, higher international selling and
marketing costs offset by lower general and administrative expenses.
International selling, general and administrative expenses increased in the 2003
periods compared to the corresponding 2002 periods mainly from strengthening
foreign currencies compared to the U.S. dollar. We implemented cost controls as
a result of the slowdown in sales in the first three months of 2003 and the
expenses, as a percentage of net sales, have declined in the three months ended
June 30, 2003 compared to the three months ended March 31, 2003. We expect these
expenses will continue to decline slightly in future periods.
Corporate charges. There were no corporate charges in the three month and six
month periods ended June 30, 2003. Corporate charges of $0.1 million and $0.5
million were recorded for the three month and six month periods ended June 30,
2002, respectively. The charges represent fees incurred for consulting and
management services provided by Greenwich Street Capital Partners, Inc. under a
consulting and management services agreement. This agreement expired in May
2002.
Amortization of other intangibles. We recorded amortization expense related to
identifiable intangible assets having definite lives of approximately $3,000 and
$30,000 for the three months ended June 30, 2003 and 2002, respectively and
$15,000 and $60,000 for the six months ended June 30, 2003 and 2002,
respectively.
Pension curtailment gain. We recorded a pension curtailment gain of $2.4 million
in the three months ended June 30, 2003 resulting from our decision to freeze
future pension plan benefits effective June 30, 2003. This decision by Telex
resulted in recognition of previously unrecognized prior service costs in
accordance with SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits"
(SFAS 88).
Interest expense. Interest expense increased from $6.4 million for the three
months ended June 30, 2002 to $7.4 million for the three months ended June 30,
2003. Included in interest expense is $5.3 million and $4.1 million of
pay-in-kind interest expense for the three months ended June 30, 2003 and 2002,
respectively. Our interest expense increased from $12.5 million for the six
months ended June 30, 2002 to $14.4 million for the six months ended June 30,
2003. Included in interest expense is $10.2 million and $7.9 million of
pay-in-kind interest expense for the six months ended June 30, 2003 and 2002,
respectively. Interest expense increased primarily because of the higher
pay-in-kind interest expense that offset the benefits of lower average
outstanding indebtedness and lower average interest rates on non pay-in-kind
debt.
Other income. Other income of $0.1 million for the three months ended June 30,
2003 is principally from the gain on the sale of an idle facility. Other expense
of $0.1 million for the three months ended June 30, 2002 is principally from
foreign currency losses offset by the profit from the sale of production assets
related to shutdown of certain manufacturing facilities. For the six months
ended June 30, 2003 other income of $0.2 million is principally from the gain on
15
sale of production assets related to shutdown of certain manufacturing
facilities and from amortization of deferred revenue for a patent fee, trademark
license fee and non-compete agreement associated with the sale of hearing
instrument product lines. Other income of $1.0 million for the six months ended
June 30, 2002 is principally from the sale of $2.1 million of assets related to
the hearing instrument product lines.
Income taxes. Our effective tax rate for the three month and six month periods
ended June 30, 2003 and 2002, respectively, is not meaningful because a tax
benefit has not been recorded on the pretax loss in the United States. The tax
provision recorded relates only to the countries in which we are profitable.
Income tax expense increased in 2003 compared to 2002, as foreign subsidiary
taxable income in higher tax-rate countries has increased.
As of June 30, 2003, we have a reserve of $4.3 million included in income taxes
payable for tax liability, penalties, and accrued interest (as of the settlement
date) related to a dispute for taxable years 1990 through 1995. We have agreed
with the Internal Revenue Service on the final amount of the tax liability to be
paid and have been making monthly payments.
At June 30, 2003, we have $16.6 million of net operating loss tax benefit
carryforwards. The U.S. net operating loss tax benefit carryforward is $13.5
million, of which $0.5 million expires in 2021, $9.0 million expires in 2022 and
$4.0 million expires in 2023. We have established a net deferred tax valuation
allowance of $14.6 million due to the uncertainty of the realization of future
tax benefits. This amount relates primarily to the U.S. deferred tax assets as
our realization of the future tax benefits related to the deferred tax asset is
dependent on our ability to generate taxable income within the net operating
loss carryforward period. We have considered this factor in reaching our
conclusion as to the adequacy of the valuation allowance for financial reporting
purposes.
Cumulative effect of a change in accounting. We recorded a charge of $29.9
million in 2002 related to the impairment of goodwill related to our
Professional Audio business segment in accordance with the guidance in SFAS 142.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, we had cash and cash equivalents of $3.3 million compared to
$3.4 million at December 31, 2002.
Our principal source of funds for the six months ended June 30, 2003 consisted
of $1.9 million of net cash provided by financing activities. Our principal uses
of funds were for operating activities of $0.4 million and $1.7 million for
capital expenditures. Our principal source of funds for the six months ended
June 30, 2002 was $2.8 million of cash provided by operating activities and $2.2
million generated from the sale of assets from a discontinued product line. Our
principal uses of funds for the six months ended June 30, 2002 were for debt
retirement of $4.1 million, net of borrowings, and $1.9 million for capital
expenditures.
Our investing activities consist mainly of capital expenditures to maintain
facilities, acquire machines or tooling, update certain manufacturing processes,
update information systems and improve efficiency. We anticipate our capital
expenditures for 2003 will be approximately $7.0 million. Our ability to make
capital expenditures is subject to certain restrictions under our senior secured
credit facility, our senior secured notes, and our senior subordinated discount
notes.
16
Telex's accounts receivable of $49.8 million as of June 30, 2003 increased $5.2
million from $44.6 million at December 31, 2002. The increase is primarily a
result of higher receivables at our U.S. and German operations resulting from
higher sales activity in the second quarter of 2003.
Our inventories of $50.6 million as of June 30, 2003 increased $2.9 million from
$47.7 million at December 31, 2002. Excluding the impact of foreign currencies
exchange rate movements, our inventories increased $1.2 million from December
31, 2002. We are working to reduce our investment in inventories and expect
inventory levels to decline in the future.
Our consolidated indebtedness increased $12.9 million from $175.8 million at
December 31, 2002 to $188.7 million at June 30, 2003. The increase is attributed
mainly to our senior secured notes and the senior subordinated discount notes
for which interest expense accrues as additional indebtedness, and to increases
in borrowings under our revolving credit facilities. The senior secured notes
accreted by $5.3 million and the senior subordinated discount notes accreted by
$4.9 million, adding $10.2 million to our indebtedness since December 31, 2002.
The additional indebtedness is payable in cash at maturity, with the senior
secured notes subject to an acceleration clause based on our financial
performance. Offsetting the additional indebtedness were required loan payments,
totaling $6.2 million, made under our term loan facility and other existing
loans.
We rely mainly on internally generated funds and, to the extent necessary,
borrowings under the U.S. revolving credit facility and foreign working capital
lines to meet our liquidity needs. Our liquidity needs arise primarily from debt
service, working capital needs and capital expenditure requirements.
Our current credit facilities include the senior secured credit facility
(expiring on April 30, 2004), consisting of the term loan facility of $61.2
million, the revolving credit facility, subject to certain borrowing base
limitations, of $25.0 million, and foreign working capital lines (with on demand
repayment provisions), subject to certain limitations, of $10.8 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 June 30, 2003 all of our $61.2 million term loan facility is payable
within the next 12 months. In addition we had outstanding borrowings of $14.2
million under the revolving credit facility and outstanding borrowings of $7.1
million under our foreign working capital lines. The net availability under the
revolving credit facilities, after deduction for open letters of credit and
allowing for borrowing base limitations, was $6.8 million at June 30, 2003.
Outstanding balances under substantially all of these credit facilities bear
interest at floating rates based upon the interest rate option selected by us;
therefore, our financial condition is and will continue to be affected by
changes in the prevailing interest rates. The effective interest rate under
these credit facilities for the six months ended June 30, 2003 was 6.8%.
Pursuant to the term loan facility, we are required to make principal payments
under (i) the $50.0 million Tranche A Term Loan Facility ($14.2 million of which
was outstanding at June 30, 2003), of $1.1 million and $13.1 million in the
remainder of 2003 and 2004, respectively, with a final maturity date of April
30, 2004 and (ii) the $65.0 million Tranche B Term Loan Facility ($47.0 million
of which was outstanding at June 30, 2003), of $3.6 million and $43.4 million in
the remainder of 2003 and 2004, respectively, with a final maturity date of
April 30, 2004. In addition, under the terms of the senior secured credit
facility, we are required to make mandatory prepayments from proceeds of the
17
sale of assets and an additional payment in 2003 and 2004 if our operating
performance for 2002 and 2003 exceeds certain targets. In the six months ended
June 30, 2003, we made an additional payment of $0.5 million related to our 2002
operating performance.
In addition to payments on our term loan facility, we are required to make
principal payments totaling $0.4 million in the next 12 months pursuant to our
other U.S. and foreign debt agreements.
We have incurred substantial indebtedness in connection with a series of
leveraged transactions and subsequently completed a debt restructuring in
November 2001. As a result, debt service obligations represent significant
liquidity constraints for us. We were in compliance with all covenants related
to all debt agreements at June 30, 2003.
As stated previously, our term loan facility, totaling $61.2 million, is payable
within the next 12 months. Management is currently assessing various financing
alternatives to repay this debt and expects to have new financing in place by
the end of 2003.
Telex will record a normal pension income of approximately $0.1 million in 2003
primarily due to the benefit of the freezing of future plan benefits. Telex was
not required to make an employer contribution to its pension plan in 2002 for
the 2001 plan year. We will be making employer contributions to the pension plan
of approximately $2.2 million in the next 12 months for the 2002 and 2003 plan
years.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including changes in foreign currency
exchange rates and interest rates. Market risk is the potential loss arising
from adverse changes in market rates and prices, such as foreign exchange and
interest rates. We have entered into various financial instruments to manage
this risk. The counterparties to these transactions are major financial
institutions. We do not enter into derivatives or other financial instruments
for trading or speculative purposes.
EXCHANGE RATE SENSITIVITY ANALYSIS
We enter into forward exchange contracts principally to hedge the currency
fluctuations in transactions denominated in foreign currencies, thereby limiting
our risk that would otherwise result from changes in exchange rates. During the
six months ended June 30, 2003, 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 condensed consolidated statements of
operations.
At June 30, 2003, we had outstanding forward exchange contracts with a notional
amount of $5.8 million and a weighted remaining maturity of 84 days.
At June 30, 2003, 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 percent fluctuation in exchange rates for
these currencies would change the fair value by approximately $0.6 million.
However, since these contracts hedge foreign currency denominated transactions,
any change in the fair value of the contracts would be about 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 our earnings or cash flows. Conversely, for floating rate debt,
interest rate changes generally do not affect the fair market value but do
impact our future earnings and cash flows, assuming other factors are held
constant.
At June 30, 2003, we had fixed rate debt of $59.7 million, step-up, pay-in-kind
interest debt of $45.3 million (redemption value of $45.9 million at June 30,
2003), and an interest-free loan of $1.0 million. Holding all other variables
constant (such as foreign exchange rates and debt levels), a one-percentage
point decrease in interest rates would increase the unrealized fair market value
of these debts by approximately $2.3 million.
At June 30, 2003, we had floating rate debt of $82.5 million. The earnings and
cash flow impact for the next twelve months resulting from a one-percentage
point increase in interest rates on this debt would be approximately $0.8
million, holding all other variables constant.
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ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
our management, including the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of the design and operation of Telex's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)
and 15d-14(c)) as of June 30, 2003. Based on that evaluation, our management,
including the CEO and CFO, concluded that (i) our disclosure controls and
procedures were effective as of the end of the period to ensure that the
information that we are required to disclose in the reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Commission's rules and forms, and that (ii)
the information that is required to be reported is accumulated and communicated
to management, including our principal executive and financial officers, as
appropriate, to allow timely decisions regarding required disclosure. There have
been no significant changes in our internal controls or in other factors that
could significantly affect Telex's internal controls.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.6 Employment Agreement, dated as of April 14, 2003, between the
Company and Raymond V. Malpocher.
10.7 Consulting Agreement, dated as of May 5, 2003, between the Company
and Ned Jackson.
31.1 Certification of Telex's Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Telex's Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.
32.1 Certification of Telex's Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
A Report on Form 8-K, dated April 16, 2003, reporting under Items 5 and 7,
was filed on April 17, 2003.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
TELEX COMMUNICATIONS, INC.
Dated: August 1, 2003 By: /s/ Raymond V. Malpocher
-------------------------------- -----------------------------
Raymond V. Malpocher
President and Chief Executive
Officer
TELEX COMMUNICATIONS, INC.
Dated: August 1, 2003 By: /s/ Gregory W. Richter
-------------------------------- -----------------------------
Gregory W. Richter
Vice President and Chief
Financial Officer
22
TELEX COMMUNICATIONS, INC.
FORM 10-Q
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
10.6 Employment Agreement, dated as of April 14, 2003, between the
Company and Raymond V. Malpocher.
10.7 Consulting Agreement, dated as of May 5, 2003, between the Company
and Ned Jackson.
31.1 Certification of Telex's Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Telex's Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.
32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
23