Attached files
file | filename |
---|---|
EX-31.2 - EX-31.2 - DynaVox Inc. | a11-9582_1ex31d2.htm |
EX-31.1 - EX-31.1 - DynaVox Inc. | a11-9582_1ex31d1.htm |
EX-32.2 - EX-32.2 - DynaVox Inc. | a11-9582_1ex32d2.htm |
EX-32.1 - EX-32.1 - DynaVox Inc. | a11-9582_1ex32d1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 1, 2011
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-34716
DynaVox Inc.
(Exact name of registrant as specified in its charter)
Delaware |
|
27-1507281 |
(State or other jurisdiction of |
|
(I.R.S. Employer Identification No.) |
2100 Wharton Street, Suite 400
Pittsburgh, Pennsylvania 15203
(Address of principal executive offices) (Zip Code)
Telephone: (412) 381-4883
(Registrants telephone number, including area code)
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
|
Accelerated filer o |
|
|
|
Non-accelerated filer o |
|
Smaller reporting company x |
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrants Class A common stock, par value $0.01 per share, outstanding was 9,383,335 as of May 2, 2011. The number of shares of the registrants Class B common stock, par value $0.01 per share, outstanding as of May 2, 2011 was 53 (excluding 47 shares of Class B common stock held by a subsidiary of the registrant).
DYNAVOX INC.
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended April 1, 2011
This report contains forward-looking statements, which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as outlook, believes, expects, potential, continues, may, will, should, seeks, approximately, predicts, intends, plans, estimates, anticipates or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under Item 1A. Risk Factors in our Annual Report on Form 10-K, as such factors may be updated by Quarterly Reports on Form 10-Q subsequently filed with the U.S. Securities and Exchange Commission (the SEC), including by Item 1A. Risk Factors of this report. Some of these important factors include, but are not limited, to the following:
· The current adverse economic environment, including the associated impact on government budgets, could continue to adversely affect our business.
· Changes in funding for public schools could cause the demand for our speech generating devices, special education software and content to continue to decrease.
· Reforms to the United States healthcare system may adversely affect our business.
· Changes in third-party payor funding practices or preferences for alternatives may decrease the demand for, or put downward pressure on the price of, our speech generating devices.
· Legislative or administrative changes could reduce the availability of third-party funding for our speech generating devices.
· The loss of members of our senior management or other key personnel or the failure to attract and retain highly qualified personnel could compromise our ability to effectively manage our business and pursue our growth strategy.
· We may not be able to develop and market successful new products.
· New disruptive technologies may adversely affect our market position and financial results.
· We are dependent on the continued support of speech language pathologists and special education teachers.
· Our products are dependent on the continued success of our proprietary symbol sets.
· We depend upon certain third-party suppliers and licensing arrangements, making us vulnerable to supply problems and price fluctuations, which could harm our business.
· If our patents and other intellectual property rights do not adequately protect our products, we may lose market share to our competitors and be unable to operate our business profitably.
· Our products could infringe on the intellectual property of others, which may cause us to engage in costly litigation and could cause us to pay substantial damages and prohibit us from selling our products.
· The market opportunities for our products and content may not be as large as we believe.
· We may fail to successfully execute our strategy to grow our business.
· We may attempt to pursue acquisitions or strategic alliances, which may be unsuccessful.
· We are subject to a variety of risks due to our international operations that could adversely affect those operations or our profitability and operating results.
· We depend on third-party distributors to market and sell our products internationally in a number of markets. Our business, financial condition and results of operations may be adversely affected by both our distributors performance and our ability to maintain these relationships on terms that are favorable to us.
· Our business could be adversely affected by disruption to our suppliers operations due to the recent natural disaster in Japan.
· We may fail to obtain regulatory approval in foreign jurisdictions which could prevent us from marking our products abroad.
· Our business could be adversely affected by competition including potential new entrants.
· If we fail to comply with the U.S. Federal Anti-Kickback Statute and similar state and foreign laws, we could be subject to criminal and civil penalties and exclusion from Medicare, Medicaid and other governmental programs.
· If we fail to comply with the Health Insurance Portability and Accountability Act of 1996, (HIPAA), we could be subject to enforcement actions.
· Risks related to our organizational structure.
· Our use of leverage may expose us to substantial risks.
These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. These forward-looking statements speak only as of the date of this report or as of the date they were made, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
DynaVox Inc. is a holding company and its sole asset is a controlling equity interest in DynaVox Systems Holdings LLC. Unless the context suggests otherwise, references in this report to DynaVox, the Company, the Corporation, we, us and our refer (1) prior to the April 2010 initial public offering (IPO) of the Class A common stock of DynaVox Inc. and related transactions, to DynaVox Systems Holdings LLC (or DynaVox Holdings) and its consolidated subsidiaries and (2) after our IPO and related transactions, to DynaVox Inc. and its consolidated subsidiaries. We refer to Vestar Capital Partners, a New York-based registered investment adviser, together with its affiliates, as Vestar, and to Park Avenue Equity Partners, L.P., together with its affiliates, as Park Avenue.
DYNAVOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
|
|
Successor |
|
Successor |
| ||
|
|
April 1, |
|
July 2, |
| ||
ASSETS |
|
|
|
|
| ||
CURRENT ASSETS: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
12,246 |
|
$ |
20,777 |
|
Trade receivablesnet of allowance for doubtful accounts of $2,087 and $1,393 as of April 1, 2011 and July 2, 2010, respectively |
|
17,384 |
|
17,741 |
| ||
Other receivables |
|
323 |
|
503 |
| ||
Inventories |
|
5,885 |
|
6,808 |
| ||
Prepaid expenses and other current assets |
|
1,082 |
|
1,210 |
| ||
Deferred taxes |
|
728 |
|
728 |
| ||
Total current assets |
|
37,648 |
|
47,767 |
| ||
PROPERTY AND EQUIPMENTNet |
|
6,763 |
|
7,065 |
| ||
GOODWILL |
|
60,846 |
|
60,846 |
| ||
INTANGIBLESNet |
|
29,825 |
|
31,331 |
| ||
DEFERRED TAXES |
|
41,525 |
|
41,474 |
| ||
OTHER ASSETS |
|
2,414 |
|
2,683 |
| ||
TOTAL ASSETS |
|
$ |
179,021 |
|
$ |
191,166 |
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
| ||
CURRENT LIABILITIES: |
|
|
|
|
| ||
Current portion of long-term debt |
|
$ |
1,875 |
|
$ |
3,961 |
|
Trade accounts payable |
|
5,664 |
|
5,541 |
| ||
Related-party payable |
|
|
|
181 |
| ||
Deferred revenue |
|
1,281 |
|
1,216 |
| ||
Payable to related parties pursuant to tax receivable agreement |
|
500 |
|
|
| ||
Other liabilities |
|
7,550 |
|
13,165 |
| ||
Total current liabilities |
|
16,870 |
|
24,064 |
| ||
LONG-TERM DEBT |
|
40,300 |
|
44,200 |
| ||
PAYABLE TO RELATED PARTIES PURSUANT TO TAX RECEIVABLE AGREEMENT |
|
40,426 |
|
40,870 |
| ||
OTHER LONG-TERM LIABILITIES |
|
2,408 |
|
4,168 |
| ||
Total liabilities |
|
100,004 |
|
113,302 |
| ||
|
|
|
|
|
| ||
STOCKHOLDERS EQUITY: |
|
|
|
|
| ||
Class A common stock, par value $0.01 per share, 1,000,000,000 shares authorized, 9,383,335 shares issued and outstanding at April 1, 2011 and July 2, 2010 |
|
94 |
|
94 |
| ||
Class B common stock, par value $0.01 per share, 1,000,000 shares authorized, 100 shares issued and outstanding at April 1, 2011 and July 2, 2010 |
|
|
|
|
| ||
Preferred stock, par value $0.01 per share, 100,000,000 shares authorized, none issued or outstanding at April 1, 2011 and July 2, 2010 |
|
|
|
|
| ||
Additional paid-in capital |
|
23,299 |
|
24,205 |
| ||
Retained earnings |
|
2,605 |
|
2,306 |
| ||
Accumulated other comprehensive loss |
|
(19 |
) |
(46 |
) | ||
Total stockholders equity attributable to DynaVox Inc. |
|
25,979 |
|
26,559 |
| ||
Non-controlling interest |
|
53,125 |
|
51,392 |
| ||
Non-controlling interest shareholder notes |
|
(87 |
) |
(87 |
) | ||
Total equity |
|
79,017 |
|
77,864 |
| ||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
179,021 |
|
$ |
191,166 |
|
See notes to unaudited condensed consolidated financial statements.
DYNAVOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share amounts)
|
|
Successor |
|
Predecessor |
|
Successor |
|
Predecessor |
| ||||
|
|
Thirteen Weeks Ended |
|
Thirty-nine Weeks Ended |
| ||||||||
|
|
April 1, |
|
April 2, |
|
April 1, |
|
April 2, |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
NET SALES |
|
$ |
28,668 |
|
$ |
28,382 |
|
$ |
75,763 |
|
$ |
81,245 |
|
COST OF SALES |
|
8,726 |
|
6,881 |
|
22,547 |
|
20,030 |
| ||||
GROSS PROFIT |
|
19,942 |
|
21,501 |
|
53,216 |
|
61,215 |
| ||||
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
| ||||
Selling and marketing |
|
8,296 |
|
8,955 |
|
25,780 |
|
26,490 |
| ||||
Research and development |
|
2,344 |
|
2,641 |
|
7,236 |
|
7,223 |
| ||||
General and administrative |
|
4,350 |
|
4,527 |
|
14,114 |
|
11,311 |
| ||||
Amortization of certain intangibles |
|
112 |
|
121 |
|
334 |
|
962 |
| ||||
Impairment loss |
|
1,018 |
|
|
|
1,018 |
|
|
| ||||
Total operating expenses |
|
16,120 |
|
16,244 |
|
48,482 |
|
45,986 |
| ||||
INCOME FROM OPERATIONS |
|
3,822 |
|
5,257 |
|
4,734 |
|
15,229 |
| ||||
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
| ||||
Interest income |
|
17 |
|
7 |
|
30 |
|
38 |
| ||||
Interest expense |
|
(668 |
) |
(1,908 |
) |
(2,014 |
) |
(5,838 |
) | ||||
Change in fair value and net loss on interest rate swap agreements |
|
(5 |
) |
(216 |
) |
(81 |
) |
(665 |
) | ||||
Other income (expense) net |
|
(34 |
) |
(10 |
) |
(269 |
) |
(84 |
) | ||||
Total other expense-net |
|
(690 |
) |
(2,127 |
) |
(2,334 |
) |
(6,549 |
) | ||||
INCOME BEFORE INCOME TAXES |
|
3,132 |
|
3,130 |
|
2,400 |
|
8,680 |
| ||||
INCOME TAX EXPENSE |
|
341 |
|
248 |
|
334 |
|
414 |
| ||||
NET INCOME ATTRIBUTABLE TO THE CONTROLLING AND NON-CONTROLLING INTERESTS |
|
$ |
2,791 |
|
$ |
2,882 |
|
$ |
2,066 |
|
$ |
8,266 |
|
Less: net income attributable to the non-controlling interests |
|
(2,140 |
) |
|
|
(1,767 |
) |
|
| ||||
NET INCOME ATTRIBUTABLE TO DYNAVOX INC. |
|
$ |
651 |
|
|
|
$ |
299 |
|
|
| ||
Weighted-average shares of Class A common stock outstanding: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
9,375,000 |
|
|
|
9,375,000 |
|
|
| ||||
Diluted |
|
9,375,000 |
|
|
|
9,375,000 |
|
|
| ||||
Net income available to Class A common stock per share: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
0.07 |
|
|
|
$ |
0.03 |
|
|
| ||
Diluted |
|
$ |
0.07 |
|
|
|
$ |
0.03 |
|
|
|
See notes to unaudited condensed consolidated financial statements.
DYNAVOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF MEMBERS AND STOCKHOLDERS EQUITY
(Unaudited)
(In thousands, except unit and share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Units |
|
Common A |
|
Common B |
|
Treasury |
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
Non- |
|
Total |
| |||||||||||||||||||||
|
|
Number |
|
Amount |
|
Number |
|
Amount |
|
Number |
|
Amount |
|
Number |
|
Amount |
|
Management |
|
Contributed |
|
Additional |
|
Retained |
|
Other |
|
Comprehensive |
|
Non- |
|
Interest |
|
and |
| |||||||||||||
PREDECESSOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
BALANCEJuly 3, 2009 |
|
4,868,524 |
|
$ |
41,344 |
|
|
|
$ |
|
|
|
|
$ |
|
|
(2,196,961 |
) |
$ |
(35,050 |
) |
$ |
(425 |
) |
$ |
13,248 |
|
$ |
|
|
$ |
6,149 |
|
$ |
(453 |
) |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
24,813 |
|
Issuance of common units |
|
44,045 |
|
1,122 |
|
|
|
|
|
|
|
|
|
15,650 |
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,160 |
| |||||||||||||
Forfeiture, redemption, and cancellation of management equity units |
|
(5,000 |
) |
(50 |
) |
|
|
|
|
|
|
|
|
(7,508 |
) |
(152 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(202 |
) | |||||||||||||
Equity-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
573 |
| |||||||||||||
Issuance of notes receivable for management units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(245 |
) | |||||||||||||
Payment of notes receivable for management units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
399 |
| |||||||||||||
Equity distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(1,193 |
) | |||||||||||||
Dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10.000 |
) |
|
|
|
|
|
|
|
|
(10,000 |
) | |||||||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,266 |
|
|
|
8,266 |
|
|
|
|
|
8,266 |
| |||||||||||||
Net gain on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242 |
|
242 |
|
|
|
|
|
242 |
| |||||||||||||
Currency translation gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40 |
|
40 |
|
|
|
|
|
40 |
| |||||||||||||
BALANCEApril 2, 2010 |
|
4,907,569 |
|
$ |
42,416 |
|
|
|
$ |
|
|
|
|
$ |
|
|
(2,188,819 |
) |
$ |
(35,164 |
) |
$ |
(271 |
) |
$ |
12,628 |
|
$ |
|
|
$ |
4,415 |
|
$ |
(171 |
) |
$ |
8,548 |
|
$ |
|
|
$ |
|
|
$ |
23,853 |
|
SUCCESSOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
BALANCEJuly 2, 2010 |
|
|
|
$ |
|
|
9,383,335 |
|
$ |
94 |
|
100 |
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
24,205 |
|
$ |
2,306 |
|
$ |
(46 |
) |
$ |
|
|
$ |
51,392 |
|
$ |
(87 |
) |
$ |
77,864 |
|
Equity-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,584 |
|
|
|
|
|
|
|
|
|
|
|
1,584 |
| |||||||||||||
Equity distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,574 |
) |
|
|
|
|
|
|
|
|
|
|
(2,574 |
) | |||||||||||||
Adjustment to give effect of the tax receivable agreement with DynaVox Holdings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
20 |
| |||||||||||||
Purchase of subsidiary shares from non-controlling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64 |
|
|
|
|
|
|
|
(92 |
) |
|
|
(28 |
) | |||||||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299 |
|
|
|
299 |
|
1,767 |
|
|
|
2,066 |
| |||||||||||||
Currency translation gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
27 |
|
58 |
|
|
|
85 |
| |||||||||||||
BALANCEApril 1, 2011 |
|
|
|
$ |
|
|
9,383,335 |
|
$ |
94 |
|
100 |
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
23,299 |
|
$ |
2,605 |
|
$ |
(19 |
) |
$ |
326 |
|
$ |
53,125 |
|
$ |
(87 |
) |
$ |
79,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements
DYNAVOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
Successor |
|
Predecessor |
| ||
|
|
Thirty-nine Weeks Ended |
| ||||
|
|
April 1, |
|
April 2, |
| ||
|
|
|
|
|
| ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
| ||
Net income attributable to the controlling and non-controlling interests |
|
$ |
2,066 |
|
$ |
8,266 |
|
Depreciation |
|
2,543 |
|
2,147 |
| ||
Amortization of certain intangibles |
|
694 |
|
1,192 |
| ||
Amortization of deferred financing costs |
|
488 |
|
611 |
| ||
Equity-based compensation expense |
|
1,584 |
|
573 |
| ||
Change in fair value of interest rate swaps |
|
(461 |
) |
(109 |
) | ||
Change in fair value of acquisition contingencies |
|
(157 |
) |
|
| ||
Deferred taxes |
|
25 |
|
|
| ||
Impairment loss |
|
1,018 |
|
|
| ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Trade and other receivables |
|
538 |
|
314 |
| ||
Inventories |
|
923 |
|
(1,710 |
) | ||
Related-party receivable |
|
|
|
(428 |
) | ||
Other assets |
|
57 |
|
(301 |
) | ||
Deferred revenue |
|
(146 |
) |
38 |
| ||
Trade accounts payable |
|
423 |
|
(326 |
) | ||
Accrued compensation |
|
(5,273 |
) |
2,223 |
| ||
Accrued interest |
|
(36 |
) |
(70 |
) | ||
Related-party payable |
|
(181 |
) |
(469 |
) | ||
Disbursements on derivative instruments |
|
(542 |
) |
|
| ||
Othernet |
|
89 |
|
(215 |
) | ||
Net cash provided by operating activities |
|
3,652 |
|
11,736 |
| ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
| ||
Purchase of property and equipment |
|
(2,828 |
) |
(3,304 |
) | ||
Acquisition of businesses, net of cash acquired |
|
|
|
(4,621 |
) | ||
Cash used in investing activities |
|
(2,828 |
) |
(7,925 |
) | ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
| ||
Repayments of debt agreements |
|
(5,986 |
) |
(4,651 |
) | ||
Borrowings under debt agreements |
|
|
|
10,000 |
| ||
Payment on acquisition contingencies |
|
(703 |
) |
|
| ||
Payment on noncompete liability |
|
|
|
(258 |
) | ||
Equity distributions |
|
(2,574 |
) |
(1,193 |
) | ||
Payment of costs associated with initial public offering |
|
|
|
(986 |
) | ||
Deferred issuance costs |
|
(149 |
) |
|
| ||
Issuances of common units |
|
|
|
200 |
| ||
Dividend distributions |
|
|
|
(10,000 |
) | ||
Redemptions of management and common units |
|
(28 |
) |
(202 |
) | ||
Payments received on non-controlling interest shareholder notes |
|
|
|
399 |
| ||
Net cash used in financing activities |
|
(9,440 |
) |
(6,691 |
) | ||
EFFECT OF CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
|
85 |
|
40 |
| ||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
(8,531 |
) |
(2,840 |
) | ||
CASH AND CASH EQUIVALENTS: |
|
|
|
|
| ||
Beginning of period |
|
20,777 |
|
12,631 |
| ||
End of period |
|
$ |
12,246 |
|
$ |
9,791 |
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
| ||
Net interest paid |
|
$ |
1,517 |
|
$ |
5,161 |
|
Net income taxes paid |
|
$ |
704 |
|
$ |
264 |
|
The Company had non-cash investing activities of $47 and $60 for accrued capital costs during the thirty-nine weeks ended April 1, 2011 and April 2, 2010, respectively.
See notes to unaudited condensed consolidated financial statements.
DYNAVOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except unit and share amounts)
1. GENERAL
DynaVox Inc. (the Corporation) and subsidiaries design, manufacture, and distribute electronic and symbol-based augmentative communication equipment, software, and services in the United States and internationally. Products include assistive technology speech devices, proprietary symbols, books, and software programs to aid in the communication skills of individuals affected by speech disabilities as a result of traumatic, degenerative, or congenital conditions.
The Corporation was formed as a Delaware corporation on December 16, 2009 for the purpose of facilitating an initial public offering (IPO) of common equity and to become the sole managing member of DynaVox Systems Holdings LLC and subsidiaries (DynaVox Holdings). On April 21, 2010, a registration statement filed with the U.S. Securities and Exchange Commission (SEC) related to shares of Class A common stock of the Corporation was declared effective and the price of such shares was set at $15.00 per share. The IPO closed on April 27, 2010. Prior to the IPO, the Corporation had not engaged in any business or other activities except in connection with its formation and the IPO.
After the effective date of the registration statement, but prior to the completion of the IPO, the limited liability company agreement of DynaVox Holdings was amended and restated to, among other things, modify its capital structure by replacing the different classes of interests previously held by the DynaVox Holdings owners to a single new class of units called Holdings Units. In addition, each Holdings Units unit holder received one share of the Corporations Class B common stock. These transactions are collectively referred to as the Recapitalization Transactions. We and our then-existing owners also entered into an exchange agreement under which (subject to the terms of the exchange agreement, as amended) they have the right to exchange their Holdings Units for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. Notwithstanding the foregoing, for so long as Holdings Unit holders other than the Corporation hold in excess of 25% of the outstanding Holdings Units (including Holdings Units held by the Corporation), Holdings Unit holders shall only be entitled to effect exchanges on the second Friday or last day of each fiscal month of the Corporation occurring following May 2, 2011, the date of the initial filing of the registration statement filed by the Corporation with the SEC to cover issuances of shares of Class A common stock upon exchange; provided that Holdings Unit holders may effect exchanges on a day that is not the second Friday or last day of a fiscal month of the Corporation during the one week period immediately following the effective date of such registration statement.
The Corporation, as a result of the IPO and the related Recapitalization Transactions, became the sole managing member of, and has a controlling equity interest in, DynaVox Holdings. As the sole managing member of DynaVox Holdings, the Corporation operates and controls all of the business and affairs of DynaVox Holdings and, through DynaVox Holdings and its subsidiaries, conducts our business. Commencing on April 28, 2010, the Corporation consolidates the financial results of DynaVox Holdings and its subsidiaries, and records non-controlling interest for the economic interest in DynaVox Holdings held by the non-controlling unit holders. The table below sets forth the non-controlling interest ownership as of July 2, 2010 and April 1, 2011 and reflects the repurchase and cancellation of 35,455 unvested Holdings Units during the thirteen weeks ended April 1, 2011.
|
|
Non-controlling |
|
DynaVox Inc. |
|
Total * |
|
July 2, 2010 |
|
20,451,648 |
|
9,383,335 |
|
29,834,983 |
|
April 1, 2011 |
|
20,416,193 |
|
9,383,335 |
|
29,799,528 |
|
|
|
|
|
|
|
|
|
Ownership percentage: |
|
|
|
|
|
|
|
July 2, 2010 |
|
68.6 |
% |
31.4 |
% |
|
|
April 1, 2011 |
|
68.5 |
% |
31.5 |
% |
|
|
* Assumes all of the holders of Holdings Units exchange their Holdings Units for shares of the Corporations Class A common stock on a one-for-one basis.
Collectively, the Corporation and DynaVox Holdings are referred to as the Company and as such, references to the Company and Successor refer to the period subsequent to the IPO and Recapitalization Transactions, and references to Predecessor refer to the period prior to the IPO and related Recapitalization Transactions.
2. ACCOUNTING POLICIES
These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, all estimates and adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended July 2, 2010. The results of operations for these interim periods are not necessarily indicative of the operating results for other quarters, for the full fiscal year or for any future period. The July 2, 2010 financial information has been derived from the Companys audited financial statements.
There have been no significant changes in our significant accounting policies and estimates that were disclosed in the Companys Annual Report on Form 10-K for the fiscal year ended July 2, 2010, except for the impairment loss which is disclosed in Note 5.
Recently Adopted Accounting Standards-In October 2009, the Financial Accounting Standards Board (FASB) issued changes to accounting for multiple-deliverable revenue arrangements, and arrangements that include software elements. These changes require entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated among the various deliverables in a multi-element transaction using the relative selling price method. These changes remove tangible products from the scope of software revenue guidance and provide guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. These changes should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company adopted the changes issued by the FASB on July 3, 2010 and it had no impact on the Companys financial statements.
3. ACQUISITIONS
Eye Response Technologies-On January 4, 2010, the Company acquired all the outstanding shares of Eye Response Technologies, Inc. (ERT) in exchange for $3,703 in cash and a guaranteed minimum royalty of $3,500 over three years, plus other contingent consideration, as discussed below. ERTs results of operations have been included in the Companys condensed consolidated statements of operations beginning January 4, 2010.
As of the acquisition date, the Company recorded the fair value of contingent consideration related to guaranteed minimum royalty payments due to the previous owner based on future sales of eye products over a period of three years of $3,728. As of April 1, 2011, the liability was $2,781, which reflects cumulative payments of $783 and a fair value adjustment recorded to other expense of $23 and other income of $164 during the thirteen and thirty-nine weeks ended April 1, 2011 (Successor), respectively.
As of the acquisition date, the Company recorded the fair value of contingent consideration related to a consulting agreement due to the previous owner related to future service over three years of $430. As of April 1, 2011, the liability was $269, which reflects cumulative payments totaling $175 and cumulative fair value adjustments of $14 of which $3 and $7 was recorded to interest expense during the thirteen and thirty-nine weeks ended April 1, 2011 (Successor), respectively.
As of the acquisition date, the Company recorded the fair value of working capital adjustments based on the terms of the stock purchase agreement with the previous owner which was calculated based on a targeted value of $-0- compared to the actual amount of working capital acquired. The fair value of the contingent consideration is classified as a liability, with the acquisition date fair value of $117. On October 13, 2010, the fair value of the working capital adjustment liability was paid in full.
The pro forma results for this acquisition are not material to the Companys financial results.
Blink-Twice Inc.-On July 6, 2009, the Company acquired certain assets and liabilities of Blink-Twice Inc. (Blink-Twice), in exchange for $1,000 in cash, issuance of 19,062 Class A units valued at $712, and other contingent consideration, as discussed below. Blink-Twices results of operations have been included in the Companys condensed consolidated statements of operations beginning July 6, 2009.
As of the acquisition date, the Company recorded the fair value of contingent consideration related to certain payments owed to the previous owner based on the order backlog acquired (Acquired Backlog). The fair value of the Acquired Backlog was determined to be $674 based on the fixed terms of the agreement with the previous owner and is recorded within related-party payable in the condensed consolidated balance sheets as the previous owner is a former employee and current stockholder of the Company. As of April 1, 2011, the related-party payable was $-0-, which reflects cumulative payments totaling $600 and cumulative fair value adjustment of $74 that were recorded to other income during fiscal year 2010.
The Company recorded the fair value of working capital adjustments owed to the previous owner. The acquisition date fair value of the working capital adjustment was determined to be $125 based on the terms of the agreement with the previous owner and was calculated based on a targeted value of $500 compared to the actual amount of working capital acquired. The fair value of the contingent consideration is classified as a liability. As of April 1, 2011, the related-party payable was $-0-, which reflects cumulative payments totaling $154 and cumulative fair value adjustment of $29 that was recorded to other expense during fiscal year 2010.
Acquisition-related costs for ERT and Blink-Twice, which include legal, accounting, and other external costs, were expensed as incurred and classified within general and administrative expenses in the condensed consolidated statements of operations. For the thirteen week period ended April 1, 2011 (Successor) and April 2, 2010 (Predecessor), such costs totaled $-0- and $49, respectively. For the thirty-nine week period ended April 1, 2011 (Successor) and April 2, 2010 (Predecessor), such costs totaled $-0- and $345, respectively.
4. BALANCE SHEET ITEMS
Inventories as of April 1, 2011 and July 2, 2010 consist of the following:
|
|
Successor |
|
Successor |
| ||
|
|
April 1, 2011 |
|
July 2, 2010 |
| ||
|
|
|
|
|
| ||
Raw materials |
|
$ |
3,629 |
|
$ |
4,443 |
|
Work in progress |
|
16 |
|
79 |
| ||
Finished goods |
|
2,239 |
|
2,286 |
| ||
Inventories |
|
$ |
5,885 |
|
$ |
6,808 |
|
The components of property and equipment as of April 1, 2011 and July 2, 2010 are as follows:
|
|
Successor |
|
Successor |
| ||
|
|
April 1, 2011 |
|
July 2, 2010 |
| ||
|
|
|
|
|
| ||
Molds, machinery and equipment |
|
$ |
9,069 |
|
$ |
6,278 |
|
Computer equipment and purchased software |
|
4,618 |
|
4,436 |
| ||
Furniture, fixtures and office equipment |
|
1,294 |
|
1,224 |
| ||
Leasehold improvements |
|
645 |
|
599 |
| ||
Less impairment loss (Note 5) |
|
(206 |
) |
|
| ||
Total property and equipment gross |
|
$ |
15,420 |
|
$ |
12,537 |
|
Less accumulated depreciation |
|
(9,817 |
) |
(7,274 |
) | ||
Construction in process |
|
1,160 |
|
1,802 |
| ||
Property and equipment net |
|
$ |
6,763 |
|
$ |
7,065 |
|
Accumulated other comprehensive loss as of April 1, 2011 and July 2, 2010 are as follows:
|
|
Successor |
|
Successor |
| ||
|
|
April 1, 2011 |
|
July 2, 2010 |
| ||
|
|
|
|
|
| ||
Attributable to DynaVox Inc. |
|
|
|
|
| ||
Foreign currency translation loss |
|
$ |
(19 |
) |
$ |
(46 |
) |
Accumulated other comprehensive loss attributable to DynaVox Inc. |
|
$ |
(19 |
) |
$ |
(46 |
) |
Attributable to non-controlling interest |
|
|
|
|
| ||
Foreign currency translation loss |
|
$ |
(43 |
) |
$ |
(101 |
) |
Accumulated other comprehensive loss attributable to non-controlling interest |
|
$ |
(43 |
) |
$ |
(101 |
) |
Foreign currency translation adjustments, including those pertaining to non-controlling interest, are generally not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.
5. GOODWILL AND INTANGIBLE ASSETS
As of April 1, 2011 and July 2, 2010, the carrying amount of the Companys goodwill is $60,846.
The Companys identifiable intangible assets with indefinite and finite lives are detailed below:
|
|
Successor |
|
Successor |
| |||||||||||||||||
|
|
April 1, 2011 |
|
July 2, 2010 |
| |||||||||||||||||
|
|
Gross |
|
Impairment |
|
Accumulated |
|
Net |
|
Gross |
|
Accumulated |
|
Net |
| |||||||
Acquired software technology |
|
$ |
3,253 |
|
$ |
70 |
|
$ |
1,747 |
|
$ |
1,436 |
|
$ |
3,253 |
|
$ |
1,403 |
|
$ |
1,850 |
|
Patent technology |
|
4,330 |
|
|
|
541 |
|
3,789 |
|
4,330 |
|
216 |
|
4,114 |
| |||||||
Trade name |
|
100 |
|
42 |
|
58 |
|
|
|
100 |
|
33 |
|
67 |
| |||||||
Symbols and trademarks (indefinite live) |
|
25,300 |
|
700 |
|
|
|
24,600 |
|
25,300 |
|
|
|
25,300 |
| |||||||
|
|
$ |
32,983 |
|
$ |
812 |
|
$ |
2,346 |
|
$ |
29,825 |
|
$ |
32,983 |
|
$ |
1,652 |
|
$ |
31,331 |
|
Long-lived assets, which include fixed assets and finite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset or group of assets may not be recoverable. Goodwill and intangibles with indefinite-lives are reviewed at least annually, or when events or other changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
The Company routinely monitors device unit sales for its various product lines to assist management in determining when their respective long-lived assets and indefinite-lived intangible assets should be evaluated for impairment. During the third quarter of fiscal year 2011, the continuing unfavorable general economic conditions and trends in governmental spending throughout the Companys various markets, coupled with the recent Maestro product launch having an adverse impact on its Tango! sales and a change in marketing strategy for Tango!, resulted in a downward revision to the Companys forecasted sales of two of the Companys product lines, EyeMax and Tango!. As a result, the Company determined that impairment indicators existed as of April 1, 2011. The Company conducted interim impairment testing of the long-lived assets and indefinite-lived intangible assets, related to these product lines, as of this date and determined that some impairment had occurred.
The test for recoverability of a definite long-lived asset group to be held, and used, is performed by comparing the carrying amount of the long-lived assets to the sum of the estimated future net undiscounted cash flows expected to be generated by the assets. In estimating the future undiscounted cash flows, the Company used projections of cash flows directly associated with, and which are expected to arise as a direct result of, the use and eventual disposition of the assets. These assumptions include, among other estimates, the projection of sales and cost of sales and the period of future operation. Changes in any of these estimates could have a material effect on the estimated future undiscounted cash flows expected to be generated by the asset. The Company performed a test for each asset grouping and determined that the book value of the finite-lived intangibles, mainly patents, related to the EyeMax product line was fully recoverable and no impairment charge was necessary. It was determined the long-lived assets of the Tango! product line, comprised of fixed assets and finite-lived intangibles, was not fully recoverable and an impairment loss of $206 and $112, respectively, was recorded. The impairment loss recorded was equal to the excess of the carrying value of the long-lived assets over their fair value. The fair value was established by discounting the expected future cash flows to present value using factors that consider the timing and risk of the future cash flows.
As a result of the impairment indicators within the Tango! product line, the Company performed an interim impairment test on the product lines indefinite-lived intangible, proprietary symbol sets, by comparing the fair value of the asset to its carrying value. The fair value was estimated by using a relief from royalty method (a discounted cash flow methodology) at the time of acquisition and at the April 1, 2011 interim testing date. Based upon the test, it was determined that the book value of the indefinite-lived intangible was not fully recoverable and an impairment loss of $700 was recorded equal to the excess of the carrying value over the fair value.
In total, the Company recorded an asset impairment loss of $1,018 for the thirteen week period ended April 1, 2011, related entirely to the Tango! product. The loss was separately recorded on the Companys statement of operations. No impairment loss was incurred during the thirteen week period ended April 2, 2010.
The Company performs at least one annual test for impairment of goodwill and intangibles with indefinite lives. The Company uses the end of its fiscal year for the annual test and has one reporting unit. In accordance with its policy, the Company conducted its annual impairment test as of July 2, 2010 and concluded that the fair value of its goodwill and intangibles with indefinite
lives, substantially exceeded their carrying value, and no impairment charge was necessary. During the first and second quarters of fiscal 2011 the Company determined there were indicators of potential impairment of goodwill due to the significant decline in the Companys stock price during the period. During the third quarter of fiscal 2011, based upon the impairment loss recorded during the period of certain definite and indefinite lived assets, as discussed above, the Company determined indicators of potential goodwill impairment existed as of April 1, 2011. As a result of these various indicators, the Company tested the carrying value of the reporting unit by utilizing a market approach to estimate fair value as of the end of each reporting period. The market approach is based on the Companys market capitalization as of the end of each reporting period. The Company concluded no goodwill impairment charge was necessary in any quarter as the fair value of the reporting unit exceeded the carrying value at the end of each reporting period. No impairment indicators were identified for intangibles with indefinite lives, other than discussed above; therefore, no interim impairment testing was performed for the Companys remaining indefinite-lived intangibles.
Amortization expense related to intangibles for the thirteen week periods ended April 1, 2011 and April 2, 2010 was $231 and $242, respectively. Amortization expense related to intangibles for the thirty-nine week periods ended April 1, 2011 and April 2, 2010 was $694 and $1,192, respectively. Estimated amortization expense for the remainder of fiscal year 2011 and each subsequent four fiscal years is as follows: 2011$209; 2012$831; 2013$829; 2014$807; and 2015$600.
6. LONG-TERM DEBT
Long-term debt as of April 1, 2011 and July 2, 2010 consists of the following:
|
|
Successor |
|
Successor |
| ||
|
|
April 1, 2011 |
|
July 2, 2010 |
| ||
2008 Credit Facility |
|
$ |
42,175 |
|
$ |
47,066 |
|
Note payable |
|
|
|
1,095 |
| ||
Total debt |
|
42,175 |
|
48,161 |
| ||
Less current installments |
|
(1,875 |
) |
(3,961 |
) | ||
Long-term debtless current installments |
|
$ |
40,300 |
|
$ |
44,200 |
|
2008 Credit Facility
On June 23, 2008, the Company entered into a third amended and restated secured credit facility (2008 Credit Facility) with a syndicate of financial institutions, including GE Business Financial Services Inc. (formerly known as Merrill Lynch Business Financial Services, Inc.), as administrative agent, that provides $52,000 of term loans and up to $10,000 of revolving loans and letters of credit. The 2008 Credit Facility is secured by all domestic assets and 65% of the equity in foreign subsidiaries, and requires principal amortization starting September 30, 2008, with final maturity on June 23, 2014. Advances under the revolving component of the 2008 Credit Facility are due in one installment on June 23, 2013.
On February 5, 2010, the Company amended certain aspects of its 2008 Credit Facility. In addition to other items, this amendment increased the Companys available revolving loans and letters of credit from $10,000 to $12,925, increased the amount available for restricted distributions, as defined, to $12,000 provided the Company is in compliance with certain financial and non-financial covenants and provides for a fee to be paid by the Company if the 2008 Subordinated Note (hereinafter defined) was not paid in full by August 5, 2010.
On March 4, 2010, the Company entered into a second amendment to the 2008 Credit Facility, which became effective on April 27, 2010. As part of the second amendment, the agent and the lenders under the 2008 Credit Facility consented to DynaVox Holdings, transfer of all of its obligations under the 2008 Credit Facility to a newly-formed wholly-owned subsidiary of DynaVox Holdings that became the immediate holding company parent of DynaVox Systems LLC upon the consummation of the IPO. The lenders waived the requirement of any prepayment of the credit facility with the proceeds of the IPO and consented to the repayment in full of the 2008 Subordinated Note and the indebtedness outstanding under certain other notes payable with the proceeds of the IPO.
When the second amendment to the 2008 Credit Facility became effective, all obligations under the 2008 Credit Facility were unconditionally guaranteed by the immediate holding company parent of DynaVox Systems LLC and each of DynaVox Systems LLCs existing and future wholly-owned domestic subsidiaries. The 2008 Credit Facility and the related guarantees are secured by substantially all of DynaVox Systems LLCs present and future assets and all present and future assets of each guarantor on a first lien basis.
On December 21, 2010, the Company entered into a third amendment to the 2008 Credit Facility in order to address a pre-IPO distribution of $10,000 for the 12-month period ended December 31, 2010. The third amendment modifies the following: (1) calculation of the Fixed Charge Coverage Ratio for the 12-month period ended December 31, 2010 to exclude from the definition of restricted cash distributions a $10,000 distribution made in March 2010; (2) calculation of the ratios of net senior debt to Adjusted EBITDA and net total debt to Adjusted EBITDA by limiting the Company to net cash and cash equivalents from total debt and senior debt to only any 12-month period in which Adjusted EBITDA for such period is greater than $30,000, whereupon the amount of cash and cash equivalents that may be netted is limited to $5,000; and (3) requires the Company to provide monthly financial statements to the lenders within 30 days of the end of each month. The Company incurred an arrangement fee of approximately $149 which was
capitalized to deferred financing costs as a component of Other Assets and will be amortized through the remaining term of the 2008 Credit Facility.
The 2008 Credit Facility provides the option of borrowing at London InterBank Offered Rate (LIBOR) plus a credit spread (4.2% as of April 1, 2011 and July 2, 2010), or the Prime rate plus a credit spread (6.3% as of April 1, 2011 and July 2, 2010) for all term loans and draws under the revolver.
Credit spreads for each term or revolver loan and the unused revolving credit facility fee vary according to the Companys ratio of net total debt to Adjusted EBITDA (as defined) after December 31, 2008. As of April 1, 2011 and July 2, 2010, the Companys credit spreads were as follows:
|
|
Successor |
|
Successor |
| ||||
|
|
April 1, 2011 |
|
July 2, 2010 |
| ||||
|
|
Prime |
|
LIBOR |
|
Prime |
|
LIBOR |
|
2008 Credit Facility |
|
3.00 |
% |
4.00 |
% |
3.00 |
% |
4.00 |
% |
Revolver draw under 2008 Credit Facility |
|
3.00 |
% |
4.00 |
% |
3.00 |
% |
4.00 |
% |
At April 1, 2011 and July 2, 2010, the commitment fee was 0.375% on the unused portion of the revolving credit facility.
2008 Subordinated Note
On June 23, 2008, the Company entered into a Senior Subordinated Note Agreement (2008 Subordinated Note) in the amount of $31,000, which required repayment in one installment on June 23, 2015. The 2008 Subordinated Note bore interest on the outstanding principal at a rate per annum of 15% payable on the last day of each fiscal quarter. The 2008 Subordinated Note was junior to the 2008 Credit Facility and carried a premium for prepayment of 5% after the first and up to the second anniversary date, 3% after the second and up to the third anniversary date, 2% after the third and up to the fourth anniversary date, and 0% thereafter.
On February 5, 2010, in conjunction with the 2008 Credit Facility amendment, the Company also amended certain aspects of the 2008 Subordinated Note. In addition to other items, this amendment increased the amount available for restricted distributions, as defined in the note purchase agreement relating to the 2008 Subordinated Notes, to $12,000 provided the Company was in compliance with certain financial and non-financial covenants and provided for a fee of $294 to be paid by the Company if the 2008 Subordinated Note was not paid in full by August 5, 2010. The $31,000 was paid off in full on April 27, 2010 with proceeds from the IPO, thus avoiding the $294 fee. The early repayment of the $31,000 resulted in a penalty equal to 5% of the principal balance plus related expenses, or $1,575, and write-off of deferred financing costs, for a total loss on extinguishment of debt of $2,441, which was recorded in the April 28, 2010 to July 2, 2010 Successor period of fiscal year 2010.
Revolver Draw Under 2008 Credit Facility
On March 31, 2010, the Company borrowed $10,000 under the revolving loans provision of the 2008 Credit Facility. The Company distributed the $10,000 to the DynaVox Holdings owners who then used the $10,000 to invest in the securities of a related party portfolio company. The $10,000 was paid in full on April 27, 2010 with proceeds from the IPO. At April 1, 2011 and July 2, 2010, the Company had no outstanding letters of credit and the amount available from the revolving credit facility was $12,925 as of both dates.
Financial Covenants
The 2008 Credit Facility requires the Company to comply with certain financial covenants, including maximum capital expenditures, minimum fixed-charge coverage ratio, net senior debt maximum leverage ratio and net total debt maximum leverage ratio, and places certain restrictions on acquisitions and payment of dividends. The Company was in compliance with all financial covenants as required under the 2008 Credit Facility, as amended, at April 1, 2011 and July 2, 2010. The 2008 Credit Facility contains certain mandatory prepayments, including an excess cash flow provision. The Company was not required to make an excess cash flow payment for the year ended July 2, 2010. The Company voluntarily elected to prepay $3,000 of principal during the third quarter of fiscal 2011, which was applied in the direct order of maturity to future scheduled principal payments.
Note Payable
The $1,095 note payable as of July 2, 2010 is related to an acquisition in 2004 and had an interest rate of 7%, which was paid quarterly. The note payable matured on September 30, 2010 and as such was paid off in full during the first quarter of fiscal year 2011.
7. INCOME TAXES
The Companys effective tax rate is summarized in the following table:
|
|
Successor |
|
Predecessor |
|
Successor |
|
Predecessor |
| ||||
|
|
Thirteen Weeks Ended |
|
Thirty-nine Weeks Ended |
| ||||||||
|
|
April 1, |
|
April 2, |
|
April 1, |
|
April 2, |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income tax expense |
|
$ |
341 |
|
$ |
248 |
|
$ |
334 |
|
$ |
414 |
|
Effective income tax rate |
|
10.89 |
% |
7.92 |
% |
13.92 |
% |
4.77 |
% | ||||
The tax provision for the current year period is based on an estimate of the Companys annualized income tax rate. The effective tax rate is calculated by dividing the provision for income taxes by income before income taxes. The Companys effective tax rate includes a rate benefit attributable to the fact that the Companys subsidiaries operate as a limited liability company which is not subject to federal or state income tax. Accordingly, a portion of the Companys earnings are not subject to corporate level taxes. This favorable impact is partially offset by the impact of certain permanent items, primarily attributable to certain entertainment and lobbying expenses that are not deductible for tax purposes. During the thirty-nine weeks ended April 1, 2011, the Company recorded discrete items that resulted in income tax expense, including (i) permanent provision to return differences and (ii) interest associated with the reserve for uncertainties in income tax positions.
A reconciliation of the beginning and ending gross amounts of unrecognized tax benefits is summarized as follows:
Balance as of July 2, 2010 |
|
$ |
67 |
|
Increases in prior period tax positions |
|
13 |
| |
Balance as of April 1, 2011 |
|
$ |
80 |
|
The Company recognizes interest and penalties related to income taxes as a component of corporate income tax expense.
The Company files income tax returns with federal, state, local, and foreign jurisdictions. U.S. federal and state tax returns associated with fiscal years 2007 2010 are currently open for examination. Foreign tax returns associated with fiscal year 2006 2010 also remain open under the statute.
8. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. Fair value is an exit price and the exit price should reflect all the assumptions that market participants would use in pricing the asset or liability.
Accounting standards established three different valuation techniques; market approach, income approach, and cost approach. The Company uses the market and income approaches to value assets and liabilities for which the measurement attribute is fair value.
Valuation techniques used to measure fair value are based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Companys internal market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1Inputs to the valuation methodology are based on quoted prices for an identical asset or liability in an active market.
Level 2Inputs to the valuation methodology are based on quoted prices for a similar asset or liability in an active market, quoted prices for an identical or similar asset or liability in an inactive market, or model- derived valuations for which all significant inputs are observable or can be corroborated by observable market data.
Level 3Inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability.
Valuation of assets and liabilities requires consideration of market risks in our valuations that other market participants may consider. Specifically, consideration was given to the Companys non-performance risk and counterparty credit risk to develop appropriate risk-adjusted discount rates used in our fair value measurements. The Company utilized the following valuation methodologies to measure our financial assets and liabilities:
Cash equivalents: Cash equivalents include investments in money market funds. Investments in this category can be redeemed immediately at the current net asset value per share. A money market fund is a mutual fund whose investments are primarily in short-term debt securities designed to maximize current income with liquidity and capital preservation, usually maintaining per share net asset value at a constant amount, such as one dollar. The carrying amounts approximate fair value because of the short maturity of the instruments.
Interest rate swaps: Interest rate swaps are financial contracts with counterparties that are valued using the income approach. The fair value of these contracts is measured by estimating the future cash flows of the contract based on the quoted future market prices of interest rates at the reporting date and discounting the fair value to the present value using a credit-adjusted discount rate.
The following table presents assets and liabilities measured at fair value on a recurring basis at April 1, 2011 and July 2, 2010:
|
|
Successor |
| ||||||||||
|
|
As of April 1, 2011 |
| ||||||||||
Description |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
| ||||
Assets |
|
|
|
|
|
|
|
|
| ||||
Cash equivalents |
|
$ |
252 |
|
$ |
|
|
$ |
|
|
$ |
252 |
|
|
|
|
|
|
|
|
|
|
| ||||
Total assets |
|
$ |
252 |
|
$ |
|
|
$ |
|
|
$ |
252 |
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities |
|
|
|
|
|
|
|
|
| ||||
Interest rate swaps |
|
$ |
|
|
$ |
(170 |
) |
$ |
|
|
$ |
(170 |
) |
|
|
|
|
|
|
|
|
|
| ||||
Total liabilities |
|
$ |
|
|
$ |
(170 |
) |
$ |
|
|
$ |
(170 |
) |
|
|
Successor |
| ||||||||||
|
|
As of July 2, 2010 |
| ||||||||||
Description |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
| ||||
Liabilities |
|
|
|
|
|
|
|
|
| ||||
Interest rate swaps |
|
$ |
|
|
$ |
(631 |
) |
$ |
|
|
$ |
(631 |
) |
|
|
|
|
|
|
|
|
|
| ||||
Total liabilities |
|
$ |
|
|
$ |
(631 |
) |
$ |
|
|
$ |
(631 |
) |
The carrying amounts reflected in the condensed consolidated balance sheets for cash, trade accounts receivable, and trade accounts payable approximate their respective fair values based on the short-term nature of these instruments. At April 1, 2011 and July 2, 2010, the fair value of the Companys debt instruments approximated their respective carrying value as the debt was principally comprised of variable rate debt. The fair value of the Companys long-term debt was based upon borrowing rates then available to the Company for similar debt instruments with like terms and maturities.
9. DERIVATIVE FINANCIAL INSTRUMENTS
The Company used interest rate swaps for all periods presented to hedge exposure to interest rate risk on its variable-rate debt. The Company does not enter into derivative instruments for speculative purposes. The Company enters into derivatives with high credit quality counterparties and diversifies its positions among such counterparties in order to reduce its exposure to credit losses. The Company has not experienced any credit losses on derivatives during the thirty-nine week periods ended April 1, 2011 (Successor) and April 2, 2010 (Predecessor).
Prior to June 28, 2008, the Company designated its derivative instruments as cash flow hedges and recognized the derivative instruments as either assets or liabilities at fair value in the condensed consolidated balance sheets. To the extent that the derivative instrument was effective as a cash flow hedge, the change in fair value of the derivative was deferred in other comprehensive income and reclassified to earnings once the forecasted transaction affected earnings. Any portion considered to be ineffective was immediately reported in earnings.
During the year ended July 3, 2009, the Company removed the cash flow hedge designation of its derivative instruments due to a refinancing of the underlying debt which caused the critical terms of the hedged item and hedging instruments to no longer match. Upon removal of the cash flow hedge designation, prospective changes in fair value associated with the derivative instruments are recognized directly in earnings and amounts residing in other comprehensive income related to the previously cash flow designated hedge are reclassified to earnings once the forecasted transaction affects earnings.
The Company has entered into interest rate swaps that matured, or will mature, at various dates in calendar years 2010 and 2011. These swaps serve to convert an original notional amount of $37,500 of variable-rate debt to fixed-rate debt. As of April 1, 2011 and July 2, 2010, the outstanding notional amount was $22,600 and $27,000, respectively.
Information related to the fair value of derivative instruments and their location in the unaudited condensed consolidated balance sheet is presented below:
|
|
|
|
Successor |
|
Successor |
| ||
Derivatives Not Designated |
|
Balance Sheet |
|
Fair Value as of |
|
Fair Value as of |
| ||
as Hedging Instruments |
|
Location |
|
April 1, 2011 |
|
July 2, 2010 |
| ||
|
|
|
|
|
|
|
| ||
Interest rate swaps |
|
Other current liabilities |
|
$ |
170 |
|
$ |
631 |
|
|
|
|
|
|
|
|
| ||
Total |
|
|
|
$ |
170 |
|
$ |
631 |
|
Information related to the amounts recognized for derivatives and their location in the unaudited condensed consolidated statements of operations for the thirteen week periods ended April 1, 2011 (Successor) and April 2, 2010 (Predecessor) are presented below:
|
|
|
|
Amount of Loss Reclassified |
|
Amount of Loss Recognized |
|
Total Loss Recognized |
| ||||||||||||
|
|
|
|
Thirteen weeks ended |
|
Thirteen weeks ended |
|
Thirteen weeks ended |
| ||||||||||||
Derivatives Not Designated |
|
Statement of Operations |
|
April 1, |
|
April 2, |
|
April 1, |
|
April 2, |
|
April 1, |
|
April 2, |
| ||||||
Interest rate swaps |
|
Change in fair value and net loss on interest rate swap agreements |
|
$ |
|
|
$ |
(64 |
) |
$ |
(5 |
) |
$ |
(152 |
) |
$ |
(5 |
) |
$ |
(216 |
) |
(1) Represents reclassification from AOCI that results from the hedging instruments previous designation as a cash flow hedge.
Information related to the amounts recognized for derivatives and their location in the unaudited consolidated statements of operations for the thirty-nine week periods ended April 1, 2011 (Successor) and April 2, 2010 (Predecessor) are presented below:
|
|
|
|
Amount of Loss Reclassified |
|
Amount of Loss Recognized |
|
Total Loss Recognized |
| ||||||||||||
|
|
|
|
Thirty-nine weeks ended |
|
Thirty-nine weeks ended |
|
Thirty-nine weeks ended |
| ||||||||||||
Derivatives Not Designated |
|
Statement of Operations |
|
April 1, |
|
April 2, |
|
April 1, |
|
April 2, |
|
April 1, |
|
April 2, |
| ||||||
Interest rate swaps |
|
Change in fair value and net loss on interest rate swap agreements |
|
$ |
|
|
$ |
(243 |
) |
$ |
(81 |
) |
$ |
(422 |
) |
$ |
(81 |
) |
$ |
(665 |
) |
(1) Represents reclassification from AOCI that results from the hedging instruments previous designation as a cash flow hedge.
As of July 2, 2010, the Company had reclassified all amounts recorded in other comprehensive income into other expense.
10. EQUITY-BASED COMPENSATION
For a detailed description of past equity-based compensation activity, please refer to the Companys Annual Report on Form 10-K for the fiscal year ended July 2, 2010. There have been no significant changes in the Companys equity-based compensation accounting policies and assumptions from those that were disclosed in the Companys Annual Report on Form 10-K for the fiscal year ended July 2, 2010.
The Company recorded equity-based compensation expense with respect to (a) grants of legacy interest in DynaVox Holdings, (b) options to purchase shares of the Companys Class A common stock (Successor Options) and (c) restricted stock awards (Successor RSAs) as follows:
|
|
Thirteen Weeks Ended |
| ||||||||||||||||||||||||||||
|
|
April 1, 2011 |
|
April 2, 2010 |
| ||||||||||||||||||||||||||
|
|
Successor |
|
Predecessor |
| ||||||||||||||||||||||||||
|
|
Cost of |
|
Selling and |
|
Research and |
|
General and |
|
Total |
|
Cost of |
|
Selling and |
|
Research and |
|
General and |
|
Total |
| ||||||||||
Legacy interest in DynaVox Holdings |
|
$ |
|
|
$ |
7 |
|
$ |
3 |
|
$ |
7 |
|
$ |
17 |
|
$ |
|
|
$ |
85 |
|
$ |
17 |
|
$ |
137 |
|
$ |
239 |
|
Successor Options |
|
4 |
|
40 |
|
63 |
|
385 |
|
492 |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Successor RSAs |
|
|
|
|
|
|
|
16 |
|
16 |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Total |
|
$ |
4 |
|
$ |
47 |
|
$ |
66 |
|
$ |
408 |
|
$ |
525 |
|
$ |
|
|
$ |
85 |
|
$ |
17 |
|
$ |
137 |
|
$ |
239 |
|
|
|
Thirty-nine Weeks Ended |
| ||||||||||||||||||||||||||||
|
|
April 1, 2011 |
|
April 2, 2010 |
| ||||||||||||||||||||||||||
|
|
Successor |
|
Predecessor |
| ||||||||||||||||||||||||||
|
|
Cost of |
|
Selling and |
|
Research and |
|
General and |
|
Total |
|
Cost of |
|
Selling and |
|
Research and |
|
General and |
|
Total |
| ||||||||||
Legacy interest in DynaVox Holdings |
|
$ |
|
|
$ |
26 |
|
$ |
10 |
|
$ |
23 |
|
$ |
59 |
|
$ |
|
|
$ |
237 |
|
$ |
61 |
|
$ |
275 |
|
$ |
573 |
|
Successor Options |
|
12 |
|
114 |
|
194 |
|
1,150 |
|
1,470 |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Successor RSAs |
|
|
|
|
|
|
|
55 |
|
55 |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Total |
|
$ |
12 |
|
$ |
140 |
|
$ |
204 |
|
$ |
1,228 |
|
$ |
1,584 |
|
$ |
|
|
$ |
237 |
|
$ |
61 |
|
$ |
275 |
|
$ |
573 |
|
A summary of the Companys Successor stock option activity under the 2010 Long-Term Incentive Plan (2010 Plan) for the thirty-nine weeks ended April 1, 2011 is as follows:
|
|
Options |
|
Range of |
|
Weighted-Average |
|
Weighted-Average |
|
Aggregate |
| |||
|
|
|
|
|
|
|
|
|
|
(in thousands) |
| |||
OutstandingJuly 2, 2010 |
|
1,370,500 |
|
$ |
15.00 |
|
$ |
15.00 |
|
9.8 |
|
$ |
365 |
|
Granted |
|
42,500 |
|
4.10-9.45 |
|
6.50 |
|
|
|
|
| |||
Exercised |
|
|
|
|
|
|
|
|
|
|
| |||
Cancelled |
|
(29,000 |
) |
9.45-15.00 |
|
|
|
|
|
|
| |||
OutstandingApril 1, 2011 |
|
1,384,000 |
|
$ |
4.10-$15.00 |
|
$ |
14.75 |
|
9.1 |
|
$ |
25 |
|
Exercisable at April 1, 2011 |
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of stock options granted during the thirty-nine weeks ended April 1, 2011 was $3.84 per share.
The fair value of the stock options issued under the 2010 Plan was estimated based on the closing market price of the Companys common stock on the date of grant using a Black-Scholes option valuation model with the following assumptions:
|
|
Thirty-nine Weeks |
|
|
|
April 1, 2011 |
|
Black-Scholes Option Valuation Assumptions: |
|
|
|
Dividend yield(1) |
|
0 |
% |
Expected volatility(2) |
|
47.4-84.0 |
% |
Risk-free interest rates(3) |
|
2.0-3.0 |
% |
Expected term of options(4) |
|
6.4 |
|
(1) The expected dividend yield was based on our expectation of not paying dividends on the Companys Class A common stock for the foreseeable future.
(2) The expected volatility was based on the historical volatility of the Companys Class A common stock.
(3) Based on the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of our stock options.
(4) Represents the period of time options are expected to be outstanding. The weighted-average expected term was determined using the simplified method for plain vanilla options as the Company lacks historical experience. The simplified method calculates the expected term as the average of the vesting term and original contractual term of the options.
As of April 1, 2011, there was $7,674 of unrecognized compensation expense related to nonvested stock option awards that is expected to be recognized over a weighted-average period of 3.9 years.
A summary of the Companys Successor restricted stock award activity under the 2010 Plan for the thirty-nine weeks ended April 1, 2011 is as follows:
|
|
Restricted |
|
Weighted - |
|
Weighted-Average |
|
Aggregate |
| ||
|
|
|
|
|
|
|
|
(in thousands) |
| ||
OutstandingJuly 2, 2010 |
|
8,335 |
|
$ |
15.00 |
|
1.8 |
|
$ |
127 |
|
Granted |
|
|
|
|
|
|
|
|
| ||
Vested |
|
|
|
|
|
|
|
|
| ||
Cancelled |
|
|
|
|
|
|
|
|
| ||
OutstandingApril 1, 2011 |
|
8,335 |
|
$ |
15.00 |
|
1.0 |
|
$ |
46 |
|
As of April 1, 2011, there was $65 of unrecognized compensation expense related to nonvested restricted share awards that is expected to be recognized over a weighted-average period of 1.0 years.
A summary of the changes in non-vested Holdings Units outstanding during the thirty-nine weeks ended April 1, 2011 is detailed in the following table below:
|
|
Number of |
|
Weighted-Average |
|
Aggregate |
| ||
|
|
|
|
|
|
(in thousands) |
| ||
Holdings Units: |
|
|
|
|
|
|
| ||
Nonvested units as of July 2, 2010 |
|
165,573 |
|
$ |
2.97 |
|
|
| |
Granted |
|
|
|
|
|
|
| ||
Vested |
|
(33,948 |
) |
3.57 |
|
|
| ||
Forfeited |
|
(35,455 |
) |
2.25 |
|
|
| ||
Redeemed |
|
|
|
|
|
|
| ||
Nonvested units as of April 1, 2011 |
|
96,170 |
|
$ |
3.02 |
|
$ |
7 |
|
Non-vested Holdings Units that were service-based retained their original vesting date and unrecognized compensation expense associated with them will be expensed according to the original schedule. As of April 1, 2011, there was $143 of unrecognized compensation expense related to non-vested Holdings Units that is expected to be recognized over a weighted-average vesting period of 2.8 years.
11. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per common share:
|
|
Successor |
| ||||
|
|
Thirteen Weeks |
|
Thirty-nine Weeks |
| ||
Numerator: |
|
|
|
|
| ||
Numerator for basic and diluted net income per Class A common share- net income attributable to DynaVox Inc. |
|
$ |
651 |
|
$ |
299 |
|
Denominator: |
|
|
|
|
| ||
Denominator for basic net income per Class A common share- weighted-average shares |
|
9,375,000 |
|
9,375,000 |
| ||
Effect of dilutive securities: |
|
|
|
|
| ||
Option equivalents |
|
|
|
|
| ||
Denominator for diluted net income per common share- adjusted weighted-average shares |
|
9,375,000 |
|
9,375,000 |
| ||
Basic net income attributable to DynaVox Inc. per Class A common share |
|
$ |
0.07 |
|
$ |
0.03 |
|
Diluted net income attributable to DynaVox Inc. per Class A common share |
|
$ |
0.07 |
|
$ |
0.03 |
|
Weighted-average shares of stock options and restricted stock, which were anti-dilutive and thus not included in the computation of weighted-average diluted common share amounts, were 1,383,894 and 8,335, respectively, for the thirteen week period presented and 1,387,429 and 8,335, respectively, for the thirty-nine week period presented. Earnings per share information is not applicable for reporting periods prior to the Successor period beginning April 28, 2010. The shares of Class B common stock do not share in the earnings or losses of DynaVox Inc. and are therefore not participating securities. Accordingly, basic and diluted net income per share of Class B common stock has not been presented.
12. COMMITMENTS AND OTHER CONTINGENCIES
From time to time, we may be involved in a variety of claims, lawsuits, investigations and proceedings relating to securities laws, product liability, patent infringement, contract disputes and other matters relating to various claims that arise in the normal course of our business. The results of litigation and claims cannot be predicted with certainty, and unfavorable resolutions are possible and could materially affect our results of operations, cash flows or financial position. In addition, regardless of the outcome, litigation could have an adverse impact on us because of defense costs, diversion of management resources and other factors.
On October 14, 2010, a purported class action lawsuit was filed in the United States District Court for the Western District of Pennsylvania against us, two of our officers, Edward L. Donnelly, Jr. and Kenneth D. Misch, and two of the underwriters in our IPO. The lawsuit sought unspecified damages on behalf of a putative class of persons who purchased our Class A common stock pursuant to our prospectus dated April 21, 2010, filed with the SEC in accordance with Rule 424(b) of the Securities Act on April 23, 2010. The complaint alleged that the defendants issued materially false and misleading statements in our prospectus in light of the Companys September 30, 2010 press release announcing it had experienced a softening of demand for both its speech generating devices and software products during the first quarter of its fiscal year 2011 which ended October 1, 2010. The press release also announced that as a result of the softening of demand operating results for the fiscal first quarter would not be consistent with historical performance or indicative of what management believes to be the Companys long-term future operating potential. On February 18, 2011, the plaintiffs voluntarily dismissed without prejudice the purported class action lawsuit as noted in the Form 8-K filed on February 23, 2011. The Notice of Voluntary Dismissal states that the lead plaintiff has determined not to proceed with this action and had not received any compensation or payments of any kind from the defendants.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with our condensed consolidated financial statements included elsewhere herein and our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended Juy 2, 2010. The financial information set forth and discussed below is unaudited, but in the opinion of management, reflects all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of such information. The Companys results of operations for a particular quarter may not be indicative of results expected during the other quarters or for the entire year. The following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those listed under the Forward-Looking Statements section above. These risks and uncertainties are described in more detail in our Annual Report on Form 10-K for the fiscal year ended July 2, 2010,as they may be updated by Quarterly Reports on Form 10-Q subsequently filed with the SEC, including by Item 1A. Risk Factors of this Report, and could cause our actual results to differ materially from any future performance suggested below.
We operate on a fiscal calendar that results in a given fiscal year consisting of a 52-week or 53-week period ending on the Friday closest to June 30th of each year. For example, references to fiscal year 2011 refer to the 52-week period ending on July 1, 2011. Fiscal year 2011 and fiscal year 2010 each consists of 52-week periods.
Overview
We develop and market industry-leading software, devices and content to assist people in overcoming their speech, language or learning disabilities. Our proprietary software is the result of decades of research and development. We believe our trademark- and copyright-protected symbol sets are more widely used than any other in our industry. These assets have positioned us as a leader in two areas within the broader market for assistive technologiesspeech generating technologies and special education software.
Sales of our speech generating technologies is our largest source of revenue. In fiscal years 2010, 2009 and 2008, sales of speech generating technologies produced approximately 79%, 82% and 79%, respectively, of our net sales. Our revenue from sales of speech generating technologies grew to $90.0 million in fiscal year 2010 from $64.6 million in fiscal year 2008. We believe a primary driver of our sales of speech generating technologies has been, and will continue to be, the scale and effectiveness of our sales and marketing infrastructure and other awareness-building activities. The pricing levels at which third party payors, including Medicare, Medicaid and private insurers, are willing to provide coverage for speech generating technology also significantly influences our sales of speech generating technologies because a significant portion of the speech generating devices that we sell are funded by such third-party payors.
Our other source of revenue is sales of special education software. In fiscal years 2010, 2009 and 2008, sales of special education software produced approximately 21%, 18% and 21%, respectively, of our net sales. Our software products are generally purchased by special education teachers and are generally funded by schools, which receive funding from federal, state and local sources. The level of funding available for special education and educational technology is an important driver of our software sales. Currently, revenue from sales of our software products is generated primarily from up-front fees that we collect on the initial sale of our authoring tools. In August 2010, we introduced the next generation of our special education software, which we anticipate will be adopted by our existing customer base as well as new users. This new generation of our software products will allow us to diversify our revenue sources to include licensing fees and sales of professionally-generated content for use with our software platforms.
As we previously disclosed, we experienced a softening of demand for both our speech generating devices and software products during the first quarter of our fiscal year 2011. This softening of demand relative to our prior year continued during the second quarter of fiscal year 2011 as net sales for the twenty-six weeks ended December 31, 2010 declined 10.9% compared to the same period of the prior fiscal year. Net sales for our fiscal year 2011 third quarter, which ended April 1, 2011, increased 1.0% compared to the third quarter of fiscal year 2010. We continue to believe that reduced domestic government funding, and particularly more constrained state and local government funding of school budgets, is adversely affecting our product sales in the United States. In addition, we believe that constraints in government spending in the Companys key international markets, including Canada and the United Kingdom, have had a similar effect on our product sales in those regions. The adverse impact of these factors on our net sales generation has been more significant than initially anticipated. Although there were some encouraging signs in the later part of the second quarter and during the third quarter of fiscal year 2011, we have not seen any material improvement in the demand for both our speech generating devices and software products, and we cannot predict when such improvement might occur. Although we are not yet seeing evidence of a material improvement in the government funding environment, we are continuing to invest in our business and have launched new products into our target markets which we continue to believe are underpenetrated.
Our cost of sales as a percentage of net sales is influenced by the mix of our net sales between speech generating technologies and special education software, with the gross margin on our software sales being moderately higher.
Our primary operating expenses are selling and marketing, research and development and general and administrative.
Significant Transactions
Incorporation of DynaVox Inc.
DynaVox Inc. was incorporated as a Delaware corporation on December 16, 2009 for the purposes of facilitating an initial public offering of common equity. Following the recapitalization and IPO transactions described below, DynaVox Inc.s sole material asset is a controlling equity interest in DynaVox Systems Holdings LLC. As the sole managing member of DynaVox Systems Holdings LLC, DynaVox Inc. operates and controls all of the business and affairs of DynaVox Systems Holdings LLC and, through DynaVox Systems Holdings LLC and its subsidiaries, conducts our business. Prior to the initial public offering, DynaVox Inc. did not engage in any business or activities except in connection with its formation.
The certificate of incorporation of DynaVox Inc. authorizes two classes of common stock, Class A common stock and Class B common stock. On April 21, 2010, one or more shares of Class B common stock of DynaVox Inc. were distributed to each of our then-existing owners, each of which provides its owner with no economic rights but entitles the holder, without regard to the number of shares of Class B common stock held by such holder, to one vote on matters presented to stockholders of DynaVox Inc. for each Holdings Unit held by such holder. Holders of our Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.
Recapitalization Transactions
On April 21, 2010, the limited liability company agreement of DynaVox Systems Holdings LLC was amended and restated to, among other things, modify its capital structure by replacing the different classes of interests previously held by our then-existing owners with a single new class of units that we refer to as Holdings Units. We and our then-existing owners also entered into an exchange agreement under which (subject to the terms of the exchange agreement, as amended) they have the right to exchange their Holdings Units for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. As of April 1, 2011 there were 20,416,193 Holdings Units held by parties other than DynaVox Inc. which upon exercise of the right to exchange would exchange for 20,416,193 shares of Class A common stock.
Notwithstanding the foregoing, for so long as Holdings Unit holders other than DynaVox Inc. hold in excess of 25% of the outstanding Holdings Units (including Holdings Units held by DynaVox Inc.), Holdings Unit holders shall only be entitled to effect exchanges on the second Friday or last day of each fiscal month of DynaVox Inc. occurring following May 2, 2011, the date of the initial filing of the registration statement filed by DynaVox Inc. with the SEC to cover issuances of shares of Class A common stock upon exchange; provided that Holdings Unit holders may effect exchanges on a day that is not the second Friday or last day of a fiscal month of DynaVox Inc. during the one week period immediately following the effective date of such registration statement.
Initial Public Offering
On April 21, 2010, a registration statement relating to shares of Class A common stock was declared effective and the price of such shares was set at $15.00 per share. The IPO closed on April 27, 2010. Pursuant to the IPO, DynaVox Inc. issued and sold 9,375,000 shares of Class A common stock and acquired an equivalent number of Holdings Units.
Subsequent to the IPO and related offering transactions DynaVox Inc. consolidates the financial results of DynaVox Systems Holdings LLC and its subsidiaries, and the ownership interest of the other members of DynaVox Systems Holdings LLC is reflected as a non-controlling interest in DynaVox Inc.s consolidated financial statements beginning April 28, 2010.
Tax Receivable Agreement
DynaVox Systems Holdings LLC intends to make an election under Section 754 of the Internal Revenue Code (the Code) effective for each taxable year in which an exchange of Holdings Units for shares of Class A common stock as described above occurs, which may result in an adjustment to the tax basis of the assets of DynaVox Systems Holdings LLC at the time of an exchange of Holdings Units. As a result of both the initial purchase of Holdings Units from our then-existing owners immediately prior to the IPO and these subsequent exchanges, DynaVox Inc. will become entitled to a proportionate share of the existing tax basis of the assets of DynaVox Systems Holdings LLC. In addition, the purchase of Holdings Units and subsequent exchanges are expected to result in increases in the tax basis of the assets of DynaVox Systems Holdings LLC that otherwise would not have been available. Both this proportionate share and these increases in tax basis may reduce the amount of tax that DynaVox Inc. would otherwise be required to pay in the future. These increases in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
In connection with the IPO, we entered into a tax receivable agreement with our then-existing owners that provides for the payment from time to time by DynaVox Inc. to our then-existing owners of 85% of the amount of the benefits, if any, that DynaVox Inc. is deemed to realize as a result of (i) the existing tax basis in the intangible assets of DynaVox Holdings on the date of the IPO, (ii) an increase in the tax basis of the assets of DynaVox Holdings that otherwise would not have been available and (iii) certain other tax benefits related to our entering into the tax receivable agreement, including tax benefits attributable to payments
under the tax receivable agreement. These payment obligations are obligations of DynaVox Inc. and not of DynaVox Holdings. For purposes of the tax receivable agreement, the benefit deemed realized by DynaVox Inc. will be computed by comparing the actual income tax liability of DynaVox Inc. (calculated with certain assumptions) to the amount of such taxes that DynaVox Inc. would have been required to pay had there been no increase to the tax basis of the assets of DynaVox Holdings as a result of the purchase or exchanges, had there been no tax benefit from the tax basis in the intangible assets of DynaVox Holdings on the date of the IPO and had DynaVox Inc. not entered into the tax receivable agreement. The term of the tax receivable agreement will continue until all such tax benefits have been utilized or expired, unless DynaVox Inc. exercises its right to terminate the tax receivable agreement for an amount based on the agreed payments remaining to be made under the agreement or DynaVox Inc. breaches any of its material obligations under the tax receivable agreement, in which case all obligations will generally be accelerated and due as if DynaVox Inc. had exercised its right to terminate the agreement.
For a complete discussion of the tax receivable agreement see Item 13. Certain Relationships and Related Transactions, and Director Independence in our Annual Report on Form 10-K for the fiscal year ended July 2, 2010.
Predecessor and Successor Periods
DynaVox Inc. completed an initial public offering on April 27, 2010. As a result of the IPO and certain other recapitalization transactions, DynaVox Inc. became the sole managing member of, and has a controlling interest in, DynaVox Systems Holdings LLC and its subsidiaries (DynaVox Holdings or Predecessor). References to Successor refer to DynaVox Inc. and its consolidated subsidiaries.
The results of operations and following discussion present income statement line items down to income before non-controlling interest and income taxes. We also present a separate explanatory discussion on the Predecessor operating performance for the thirteen and thirty-nine week periods ended April 2, 2010 and for the Successor operating performance for the thirteen and thirty-nine week periods ended April 1, 2011.
Components of Results of Operations
Net Sales
Our sales are recorded net of product returns and an allowance for discounts and adjustments at the time of the sale based upon contractual arrangements with insurance companies, Medicare allowable billing rates and state Medicaid rates. Our net sales are derived from the sales of speech generating devices and special education software and content. The following table summarizes our net sales by product categories for the periods indicated both in dollars and as a percentage of net sales:
|
|
Successor |
|
Predecessor |
|
Successor |
|
Predecessor |
| ||||
|
|
Thirteen weeks ended |
|
Thirty-nine weeks ended |
| ||||||||
|
|
April 1, |
|
April 2, |
|
April 1, |
|
April 2, |
| ||||
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
|
|
(Amounts in thousands) |
| ||||||||||
Net sales |
|
|
|
|
|
|
|
|
| ||||
Speech generating devices |
|
$ |
22,707 |
|
$ |
22,419 |
|
$ |
60,700 |
|
$ |
63,139 |
|
Special education software |
|
5,961 |
|
5,963 |
|
15,063 |
|
18,106 |
| ||||
|
|
$ |
28,668 |
|
$ |
28,382 |
|
$ |
75,763 |
|
$ |
81,245 |
|
|
|
|
|
|
|
|
|
|
| ||||
Percentage of net sales |
|
|
|
|
|
|
|
|
| ||||
Speech generating devices |
|
79.2 |
% |
79.0 |
% |
80.1 |
% |
77.7 |
% | ||||
Special education software |
|
20.8 |
% |
21.0 |
% |
19.9 |
% |
22.3 |
% | ||||
|
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
A majority of our net sales for devices are generated by our direct sales efforts for products that are shipped to clients and billed to Medicare (national), Medicaid (local) and private insurance companies as well as products that are shipped and directly billed to school districts, evaluation centers and Department of Veterans Affairs centers.
Our business is seasonal and historically has realized a higher portion of net sales, net income and operating cash flows in the second half of the fiscal year and especially in the fourth fiscal quarter (second calendar quarter). In our fiscal year ended July 2, 2010, 29% of our net sales occurred in the 13-week fourth quarter period compared to 33% of our net sales occurring in the 14-week fourth quarter period of our fiscal year 2009. In our fiscal year ended July 2, 2010, 54% of our net sales occurred in the 26-week second half period of our fiscal year compared to 57% of our net sales occurring in the 27-week second half period of our fiscal year 2009. Sales of our speech generating technologies and of our special education software are highly seasonal as schools make a large percentage of their purchases of these products at the end of the school year, which is the second quarter of the calendar year and the fourth quarter of our fiscal year.
Cost of Sales
Cost of sales includes the direct labor and indirect costs of the final assembly operations performed at our facility in Pittsburgh, the cost of the component materials used in the final assembly, quality control testing, certain royalties, the distribution costs of our special education software center and other third-party costs. Our cost of sales is substantially higher in higher volume quarters, generally increasing as net sales increase. Changes in the mix of our products, such as changes in the proportion of synthesized to digitized devices or the proportion of sales of speech generating devices to special education software may also impact our overall cost of sales. We review our inventory levels on an ongoing basis in order to identify potentially obsolete products and record any adjustments to our reserve as a component of cost of sales.
Operating Expenses
Selling and Marketing. Selling and marketing expenses consist primarily of salaries, commissions, benefits and other personnel related expenses for employees engaged in field sales, front-end technical support to assist the sales process, sales operations (order authorization, processing and billing), marketing and external advertising and promotion. While some of these expenses vary proportionally with net sales, such as commissions, the majority of these expenses do not. As a result, selling and marketing expense as a percentage of net sales is usually higher in lower volume quarters and lower in higher volume quarters.
Research and Development. Our research and development expenses consist primarily of compensation of employees associated with the development, design and testing of new products, product enhancements and new applications for our existing products. We expense all of our research and development costs as they are incurred. Certain patent technology costs are capitalized using an estimated useful life of 10 years.
General and Administrative. General and administrative expenses consist primarily of salaries, benefits and other personnel related expenses for employees engaged in finance, legal, human resources and executive management. Other costs include outside legal and accounting fees, investor relations, risk management (insurance) and other administrative costs.
Amortization of Certain Intangible Assets. We have finite-lived intangible assets composed of non-compete agreements, acquired software technology, patent technology, trade names, and acquired backlog which are amortized on a straight-line basis over their estimated useful lives. Non-competition agreements are amortized over six years, acquired software technology is amortized over three to ten years, patent technology is amortized over 10 years, trade names are amortized over three years, and acquired backlog was amortized over a six-month period. Amortization related to acquired software technology and trade names is included in cost of sales. Amortization of non-competition agreements and acquired backlog is included in operating expenses.
Equity-Based Compensation
We estimate the grant date fair value of stock options for our Class A common stock using the Black-Scholes valuation model. Significant assumptions we use in the model are: (i) an expected dividend yield of 0% based on our expectation of not paying dividends for the foreseeable future; (ii) the expected volatility based on the historical volatility of our Class A common stock; (iii) a risk-free interest rate based on the U.S, Treasury yield curve in effect at the time of the grant; and (iv) a weighted-average expected term using the simplified method. The simplified method calculates the expected term as the average of the vesting term and original contractual term of the options.
Interest Expense
Interest expense consists primarily of interest on borrowings under our existing and previous credit facilities and the previous senior subordinated notes. We issued the senior subordinated notes in the amount of $31.0 million in June of 2008 to fund the repurchase of all of the Holdings Units held by a related party. In April 2010 we repaid the senior subordinated notes with a portion of the proceeds from the IPO. If this repayment had occurred at the beginning of fiscal year 2010, interest expense for the thirteen weeks and thirty-nine weeks ended April 2, 2010 would have decreased by approximately $1.2 million and $3.5 million, respectively.
Income Taxes
Prior to April 28, 2010, the Company had not been subject to U.S. federal income taxes and most applicable state and local income taxes as the Predecessor entity is a limited liability company. As a partnership, the taxable income or loss is passed through to and included in the tax returns of our members. Accordingly, the accompanying condensed consolidated financial statements prior to April 28, 2010 do not include a provision for federal and most state and local income taxes. However, we generally made distributions to our members, per the terms of our limited liability company agreement, related to such taxes. We are subject to entity level taxation in certain states, and certain domestic and foreign subsidiaries are subject to entity level U.S. and foreign income taxes. As a result, the accompanying condensed consolidated statements of income prior to April 28, 2010 include tax expense related to those states and to U.S. and foreign jurisdictions where those subsidiaries operate. Subsequent to April 28, 2010 DynaVox Inc. became subject to U.S. federal, state, local and foreign income taxes with respect to its allocable share of any taxable income of DynaVox Systems Holdings LLC and is taxed at the prevailing corporate tax rates.
Adjusted EBITDA
Adjusted EBITDA represents income before income taxes, interest income, interest expense, impairment loss, depreciation, amortization and other adjustments noted in the table below. We present Adjusted EBITDA because:
· Adjusted EBITDA is used by management in managing our business as an indicator of our operating performance;
· our compliance with certain covenants in our credit agreement is measured based on Adjusted EBITDA; and
· targets for Adjusted EBITDA are among the measures we use to evaluate our managements performance for purposes of determining their compensation under our management incentive bonus plan.
Our management uses Adjusted EBITDA principally as a measure of our operating performance and believes that Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in industries similar to ours. We also believe Adjusted EBITDA is useful to our management and investors as a measure of comparative operating performance from period to period. Our management also uses Adjusted EBITDA for planning purposes, including the preparation of our annual operating budget and financial projections. Adjusted EBITDA, however, does not represent and should not be considered as an alternative to net income or cash flow from operating activities, as determined in accordance with GAAP, and our calculations thereof may not be comparable to similarly entitled measures reported by other companies. Although we use Adjusted EBITDA as a measure to assess the operating performance of our business, Adjusted EBITDA has significant limitations as an analytical tool because it excludes certain material costs. For example, it does not include interest expense or the change in fair value on our related interest rate swap agreements, which have been necessary elements of our costs. Because we use capital assets, depreciation expense is a necessary element of our costs and ability to generate revenue. In addition, the omission of the substantial amortization expense associated with our intangible assets or any impairment loss further limits the usefulness of this measure. Adjusted EBITDA also does not include the payment of taxes, which is also a necessary element of our operations. Adjusted EBITDA also does not include expenses incurred in connection with equity-based compensation to our employees, certain costs relating to restructuring and acquisitions, debt refinancing fees and management fees that we have historically paid to Vestar and certain other existing owners pursuant to a management agreement. In connection with the IPO, the management agreement with Vestar and certain other pre-IPO owners was terminated. Because Adjusted EBITDA does not account for these expenses, its utility as a measure of our operating performance has material limitations. Because of these limitations, management does not view Adjusted EBITDA in isolation or as a primary performance measure and also uses other measures, such as net income, net sales, gross profit and income from operations, to measure operating performance.
Non-Controlling Interest
The Company, as a result of the IPO and the related transactions, became the sole managing member of, and has a controlling equity interest in, DynaVox Holdings. As the sole managing member of DynaVox Holdings, the Company operates and controls all of the business and affairs of DynaVox Holdings and, through DynaVox Holdings and its subsidiaries, conducts our business. As of April 28, 2010, the Company consolidates the financial results of DynaVox Holdings and its subsidiaries, and records non-controlling interest for the economic interest in the Company held by the non-controlling unitholders. Non-controlling interest on the statement of operations represents the portion of earnings or loss attributable to the economic interest in the Company held by the non-controlling unitholders. Non-controlling interest on the balance sheet represents the portion of net assets of the Company attributable to the non-controlling unitholders, based on the portion of the Holdings Units owned by such unitholders. The non-controlling interest ownership percentage as of April 1, 2011 is calculated as follows:
|
|
Non- |
|
DynaVox |
|
Total* |
|
April 1, 2011 |
|
20,416,193 |
|
9,383,335 |
|
29,799,528 |
|
|
|
68.5 |
% |
31.5 |
% |
100.0 |
% |
* Assumes all of the holders of Holdings Units exchange their Holdings Units for shares of the Corporations Class A common stock on a one-for-one basis
Results of Operations
The following table summarizes key components of our results of operations for the periods indicated:
|
|
Successor |
|
Predecessor |
|
Successor |
|
Predecessor |
| ||||||||||||
|
|
Thirteen weeks ended |
|
Thirty-nine weeks ended |
| ||||||||||||||||
|
|
April 1, |
|
% of Net |
|
April 2, |
|
% of Net |
|
April 1, |
|
% of Net |
|
April 2, |
|
% of Net |
| ||||
|
|
(unaudited) |
| ||||||||||||||||||
|
|
(Dollar in thousands) |
| ||||||||||||||||||
Net sales |
|
$ |
28,668 |
|
100.0 |
% |
$ |
28,382 |
|
100.0 |
% |
$ |
75,763 |
|
100.0 |
% |
$ |
81,245 |
|
100.0 |
% |
Costs of goods sold |
|
8,726 |
|
30.4 |
% |
6,881 |
|
24.2 |
% |
22,547 |
|
29.8 |
% |
20,030 |
|
24.7 |
% | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Gross profit |
|
19,942 |
|
69.6 |
% |
21,501 |
|
75.8 |
% |
53,216 |
|
70.2 |
% |
61,215 |
|
75.3 |
% | ||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Selling and marketing |
|
8,296 |
|
28.9 |
% |
8,955 |
|
31.6 |
% |
25,780 |
|
34.0 |
% |
26,490 |
|
32.6 |
% | ||||
Research and development |
|
2,344 |
|
8.2 |
% |
2,641 |
|
9.3 |
% |
7,236 |
|
9.6 |
% |
7,223 |
|
8.9 |
% | ||||
General and administrative |
|
4,350 |
|
15.2 |
% |
4,527 |
|
16.0 |
% |
14,114 |
|
18.6 |
% |
11,311 |
|
13.9 |
% | ||||
Amortization of intangibles |
|
112 |
|
0.4 |
% |
121 |
|
0.4 |
% |
334 |
|
0.4 |
% |
962 |
|
1.2 |
% | ||||
Impairment loss |
|
1,018 |
|
3.6 |
% |
|
|
0.0 |
% |
1,018 |
|
1.3 |
% |
|
|
0.0 |
% | ||||
Total operating expenses |
|
16,120 |
|
56.2 |
% |
16,244 |
|
57.2 |
% |
48,482 |
|
64.0 |
% |
45,986 |
|
56.6 |
% | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income from operations |
|
3,822 |
|
13.3 |
% |
5,257 |
|
18.5 |
% |
4,734 |
|
6.2 |
% |
15,229 |
|
18.7 |
% | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest income |
|
17 |
|
0.1 |
% |
7 |
|
0.0 |
% |
30 |
|
0.0 |
% |
38 |
|
0.0 |
% | ||||
Interest expense, net |
|
(668 |
) |
-2.3 |
% |
(1,908 |
) |
-6.7 |
% |
(2,014 |
) |
-2.7 |
% |
(5,838 |
) |
-7.2 |
% | ||||
Change in fair value and net loss on interest rate swap agreements |
|
(5 |
) |
0.0 |
% |
(216 |
) |
-0.8 |
% |
(81 |
) |
-0.1 |
% |
(665 |
) |
-0.8 |
% | ||||
Other expense net |
|
(34 |
) |
-0.1 |
% |
(10 |
) |
0.0 |
% |
(269 |
) |
-0.4 |
% |
(84 |
) |
-0.1 |
% | ||||
Total other expense |
|
(690 |
) |
-2.4 |
% |
(2,127 |
) |
-7.5 |
% |
(2,334 |
) |
-3.1 |
% |
(6,549 |
) |
-8.1 |
% | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income before income taxes |
|
$ |
3,132 |
|
10.9 |
% |
$ |
3,130 |
|
11.0 |
% |
$ |
2,400 |
|
3.2 |
% |
$ |
8,680 |
|
10.7 |
% |
|
|
Successor |
|
Predecessor |
|
Successor |
|
Predecessor |
| ||||
|
|
Thirteen Weeks Ended |
|
Thirty-nine Weeks Ended |
| ||||||||
|
|
April 1, |
|
April 2, |
|
April 1, |
|
April 2, |
| ||||
|
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
| ||||
|
|
(Amounts in thousands) |
| ||||||||||
Other Financial Data |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Adjusted EBITDA (1) |
|
$ |
6,522 |
|
$ |
7,576 |
|
$ |
11,215 |
|
$ |
20,803 |
|
(1) Adjusted EBITDA represents income before income taxes, interest income, interest expense, impairment loss, depreciation, amortization and the other adjustments noted in the table below.
|
|
Adjusted EBITDA Reconciliation |
| ||||||||||
|
|
Successor |
|
Predecessor |
|
Successor |
|
Predecessor |
| ||||
|
|
Thirteen Weeks Ended |
|
Thirty-nine Weeks Ended |
| ||||||||
|
|
April 1, |
|
April 2, |
|
April 1, |
|
April 2, |
| ||||
|
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
| ||||
|
|
(Amounts in thousands) |
| ||||||||||
Income before income taxes |
|
$ |
3,132 |
|
$ |
3,130 |
|
$ |
2,400 |
|
$ |
8,680 |
|
Depreciation |
|
880 |
|
724 |
|
2,543 |
|
2,147 |
| ||||
Amortization |
|
231 |
|
242 |
|
694 |
|
1,192 |
| ||||
Interest income |
|
(17 |
) |
(7 |
) |
(30 |
) |
(38 |
) | ||||
Interest expense |
|
668 |
|
1,908 |
|
2,014 |
|
5,838 |
| ||||
Change in fair value and net loss on interest rate swaps |
|
5 |
|
216 |
|
81 |
|
665 |
| ||||
Other (income) expense, net (a) |
|
24 |
|
(3 |
) |
225 |
|
|
| ||||
Equity-based compensation |
|
525 |
|
239 |
|
1,584 |
|
573 |
| ||||
Employee severance and other costs |
|
64 |
|
463 |
|
308 |
|
621 |
| ||||
Acquisition costs (b) |
|
(80 |
) |
34 |
|
161 |
|
345 |
| ||||
Management fee (c) |
|
|
|
75 |
|
|
|
225 |
| ||||
Impairment loss |
|
1,018 |
|
|
|
1,018 |
|
|
| ||||
Other adjustments (d) |
|
72 |
|
555 |
|
217 |
|
555 |
| ||||
Adjusted EBITDA |
|
$ |
6,522 |
|
$ |
7,576 |
|
$ |
11,215 |
|
$ |
20,803 |
|
(a) Excludes realized foreign currency gains or losses.
(b) Legal, accounting and other external costs related to the purchase of certain assets and liabilities of Blink-Twice Inc. and the purchase of Eye Response Technologies, Inc. including certain post-closing expenses which may be reimbursed to the Company at a later date under the terms of the applicable agreements.
(c) Prior to April 21, 2010, we received advisory services from Vestar and certain pre-IPO owners. These arrangements concluded on April 21, 2010.
(d) Includes certain amounts related to other taxes, executive recruiting fees, relocation and other costs.
Successor Period from January 1, 2011 to April 1, 2011
Net Sales
Net sales were $28.7 million for the Successor period from January 1, 2011 to April 1, 2011. The $28.7 million of net sales were comprised of $22.7 million of speech generating devices and $6.0 million of software sales.
Gross Profit
Gross profit was $19.9 million, or 69.6% of net sales, in the Successor period from January 1, 2011 to April 1, 2011.
Operating Expenses
Operating expenses for the Successor period from January 1, 2011 to April 1, 2011 were $16.1 million and consisted primarily of selling and marketing expenses of $8.3 million, research and development expenses of $2.3 million, general and administrative expenses of $4.4 million and a $1.0 million impairment loss. Operating expenses during the Successor period from January 1, 2011 to April 1, 2011 also included $0.1 million of amortization of certain intangible assets.
Income From Operations
Income from operations was $3.8 million for the Successor period from January 1, 2011 to April 1, 2011 as a result of the items described above, as well as the impairment loss of 1.0 million.
Interest Expense
Interest expense was $0.7 million for the Successor period from January 1, 2011 to April 1, 2011 primarily as a result of interest on borrowings under our 2008 Credit Facility. Outstanding debt under the 2008 Credit Facility as of April 1, 2011 was $42.2 million.
Income Before Income Taxes
Income before income taxes was $3.1 million, or 10.9% of net sales, for the Successor period from January 1, 2011 to April 1, 2011 due to the reasons discussed above.
Adjusted EBITDA
Adjusted EBITDA was $6.5 million for the Successor period from January 1, 2011 to April 1, 2011. The Adjusted EBITDA measure presented consists of income before income taxes, interest income, interest expense, impairment loss, depreciation, amortization and the other adjustments noted in the table above.
Predecessor Period from January 2, 2010 to April 2, 2010
Net Sales
Net sales were $28.4 million for the Predecessor period from January 2, 2010 to April 2, 2010. The $28.4 million of net sales were comprised of $22.4 million of speech generating devices and $6.0 million of software sales.
Gross Profit
Gross profit was $21.5 million, or 75.8% of net sales, in the Predecessor period from January 2, 2010 to April 2, 2010.
Operating Expenses
Operating expenses for the Predecessor period from January 2, 2010 to April 2, 2010 were $16.2 million and consisted of selling and marketing expenses of $9.0 million, research and development expenses of $2.6 million, general and administrative expenses of $4.5 million and amortization of certain intangibles of $0.1 million.
Income From Operations
Income from operations was $5.3 million for the Predecessor period from January 2, 2010 to April 2, 2010 as a result of the items described above.
Interest Expense
Interest expense was $1.9 million for the Predecessor period from January 2, 2010 to April 2, 2010 primarily as a result of interest on borrowings under our 2008 Credit Facility and our 2008 Subordinated Note. Outstanding debt under the 2008 Credit Facility and the 2008 Subordinated Note as of April 2, 2010 was $78.1 million. We redeemed the $31.0 million 2008 Subordinated Note, which bore interest at 15.0%, in April 2010 with proceeds from the IPO.
Income Before Income Taxes
Income before income taxes was $3.1 million, or 11.0% of net sales, for the Predecessor period from January 2, 2010 to April 2, 2010 due to the reasons discussed above.
Adjusted EBITDA.
Adjusted EBITDA was $7.6 million for the Predecessor period from January 2, 2010 to April 2, 2010. The Adjusted EBITDA measure presented consists of income before income taxes, interest income, interest expense, impairment loss, depreciation, amortization and the other adjustments noted in the table above.
Successor Period from July 3, 2010 to April 1, 2011
Net Sales
Net sales were $75.8 million for the Successor period from July 3, 2010 to April 1, 2011. The $75.8 million of net sales were comprised of $60.7 million of speech generating devices and $15.1 million of software sales.
Gross Profit
Gross profit was $53.2 million, or 70.2% of net sales, in the Successor period from July 3, 2010 to April 1, 2011.
Operating Expenses
Operating expenses for the Successor period from July 3, 2010 to April 1, 2011 were $48.5 million and consisted primarily of selling and marketing expenses of $25.8 million, research and development expenses of $7.2 million, general and administrative expenses of $14.1 million and a $1.0 million impairment loss. Operating expenses during the Successor period from July 3, 2010 to April 1, 2011 also included $0.3 million of amortization of certain intangible assets.
Income From Operations
Income from operations was $4.7 million for the Successor period from July 3, 2010 to April 1, 2011 as a result of the items described above.
Interest Expense
Interest expense was $2.0 million for the Successor period from July 3, 2010 to April 1, 2011 primarily as a result of interest on borrowings under our 2008 Credit Facility. Outstanding debt under the 2008 Credit Facility as of April 1, 2011 was $42.2 million.
Income Before Income Taxes
Income before income taxes was $2.4 million, or 3.2% of net sales, for the Successor period from July 3, 2010 to April 1, 2011 due to the reasons discussed above.
Adjusted EBITDA
Adjusted EBITDA was $11.2 million for the Successor period from July 3, 2010 to April 1, 2011. The Adjusted EBITDA measure presented consists of income before income taxes, interest income, interest expense, impairment loss, depreciation, amortization and the other adjustments noted in the table above.
Predecessor Period from July 4, 2009 to April 2, 2010
Net Sales
Net sales were $81.2 million for the Predecessor period from July 4, 2009 to April 2, 2010. The $81.2 million of net sales were comprised of $63.1 million of speech generating devices and $18.1 million of software sales.
Gross Profit
Gross profit was $61.2 million, or75.3% of net sales, in the Predecessor period from July 4, 2009 to April 2, 2010.
Operating Expenses
Operating expenses for the Predecessor period from July 4, 2009 to April 2, 2010 were $46.0 million and consisted primarily of selling and marketing expenses of $26.5 million, research and development expenses of $7.2 million, general and administrative expenses of $11.3 million and amortization of certain intangibles of $1.0 million.
Income From Operations
Income from operations was $15.2 million for the Predecessor period from July 4, 2009 to April 2, 2010 as a result of the items described above.
Interest Expense
Interest expense was $5.8 million for the Predecessor period from July 4, 2009 to April 2, 2010 primarily as a result of interest on borrowings under our 2008 Credit Facility and our 2008 Subordinated Note. Outstanding debt under the 2008 Credit Facility and the 2008 Subordinated Note as of April 2, 2010 was $78.1 million. We redeemed the $31.0 million 2008 Subordinated Note, which bore interest at 15.0%, in April 2010 with proceeds from the IPO.
Income Before Income Taxes
Income before income taxes was $8.7 million, or 10.7% of net sales, for the Predecessor period from July 4, 2009 to April 2, 2010 due to the reasons discussed above.
Adjusted EBITDA
Adjusted EBITDA was $20.1 million for the Predecessor period from July 4, 2009 to April 2, 2010. The Adjusted EBITDA measure presented consists of income before income taxes, interest income, interest expense, impairment loss depreciation, amortization and the other adjustments noted in the table above.
Thirteen Week Period Ended April 1, 2011 Compared to the Thirteen Week Period Ended April 2, 2010
Net Sales
Net sales increased 1.0%, or $0.3 million, to $28.7 million for the thirteen week period ended April 1, 2011 from $28.4 million for the thirteen week period ended April 2, 2010. The increase in device sales was 1.3%, or $0.3 million. Software sales for the thirteen week period ended April 1, 2011 were $6.0 million, or unchanged, compared to the thirteen week period ended April 2, 2010. We believe that reduced domestic government funding, and particularly more constrained state and local government funding of school budgets, adversely affected our sales growth in the United States during the thirteen weeks ended April 1, 2011 as compared to our historical performance. Device sales in the United States, which represents approximately 70% of our consolidated sales, increased 2.6% in the thirteen week period ended April 1, 2011 compared to the thirteen week period ended April 2, 2010. Device sales in the United States grew 7.7% in the third quarter of fiscal year 2011 compared to the second quarter of fiscal year 2011. We also believe that constraints in government spending in the Companys key international markets, including the United Kingdom, had an adverse effect on our product sales in those regions during the third quarter of our fiscal year 2011 compared to the third quarter of fiscal year 2010. Our international device sales comprise approximately 10% of our total device sales and decreased 8.2% in the third quarter of fiscal year 2011 compared to the same period of fiscal year 2010.The 8.2% decline for the third quarter of fiscal year 2011 compares to a decline of greater than 25% in both the first and second quarters of fiscal year 2011 when compared to the same period in the prior fiscal year. The thirteen week period ended April 2, 2010 includes $0.8 million of software sales to one international customer which did not recur in the thirteen week period ended April 1, 2011. Software sales in the United States increased 19.2% for the thirteen weeks ended April 1, 2011 compared to the thirteen weeks ended April 2, 2010.
Gross Profit
Gross profit decreased 7.3%, or $1.6 million, to $19.9 million for the thirteen week period ended April 1, 2011 from $21.5 million for the thirteen week period ended April 2, 2010. Gross margin decreased 620 basis points to 69.6% for the thirteen week period ended April 1, 2011 from 75.8% for the thirteen week period ended April 2, 2010. The $1.6 million decrease in gross profit was due mainly to a less favorable device product mix, slightly lower margin on software sales, reduced royalty revenue, and an inventory obsolescence charge of approximately $0.5 million primarily related to our Tango! product.
Operating Expenses
Selling and Marketing. Selling and marketing expenses decreased 7.4%, or $0.7 million, to $8.3 million for the thirteen week period ended April 1, 2011 from $9.0 million for the thirteen week period ended April 2, 2010. Variable compensation expense was $0.9 million lower in the thirteen week period ended April 1, 2011compared to the thirteen week period ended April 2, 2010. The decrease in variable compensation expense was partially offset by higher travel expense of $0.4 million. Selling and marketing expenses totaled 28.9% and 31.6% of net sales for the thirteen week periods ended April 1, 2011 and April 2, 2010, respectively.
Research and Development. Research and development expenses decreased 11.2%, or $0.3 million, to $2.3 million for the thirteen week period ended April 1, 2011 as compared to $2.6 million for the thirteen week period ended April 2, 2010. This was due primarily to lower variable compensation of $0.4 million and reduced consulting and prototype development costs of $0.2 million. These reductions were partially offset by higher headcount costs totaling $0.4 million as a result of our continued investment in research and development resources. Research and development expenses totaled 8.2% and 9.3% of net sales for the thirteen week periods ended April 1, 2011 and April 2, 2010, respectively.
General and Administrative. General and administrative expenses decreased 3.9%, or $0.2 million, to $4.3 million for the thirteen week period ended April 1, 2011 from $4.5 million for the thirteen week period ended April 2, 2010. Contributing to the decrease was $0.5 million of equity valuation cash compensation expense in the prior fiscal year third fiscal quarter, which did not recur during the current fiscal year third quarter, and lower severance expense of $0.5 million in the current fiscal year third quarter. Variable compensation expense was $0.4 million lower in the thirteen week period ended April 1, 2011 as compared to the thirteen week period ended April 2, 2010. Approximately $0.8 million of the net increase was attributable to costs associated with being a public company. We completed our IPO in April 2010. The $0.8 million includes $0.3 million of stock-based compensation. The remaining $0.5 million incremental increase included approximately $0.3 million of insurance, outside professional fees for such items as our outside independent accountants, attorneys, Sarbanes-Oxley compliance consultants and external tax consultants in addition to approximately $0.2 million of higher wage expense associated with the expansion of our finance, legal and human resources headcount. The net decrease in general and administrative expenses for the thirteen week period ended April 1, 2011, as compared to the thirteen week period ended April 2, 2010, also reflects higher bad debt expense of approximately $0.3 million. General and administrative expenses as a percentage of net sales were 15.2% and 16.0% for the thirteen week periods ended April 1, 2011 and April 2, 2010, respectively.
Amortization of Certain Intangibles. Amortization of certain intangibles was $0.1 million for the thirteen week period ended April 1, 2011 compared to $0.1 million for the thirteen week period ended April 2, 2010.
Impairment Loss. The Company routinely monitors device unit sales for its various product lines to assist management in determining when their respective long-lived assets and finite-lived intangible assets should be evaluated for impairment. During the third quarter of fiscal year 2011, the continuing unfavorable general economic conditions and trends in governmental spending throughout the Companys various markets, coupled with the recent Maestro product launch having an adverse impacts on its Tango! sales and a change in marketing strategy for Tango!, resulted in a downward revision to the Companys forecasted sales of two of the Companys product lines, EyeMax and Tango!. As a result, the Company determined that impairment indicators existed as of April 1, 2011. The Company conducted interim impairment testing of the long-lived assets and indefinite-lived intangible assets, related to these product lines, as of this date and determined that some impairment had occurred. The total impairment loss of $1.0 million included $0.7 million for indefinite-lived proprietary symbol sets, $0.1 million for other finite-lived intangible assets and $0.2 million for fixed assets associated with the Tango! product. The impairment loss was separately recorded on the Companys statement of operations for the thirteen week period ended April 1, 2011. No impairment loss was incurred during the thirteen week period ended April 2, 2010 of the prior year.
Income From Operations. Income from operations was $3.8 million for the thirteen week period ended April 1, 2011 compared to income from operations of $5.3 million for the same thirteen week period of the prior year. The change in income from operations was due to the reasons discussed above.
Interest Expense. Interest expense decreased $1.2 million to $0.7 million for the thirteen week period ended April 1, 2011 from $1.9 million for the thirteen week period ended April 2, 2010 primarily as a result of the Company redeeming a $31.0 million subordinated note, which bore interest at 15.0%, in April 2010 with proceeds from the IPO.
Adjusted EBITDA. Adjusted EBITDA decreased $1.1 million to $6.5 million for the thirteen week period ended April 1, 2011 compared to $7.6 million for the prior year thirteen week period ended April 2, 2010. The $1.1 million decrease in Adjusted EBITDA was primarily a result of the $1.8 million increase in cost of goods sold. Adjusted EBITDA represents income before income taxes, interest income, interest expense, impairment loss, depreciation, amortization and the other adjustments noted in the table above.
Thirty-nine Week Period Ended April 1, 2011 Compared to the Thirty-nine Week Period Ended April 2, 2010
Net Sales
Net sales decreased 6.7%, or $5.5 million, to $75.8 million for the thirty-nine week period ended April 1, 2011 from $81.2 million for the thirty-nine week period ended April 2, 2010. The decline in device sales was 3.9%, or $2.4 million. Software sales decreased 16.8%, or $3.0 million. We experienced a softening of demand for both our speech generating devices and software products during the thirty-nine week period ended April 1, 2011 compared to the thirty-nine week period ended April 2, 2010. We believe that reduced domestic government funding, and particularly more constrained state and local government funding of school budgets, adversely affected our product sales in the United States during the thirty-nine weeks ended April 1, 2011 as compared to the thirty-nine week period ended April 2, 2010. We also believe that constraints in government spending in the Companys key international markets, including Canada and the United Kingdom, had a similar effect on our product sales in those regions during the first thirty-nine weeks of our fiscal year 2011. The thirty-nine week period ended April 2, 2010 includes $1.6 million of software sales to one international customer which did not recur in the thirty-nine week period ended April 1, 2011.
Gross Profit
Gross profit decreased 13.1%, or $8.0 million, to $53.2 million for the thirty-nine week period ended April 1, 2011 from $61.2 million for the thirty-nine week period ended April 2, 2010. Gross margin decreased 510 basis points to 70.2% for the thirty-nine week period ended April 1, 2011 from 75.3% for the thirty-nine week period ended April 2, 2010. The $8.0 million decrease in gross profit was due mainly to $5.5 million less in net sales, a less favorable device product mix and an inventory obsolescence charge of $0.5 million related primarily to our Tango! product.
Operating Expenses
Selling and Marketing. Selling and marketing expenses decreased 2.7%, or $0.7 million, to $25.8 million for the thirty-nine week period ended April 1, 2011 as compared to $26.5 million for the thirty-nine week period ended April 2, 2010. The decrease was due primarily to the net effect of approximately $2.1 million of higher wages, recruiting costs and travel expense as a result of the continued investment in both direct marketing associates and the field sales organization and an additional $0.9 million of advertising, which were more than offset by $3.6 million of lower variable compensation. Selling and marketing expenses totaled 34.0% and 32.6% of net sales for the thirty-nine week periods ended April 1, 2011 and April 2, 2010, respectively.
Research and Development. Research and development expenses remained relatively constant at $7.2 million for the thirty-nine week period ended April 1, 2011 as compared to the thirty-nine week period ended April 2, 2010. This was due primarily to continued investment in research and development resources being offset by lower variable compensation expense. The incremental increase in research and development resources for the thirty-nine weeks ended April 1, 2011 was approximately $1.2 million and was offset by lower variable compensation expense of $1.3 million. Research and development expenses totaled 9.6% and 8.9% of net sales for the thirty-nine week periods ended April 1, 2011 and April 2, 2010, respectively.
General and Administrative. General and administrative expenses increased 24.8%, or $2.8 million, to $14.1 million for the thirty-nine week period ended April 1, 2011 from $11.3 million for the thirty-nine week period ended April 2, 2010. Approximately $3.1 million of the net increase was attributable to costs associated with being a public company. We completed our IPO in April 2010. The $3.1 million includes $0.9 million of stock-based compensation. The remaining $2.2 million incremental increase included approximately $1.6 million of insurance, outside professional fees for such items as our outside independent accountants, attorneys, Sarbanes-Oxley compliance consultants and external tax consultants, in addition to approximately $0.6 million of higher wage expense associated with the expansion of our finance, legal and human resource headcount. The thirty-nine week period ended April 1, 2011 reflects $0.6 million of higher bad debt expense as compared to the thirty-nine week period ended April 2, 2010. The increase in general and administrative expenses for the thirty-nine week period ended April 1, 2011, as compared to the thirty-nine week period ended April 2, 2010, also included higher costs of approximately $1.3 million for such items as staffing and professional fees and other ordinary expenses associated with the expansion of a business. The increases in the general and administrative expenses highlighted above were partially offset by $0.5 million of lower equity valuation cash compensation expense which occurred in the prior fiscal year thirty-nine week period, but which did not recur during the current fiscal year thirty-nine week period, and lower severance expense of $0.4 million in the current year period. Variable compensation expense was $1.3 million lower in the thirty-nine week period ended April 1, 2011 as compared to the thirty-nine week period ended April 2, 2010. General and administrative expenses as a percentage of net sales were 18.6% and 13.9% for the thirty-nine week periods ended April 1, 2011 and April 2, 2010, respectively.
Amortization of Certain Intangibles. Amortization of certain intangibles was $0.3 million for the thirty-nine week period ended April 1, 2011 compared to $1.0 million for the thirty-nine week period ended April 2, 2010. The $0.7 million net decrease was mainly the result of $0.6 million of amortization expense during the thirty-nine week period ended April 2, 2010 on one of the intangible assets acquired in the Blink-Twice Inc. acquisition compared to no amortization expense in the thirty-nine week period ended April 1, 2011 for this intangible asset as it had reached full amortization.
Impairment Loss. The Company routinely monitors device unit sales for its various product lines to assist management in determining when their respective long-lived assets and finite-lived intangible assets should be evaluated for impairment. During the third quarter of fiscal year 2011, the continuing unfavorable general economic conditions and trends in governmental spending throughout the Companys various markets, coupled with the recent Maestro product launch having an adverse impact on its Tango! sales and a change in marketing strategy for Tango!, resulted in a downward revision to the Companys forecasted sales of two of the Companys product lines, EyeMax and Tango!. As a result, the Company determined that impairment indicators existed as of April 1, 2011. The Company conducted interim impairment testing of the long-lived assets and indefinite-lived intangible assets, related to these product lines, as of this date and determined that some impairment had occurred. The total impairment loss of $1.0 million included $0.7 million for indefinite-lived proprietary symbol sets, $0.1 million for other finite-lived intangible assets and $0.2 million for fixed assets associated with the Tango! product. The impairment loss was separately recorded on the Companys statement of operations for the thirty-nine week period ended April 1, 2011. No impairment loss was incurred during the thirty-nine week period ended April 2, 2010 of the prior year.
Income From Operations. Income from operations was $4.7 million for the thirty-nine week period ended April 1, 2011 compared to income from operations of $15.2 million for the same thirty-nine week period of the prior year. The change in income from operations was due to the reasons discussed above.
Interest Expense. Interest expense decreased $3.8 million to $2.0 million for the thirty-nine week period ended April 1, 2011 from $5.8 million for the thirty-nine week period ended April 1, 2011 primarily as a result of the Company redeeming a $31.0 million subordinated note, which bore interest at 15.0%, in April 2010 with proceeds from the IPO. The decrease in interest expense also reflects $6.0 million of debt repayments made in the first thirty-nine weeks of fiscal year 2011.
Change in Fair Value and Net Gain (Loss) on Interest Rate Swap Agreements. For the thirty-nine week period ended April 1, 2011, there was a decrease of $0.6 million of expense to $0.1 million from $0.7 million for the thirty-nine week period ended April 2, 2010. The decrease is primarily attributable to a reduction in the notional amount from $28.0 million as of April 2, 2010 to $23.1 million as of April 1, 2011.
Adjusted EBITDA. Adjusted EBITDA decreased $9.6 million to $11.2 million for the thirty-nine week period ended April 1, 2011 compared to $20.8 million for the prior year thirty-nine week period ended April 2, 2010. The $9.6 million decrease in Adjusted EBITDA was primarily a result of $5.5 million of lower net sales, a $2.5 million increase in cost of goods sold and $2.2 million of additional operating expense associated with being a public company. Adjusted EBITDA represents income before income taxes, interest income, interest expense, impairment loss, depreciation, amortization and the other adjustments noted in the table above.
Liquidity and Capital Resources
The primary sources of cash are existing cash and cash equivalents, cash flow from operations and borrowings under the $12.9 million revolving loan portion of our credit facility.
|
|
Successor |
| ||||
|
|
As of |
| ||||
|
|
April 1, |
|
July 2, |
| ||
|
|
(Amounts in thousands) |
| ||||
Cash and cash equivalents |
|
$ |
12,246 |
|
$ |
20,777 |
|
Revolving loan availability |
|
$ |
12,925 |
|
$ |
12,925 |
|
Our primary cash needs are to fund normal working capital requirements, capital expenditures, repay our indebtedness (scheduled interest and principal payments) and for tax distributions to members, including any payments made under the Tax Receivable Agreement. On April 27, 2010, a portion of the IPO proceeds were used to redeem the $31.0 million senior subordinated notes. This reduces originally scheduled interest expense by approximately $24.4 million over the next five years from the date of the IPO. Our revolving loan availability was $12.9 million as of April 1, 2011. Any borrowings under the revolving loan facility is either at the London Inter Bank Offered Rate (LIBOR), plus a credit spread or the Prime rate, plus a credit spread, at the Companys option. The credit spread is determined based on the then current predefined leverage ratio of the Company. The $12.9 million of availability is subject to the Companys compliance with certain contractual financial and non-financial covenants.
As part of the IPO and related transactions, we entered into a tax receivable agreement with our then-existing owners that provides for the payment from time to time by DynaVox Inc. to our then-existing owners of 85% of the amount of the benefits, if any, that DynaVox Inc. is deemed to realize as a result of (i) the existing tax basis in the intangible assets of DynaVox Holdings on the date of the IPO, (ii) an increase in the tax basis of the assets of DynaVox Holdings that otherwise would not have been available, and (iii) certain other tax benefits related to our entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. These payment obligations are obligations of DynaVox Inc. and not of DynaVox Holdings. For purposes of the tax receivable agreement, the benefit deemed realized by DynaVox Inc. will be computed by comparing the actual income tax liability of DynaVox Inc. (calculated with certain assumptions) to the amount of such taxes that DynaVox Inc. would have been required to pay had there been no increase to the tax basis of the assets of DynaVox Holdings as a result of the purchase or exchanges, had there been no tax benefit from the tax basis in the intangible assets of DynaVox Holdings on the date of the IPO and had DynaVox Inc. not entered into the tax receivable agreement. The term of the tax receivable agreement will continue until all such tax benefits have been utilized or expired, unless DynaVox Inc. exercises its right to terminate the tax receivable agreement for an amount based on the agreed payments remaining to be made under the agreement or DynaVox Inc. breaches any of its material obligations under the tax receivable agreement, in which case all obligations will generally be accelerated and due as if DynaVox Inc. had exercised its right to terminate the agreement.
We believe that our cash position, net cash provided by operating activities and availability under our senior secured credit facility will be adequate to finance working capital needs, planned capital expenditures, debt repayments and tax distributions to members, including any payments made under the Tax Receivable Agreement, for at least the next twelve months.
We may, however, require additional liquidity as we continue to execute our business strategy. We anticipate that to the extent that we require additional liquidity, it will be funded through the incurrence of indebtedness, additional equity financings or a combination of these potential sources of liquidity, although no assurance can be given that such forms of capital will be available to us, or available to us on terms which are acceptable, at such time.
Cash Flow
A summary of cash flows from operating, investing and financing activities are shown in the following table:
|
|
Successor |
|
Predecessor |
| ||
|
|
Thirty-nine weeks ended |
| ||||
|
|
April 1, |
|
April 2, |
| ||
|
|
(Amounts in thousands) |
| ||||
Cash flow summary |
|
|
|
|
| ||
Provided by operating activities |
|
$ |
3,652 |
|
$ |
11,736 |
|
Used in investing activities |
|
(2,828 |
) |
(7,925 |
) | ||
Used in financing activities |
|
(9,440 |
) |
(6,691 |
) | ||
Effect of currency exchange rate changes on cash |
|
85 |
|
40 |
| ||
Decrease in cash |
|
$ |
(8,531 |
) |
$ |
(2,840 |
) |
Operating Activities
Our operations consist of all the activities required to provide products to our customers. The net cash provided by these activities is dependent upon the timing of receipt of payment from our private pay and publicly funded customers and the timing of payment to our vendors, employees, taxing authorities and landlords, among others. We generally collect our accounts receivable within 75 days.
The principal factors impacting net cash provided by operating activities are the operation of our business and the management of our working capital as shown below for the thirty-nine week periods ended April 1, 2011 and April 2, 2010:
|
|
Successor |
|
Predecessor |
| ||
|
|
Thirty-nine weeks ended |
| ||||
|
|
April 1, |
|
April 2, |
| ||
|
|
(Amounts in thousands) |
| ||||
Operating activities |
|
|
|
|
| ||
Net income |
|
$ |
2,066 |
|
$ |
8,266 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
|
3,725 |
|
3,950 |
| ||
Equity-based compensation expense |
|
1,584 |
|
573 |
| ||
Change in fair value of interest rate swaps |
|
(461 |
) |
(109 |
) | ||
Change in fair value of acquisition contingencies |
|
(157 |
) |
|
| ||
Deferred taxes |
|
25 |
|
|
| ||
Loss on disposal of assets |
|
1 |
|
|
| ||
Impairment loss |
|
1,018 |
|
|
| ||
|
|
7,801 |
|
12,680 |
| ||
Changes in operating assets and liabilities |
|
(4,149 |
) |
(944 |
) | ||
Net cash provided by operating activities |
|
$ |
3,652 |
|
$ |
11,736 |
|
The most significant components of changes in assets and liabilities are trade receivables, inventories, accounts payable and accrued expenses and other current liabilities as shown below:
|
|
Successor |
|
Predecessor |
| ||
|
|
Thirty-nine weeks ended |
| ||||
|
|
April 1, |
|
April 2, |
| ||
|
|
(Amounts in thousands) |
| ||||
Changes in operating assets and liabilities details: |
|
|
|
|
| ||
Trade receivables |
|
$ |
538 |
|
$ |
314 |
|
Inventories |
|
924 |
|
(1,710 |
) | ||
Trade accounts payable |
|
423 |
|
(326 |
) | ||
Accrued expenses and other current liabilities |
|
(5,309 |
) |
2,153 |
| ||
Other |
|
(725 |
) |
(1,375 |
) | ||
Changes in operating assets and liabilities |
|
$ |
(4,149 |
) |
$ |
(944 |
) |
Our net cash provided by operating activities was $3.7 million for the thirty-nine week period ended April 1, 2011, compared to cash provided by operating activities of $11.7 million for the thirty-nine week period ended April 2, 2010. The $8.0 million reduction in net operating cash was primarily a result of a $6.2 million decrease in net income that included a non-cash impairment loss of $1.0 million and an additional $1.0 million of non-cash equity-based compensation expense in the thirty-nine week period ended April 1, 2011. A $3.2 million increase in change in operating assets and liabilities also contributed to the $8.0 million reduction in net operating cash. The $3.2 million increase in the change in operating assets is primarily a result of lower variable compensation expense in the thirty-nine week period ended April 1, 2011 compared to the same period of the prior fiscal year as a result of us not achieving certain bonus and profit sharing metrics during the thirty-nine weeks ended April 1, 2011. In addition, the increase in change in operating assets and liabilities was impacted by a $0.5 million decrease in trade receivables during the thirty-nine week period ended April 1, 2011 compared to a $0.3 million increase for the thirty-nine week period ended April 2, 2010 and a $0.9 million reduction in inventory during the thirty-nine week period ended April 1, 2011 compared to a $1.7 million increase for the thirty-nine week period ended April 2, 2010.
Investing Activities
Investing activities for the thirty-nine week periods ended April 1, 2011 and April 2, 2010 consisted of capital expenditures and acquisition of businesses.
|
|
Successor |
|
Predecessor |
| ||
|
|
Thirty-nine weeks ended |
| ||||
|
|
April 1, |
|
April 2, |
| ||
|
|
(Amounts in thousands) |
| ||||
Investing activities |
|
|
|
|
| ||
Capital expenditures |
|
$ |
(2,828 |
) |
$ |
(3,304 |
) |
Acquisition of businesses |
|
|
|
(4,621 |
) | ||
Cash used in investing activities |
|
$ |
(2,828 |
) |
$ |
(7,925 |
) |
Net cash used in investing activities consists primarily of capital expenditures for each thirty-nine week period presented and two strategic acquisitions in the thirty-nine weeks ended April 2, 2010. We disbursed $0.9 million of cash (net of cash acquired) for the Blink-Twice acquisition during the thirty-nine weeks ended April 2, 2010 and $3.7 million of net cash for the ERT acquisition during the same time period. Capital expenditures decreased $0.5 million for the thirty-nine weeks ended April 1, 2011 compared to the thirty-nine weeks ended April 2, 2010.
Management anticipates that capital expenditures during fiscal year 2011 will approximate our recent historical capital expenditures.
Financing Activities
Financing activities for the thirty-nine week periods ended April 1, 2011 and April 2, 2010 consisted primarily of equity distributions and repayments of our outstanding indebtedness.
|
|
Successor |
|
Predecessor |
| ||
|
|
Thirty-nine weeks ended |
| ||||
|
|
April 1, |
|
April 2, |
| ||
|
|
(Amounts in thousands) |
| ||||
Financing activities |
|
|
|
|
| ||
Repayment of debt agreements |
|
$ |
(5,986 |
) |
$ |
(4,651 |
) |
Borrowings under debt agreements |
|
|
|
10,000 |
| ||
Payment on acquisition contingencies |
|
(703 |
) |
|
| ||
Deferred issuance costs |
|
(149 |
) |
|
| ||
Equity distributions |
|
(2,574 |
) |
(1,193 |
) | ||
Dividend distribution |
|
|
|
(10,000 |
) | ||
Payments received on management equity loans and interest |
|
|
|
399 |
| ||
Costs associated with initial public offering |
|
|
|
(986 |
) | ||
Issuance of common units |
|
|
|
200 |
| ||
Redemption of management and common units |
|
(28 |
) |
(202 |
) | ||
Payment on noncompete liability |
|
|
|
(258 |
) | ||
Net cash used in financing activities |
|
$ |
(9,440 |
) |
$ |
(6,691 |
) |
Net cash of $9.4 million was required for financing activities during the thirty-nine week period ended April 1, 2011 compared to $6.7 million required in the thirty-nine week period ended April 2, 2010. The $2.7 million net increase in cash used in financing activities was mainly a net result of $1.3 million in additional debt repayments during the thirty-nine weeks ended April 1, 2011 compared to the thirty-nine week period ended April 2, 2010, additional equity distributions of $1.4 million in the current fiscal year thirty-nine week period and $1.0 million paid out in the prior year thirty-nine week period for costs associated with our April 2010 IPO. During the thirty-nine weeks ended April 1, 2011, we voluntarily elected to prepay $3.0 million of future debt repayments which were applied in the direct order of maturity to future scheduled principal payments. We estimate the $3.0 million prepayment will save us $0.1 million of interest expense. No such prepayments were made during the thirty-nine week period ended April 2, 2010. Debt repayments during the thirty-nine week period ended April 2, 2010 included a $3.3 million excess cash flow payment whereas there was no excess cash flow payment required in the thirty-nine week period ended April 1, 2011. The debt repayments of $6.0 million for the thirty-nine weeks ended April 1, 2011 included $1.1 million for a note payable related to an acquisition in 2004. Financing activity disbursements included $0.7 million in the thirty-nine week period ended April 1, 2011 for royalty, consulting and working capital adjustment payments related to the January 2010 acquisition of Eye Response Technologies, Inc.
On March 31, 2010, we borrowed $10.0 million under the revolving loans provision of the 2008 Credit Facility, as amended. We distributed the $10.0 million to the DynaVox Holdings owners who then used the $10.0 million to invest in the securities of a related party portfolio company. The $10.0 million was repaid with proceeds from the IPO on April 27, 2010.
Financing Agreements
As of April 1, 2011, we were in compliance in all material respects with all covenants contained in our financing agreements, as amended. We are required to make debt payments during the 12 months starting April 2, 2011 of approximately $1.9 million, net of the $3.0 million prepayment discussed above.
Senior Secured Credit Facility
DynaVox Systems LLC, a wholly-owned subsidiary of DynaVox Systems Holdings LLC, entered into a third amended and restated senior secured credit facility, dated as of June 23, 2008, with a syndicate of financial institutions, including GE Business Financial Services Inc. (formerly known as Merrill Lynch Business Financial Services Inc.), as administrative agent. On February 5, 2010, certain terms of our credit facility were amended to, among other items, increase our available revolving loans and letters of credit and increase the amount available for restricted distributions, as defined in the credit facility. The credit facility, as so amended, provides for a $52.0 million term loan facility that matures on June 23, 2014 and a revolving credit facility with a $12.9 million aggregate loan commitment amount available, including a $5.0 million sub-facility for letters of credit and a $2.0 million sub-facility for swingline loans, that matures on June 23, 2013. As of April 2, 2011, $42.2 million was outstanding under the term loan facility and there were no borrowings outstanding under the revolving credit facility.
On March 4, 2010, we entered into a second amendment to our credit facility, which became effective in April 2010. As part of the amendment, the agent and the lenders under our credit facility consented to DynaVox Systems Holdings LLCs transfer of all of its obligations under the credit facility to a newly formed wholly-owned subsidiary of DynaVox Systems Holdings LLC that became the immediate holding company parent of DynaVox Systems LLC. The lenders further waived the requirement of any prepayment of the credit facility with proceeds from our IPO and consented to the repayment in full of our senior subordinated notes and the indebtedness outstanding under certain other notes payable with proceeds from our IPO.
On December 21, 2010, we entered into a third amendment to our credit facility which became effective immediately. As part of the amendment, the agent and the lenders under our credit facility consented to the modification of the calculation of the Fixed Charge Coverage Ratio (as defined below) for the 12-month period ended December 31, 2010 to exclude from the definition of restricted cash distributions a $10.0 million distribution made by the Company in March 2010. In addition, the third amendment modified the calculation of the ratios of net senior debt to Adjusted EBITDA and net total debt to Adjusted EBITDA by limiting the ability of the Company to net cash and cash equivalents from total debt and senior debt to only any 12-month period in which Adjusted EBITDA for such period is greater than $30.0 million, whereupon the amount of cash and cash equivalents that may be so netted is limited to $5.0 million. The credit facility was further amended by requiring the Company to provide the agent and lenders monthly financial statements within 30 days of the end of each month commencing with the month ended November 30, 2010.
All obligations under the credit facility are unconditionally guaranteed by the immediate holding company parent of DynaVox Systems LLC and each of DynaVox Systems LLCs existing and future wholly-owned domestic subsidiaries. The credit facility and the related guarantees are secured by substantially all of DynaVox Systems LLCs present and future assets and all present and future assets of each guarantor on a first lien basis.
In general, borrowings under the credit facility bear interest, at our option, at either (1) the Base Rate (as defined in the credit facility) plus a margin of between 3.00-3.75% (depending on the ratio of net total debt to Adjusted EBITDA (as defined in the credit facility)), or (2) a rate based on LIBOR plus a margin of between 4.00-4.75% (depending on the ratio of net total debt to Adjusted EBITDA). We incur an annual commitment fee of 0.375% or 0.5% (depending on the ratio of net total debt to Adjusted EBITDA) of the unused portion of the revolving credit facility.
No principal payments will be due on the revolving credit facility until the applicable maturity date. Commencing on September 30, 2008 and ending on June 23, 2014, on the last date of each quarter, we are required to repay borrowings under the term loan facility in increasing percentages per year, beginning at 2.5%, with the remaining balance to be repaid on the applicable maturity date. If our ratio of net total debt to Adjusted EBITDA as of the end of any fiscal year is greater than or equal to 1.50 to 1.00, the credit facility requires a mandatory prepayment in an amount equal to between 25.0-75.0% (depending on the ratio of net total debt to Adjusted EBITDA) of Excess Cash Flow (as defined in the credit facility) for such fiscal year. No mandatory prepayment was required for fiscal year 2010.
The credit facility requires DynaVox Systems LLC to maintain certain financial ratios at the end of each fiscal quarter. These include a maximum ratio of net senior debt to Adjusted EBITDA for the preceding twelve-month period of 2.00 to 1.00, a maximum ratio of net total debt to Adjusted EBITDA for the preceding twelve-month period of 4.00 to 1.00 and a minimum Fixed Charge Coverage Ratio for the preceding twelve-month period of 1.20 to 1.00, which minimum Fixed Charge Coverage Ratio increases to 1.25 to 1.00 as of the last day of the first quarter of fiscal year 2012 and then to 1.30 to 1.00 as of the last day of the first quarter of fiscal year 2013. In addition, the credit facility provides for a maximum amount of Capital Expenditures in each fiscal year. The Capital Expenditures limit for fiscal year 2011 is $6.3 million which includes a $0.3 million carryover from the prior fiscal year.
As of April 1, 2011, the ratio of net senior debt to Adjusted EBITDA for the twelve-month period then ended was 1.81 to 1.00, the ratio of net total debt to Adjusted EBITDA for the twelve-month period then ended was 1.81 to 1.00 and the Fixed Charge Coverage Ratio for the twelve-month period then ended was 2.73 to 1.00.
The ratio of net senior debt to Adjusted EBITDA for a twelve-month period is calculated by dividing net senior debt as of the last day of such twelve-month period (calculated by subtracting the aggregate amount of subordinated debt permitted under the credit facility from net total debt (as defined below)) by Adjusted EBITDA for such twelve-month period. The ratio of net total debt to Adjusted EBITDA for a twelve-month period is calculated by dividing net total debt as of the last day of such twelve-month period by Adjusted EBITDA for such twelve-month period. Net total debt is defined as the sum of the average daily principal balance under the revolving credit facility for the one-month period ending on such date plus the outstanding principal balance of the term loan under the credit facility plus the outstanding principal balance of all other debt. Net total debt may be reduced by up to $5.0 million of cash and cash equivalents for any 12-month period in which Adjusted EBITDA for such period is greater than $30.0 million. As of April 1, 2011, net senior debt and net total debt were both $42.2 million and Adjusted EBITDA for the twelve-month period then ended was $23.3 million.
The Fixed Charge Coverage Ratio is calculated by dividing the sum of cash interest expense (net of interest income), cash taxes paid, scheduled principal payments on all debt, restricted cash distributions and management fees paid to Vestar and other certain pre-IPO owners (which items totaled $7.1 million for the twelve months ended April 1, 2011) by operating cash flow. Restricted cash distributions for the twelve months ended December 31, 2010 excludes the $10.0 million we borrowed on March 31, 2010 under the revolving loans provision of the 2008 Credit Facility, as amended, and which was subsequently distributed to the DynaVox Holdings owners. The $10.0 million was repaid with proceeds from the IPO on April 27, 2010. Operating cash flow is defined as Adjusted EBITDA for a twelve-month period less any unfinanced capital expenditures for such twelve-month period. Operating cash flow for the twelve months ended April 2, 2011 was $19.4 million.
Capital Expenditures are calculated based on the amount capitalized during the fiscal year less net cash proceeds of asset dispositions or proceeds from property insurance policies received during the fiscal year. Capital Expenditures for the first thirty-nine weeks of fiscal year 2011 were $2.4 million.
Our ability to maintain our compliance with these covenants is dependent upon our financial performance, which is influenced by a number of factors, including the levels of government funding in the U.S. and key international markets. Violation of any of the covenants described above would result in an event of default under the credit facility.
The credit facility also contains affirmative and negative covenants customarily found in loan agreements for similar transactions, including, but not limited to, restrictions on our ability to incur indebtedness, create liens on assets, incur certain contingent obligations, engage in mergers or consolidations, change the nature of our business, dispose of assets, make certain investments, engage in transactions with affiliates, enter into negative pledges, pay dividends or make other restricted payments, modify certain payments or modify certain debt documents, and modify our constituent documents if the modification materially adversely affect the interests of the lenders.
The credit facility contains customary events of default, including defaults based on a failure to pay principal, reimbursement obligations, interest, fees or other obligations, a material inaccuracy of representations and warranties; breach of covenants; failure to
pay other indebtedness and cross defaults; failure to comply with ERISA or labor laws; change of control events; events of bankruptcy and insolvency; material judgments; the passive holding company status of the immediate holding company parent of DynaVox Systems LLC and DynaVox International Holdings, Inc., a wholly owned subsidiary of DynaVox Systems LLC; and an impairment of collateral.
Upon the occurrence of an event of default, including in the event of non-compliance with the financial ratios described above, the lenders would have the ability to accelerate all amounts then outstanding under the credit facility, except that, upon bankruptcy and insolvency events of default, such acceleration is automatic. Upon the occurrence, and during the continuance, of an event of default under the credit facility, we would no longer have access to our revolving credit facility and we would have to reclassify on our balance sheet amounts currently shown as long-term debt under the 2008 Credit Facility to short-term debt. Under these circumstances, we may not be able to pay our debt or borrow sufficient funds to refinance it on terms that are acceptable to us or at all.
Note Payable
We had a $1.1 million note payable as of July 2, 2010 related to an acquisition consummated in fiscal year 2004, which carried an interest rate of 7% to be paid quarterly. This note payable matured, and was repaid, on September 30, 2010.
Critical Accounting Policies
Managements discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of these financial statements requires estimates and judgments that affect the reported amounts of our assets, liabilities, revenue and expenses. Management bases estimates on historical experience and other assumptions it believes to be reasonable under the circumstances and evaluates these estimates on an on-going basis. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies consist of revenue recognition, trade receivables and related allowances, inventory valuation, goodwill and intangible assets, derivative financial instruments and equity-based compensation, descriptions of which are included in our Annual Report on Form 10-K for the fiscal year ended July 2, 2010, filed with the SEC on September 30, 2010.
Off- Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information regarding quantitative and qualitative disclosures about market risk is not required pursuant to Item 305(e) of Regulation S-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of April 1, 2011. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of April 1, 2011, the design and operation of our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
Management has not identified any changes in the Companys internal control over financial reporting that occurred during the fiscal quarter ended April 1, 2011 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
From time to time, we may be involved in a variety of claims, lawsuits, investigations and proceedings relating to securities laws, product liability, patent infringement, contract disputes and other matters relating to various claims that arise in the normal course of our business. The results of litigation and claims cannot be predicted with certainty, and unfavorable resolutions are possible and could materially affect our results of operations, cash flows or financial position. In addition, regardless of the outcome, litigation could have an adverse impact on us because of defense costs, diversion of management resources and other factors.
On October 14, 2010, a purported class action lawsuit was filed in the United States District Court for the Western District of Pennsylvania against us, two of our officers, Edward L. Donnelly, Jr. and Kenneth D. Misch, and two of the underwriters in our IPO. The lawsuit sought unspecified damages on behalf of a putative class of persons who purchased our Class A common stock pursuant to our prospectus dated April 21, 2010, filed with the SEC in accordance with Rule 424(b) of the Securities Act on April 23, 2010. The complaint alleged that the defendants issued materially false and misleading statements in our prospectus in light of the Companys September 30, 2010 press release announcing it had experienced a softening of demand for both its speech generating devices and software products during the first quarter of its fiscal year 2011 which ended October 1, 2010. The press release also announced that as a result of the softening of demand operating results for the fiscal first quarter would not be consistent with historical performance or indicative of what management believes to be the Companys long-term future operating potential. On February 18, 2011, the plaintiffs voluntarily dismissed without prejudice the purported class action lawsuit. The Notice of Voluntary Dismissal states that the lead plaintiff has determined not to proceed with this action and had not received any compensation or payments of any kind from the defendants.
For a discussion of our potential risks and uncertainties, see the information under the heading Risk Factors in our Annual Report on Form 10-K for the fiscal year ended July 2, 2010, which is updated as set forth below.
Our business could be adversely affected by disruption to our suppliers operations due to the recent natural disaster in Japan.
Certain companies that supply us with materials and components maintain facilities in Japan. Even if these suppliers facilities are not located near the epicenter of the March 2011 Sendai earthquake they may be affected by the consequences of the natural disaster that has affected Japan, which have included rolling blackouts, decreased access to materials and limited ability to ship inventory. If these conditions persist, we may experience price increases or shortages of key materials required for the assembly of our own products which could affect our ability to manufacture and ship our products.
See Part I. Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Overview in this report for a discussion of the recent market conditions affecting our business. This discussion updates, and should be read together with, the risk factors entitled The current adverse economic environment, including the associated impact on government budgets, could adversely affect our business, Changes in funding for public schools could cause the demand for our speech generating devices, special education software and content to decrease and We are subject to a variety of risks due to our international operations that could adversely affect those operations or our profitability and operating results in our Annual Report on Form 10-K for the fiscal year ended July 2, 2010.
See Part I. Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Financing Agreements in this report for a discussion of our sources and uses of liquidity. This discussion updates and should be read together with, the risk factor entitled Our use of leverage may expose us to substantial risks in our Annual Report on Form 10-K for the fiscal year ended July 2, 2010.
The risks described in our Form 10-K are not the only risks facing us. Additional risks and uncertainties, not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
Not Applicable.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
Exhibit |
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Description of Exhibit |
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3.1 |
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Restated Certificate of Incorporation of DynaVox Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Registration Statement on Form S-1 filed by DynaVox Inc. on February 16, 2010 (File No. 333-164217)). |
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3.2 |
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Amended and Restated Bylaws of DynaVox Inc. (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Registration Statement on Form S-1 filed by DynaVox Inc. on February 16, 2010 (File No. 333-164217)). |
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10.1 |
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Amendment No. 1 to Exchange Agreement, dated as of April 26, 2011, among DynaVox Inc. and the Holdings Unitholders party thereto (incorporated by reference to the Registration Statement on Form S-3 filed by DynaVox Inc. on May 2, 2011 (File No. 333-173823)). |
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31.1 |
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Certification required by Rule 13a-14(a). |
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31.2 |
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Certification required by Rule 13a-14(a). |
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32.1 |
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* Filed herewith.
** Furnished herewith.
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.
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DynaVox Inc. | |
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Date: May 11, 2011 |
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/s/ Edward L. Donnelly |
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Edward L. Donnelly |
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Chief Executive Officer |
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Date: May 11, 2011 |
By |
/s/ Kenneth D. Misch |
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Kenneth D. Misch |
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Chief Financial Officer |