Table of Contents

 

 

 

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 December 30, 2011

OR

 

¨	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 incorporation or organization)		(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

(Registrant’s 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  ¨

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  x    No  ¨

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		¨		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the registrant’s Class A common stock, par value $0.01 per share, outstanding was 10,514,818 as of January 25, 2012. The number of shares of the registrant’s Class B common stock, par value $0.01 per share, outstanding as of January 25, 2012 was 45 (excluding 47 shares of Class B common stock held by a subsidiary of the registrant).

 

 

 

---

Table of Contents

DYNAVOX INC.

QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended December 30, 2011

Table of Contents

 

				Page
Forward-Looking Statements					3
Part I—Financial Information					5
Item 1.		Financial Statements			5
		DynaVox Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited)			5
		DynaVox Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)			6
		DynaVox Inc. and Subsidiaries Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)			7
		DynaVox Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)			8
		DynaVox Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)			9
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			35
Item 4.		Controls and Procedures			35
Part II—Other Information
Item 1.		Legal Proceedings			36
Item 1A.		Risk Factors			36
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 3.		Defaults Upon Senior Securities			36
Item 4.		Mine Safety Disclosures			36
Item 5.		Other Information			36
Item 6.		Exhibits			37
Signatures					38

---

Table of Contents

Forward-Looking Statements

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 most recent Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”), as such factors may be updated by Quarterly Reports on Form 10-Q subsequently filed with 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 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.

 

•

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.

 

3

---

Table of Contents

•

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.

 

•

We may fail to obtain regulatory approval in foreign jurisdictions which could prevent us from marketing 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.

 

•

DynaVox Inc. is controlled by the limited partners of DynaVox Systems Holdings LLC, whose interests may differ from those of our public shareholders.

 

•

We will be required to pay the counterparties to the tax receivable agreement for certain tax benefits we may claim arising in connection with our IPO, future purchases or exchanges of Holdings Units and related transactions, and the amounts we may pay could be significant.

 

•

In certain cases, payments under the tax receivable agreement may be accelerated and/or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the tax receivable agreement.

 

•

Our use of leverage may expose us to substantial risks.

 

•

Risks related to our Class A Common Stock.

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.”

 

4

---

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

DYNAVOX INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share amounts)

 

		December 30, 2011				July 1, 2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	20,020			$	12,171
Trade receivables—net of allowance for doubtful accounts of $2,966 and $2,228 as of December 30, 2011 and July 1, 2011, respectively			14,399				18,676
Other receivables			288				318
Inventories			5,050				4,876
Prepaid expenses and other current assets			1,072				1,298
Deferred taxes			719				669
Total current assets			41,548				38,008
PROPERTY AND EQUIPMENT—Net			4,150				5,517
GOODWILL			60,846				60,846
INTANGIBLES—Net			29,396				29,849
DEFERRED TAXES			43,653				40,677
OTHER ASSETS			1,904				2,253
TOTAL ASSETS		$	181,497			$	177,150
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade accounts payable		$	4,798			$	6,680
Deferred revenue			1,257				1,346
Payable to related parties pursuant to tax receivable agreement			250				250
Other liabilities			7,001				7,863
Total current liabilities			13,306				16,139
LONG-TERM DEBT			36,200				36,200
PAYABLE TO RELATED PARTIES PURSUANT TO TAX RECEIVABLE AGREEMENT			43,808				39,540
OTHER LONG-TERM LIABILITIES			2,463				2,722
Total liabilities			95,777				94,601
COMMITMENTS AND CONTINGENCIES (See Note 10)
STOCKHOLDERS’ EQUITY:
Class A common stock, par value $0.01 per share, 1,000,000,000 shares authorized, 10,504,818 shares issued and 10,493,669 outstanding at December 30, 2011, 9,391,680 shares issued and 9,383,335 shares outstanding at July 1, 2011.			105				94
Class B common stock, par value $0.01 per share, 1,000,000 shares authorized, 100 shares issued and 93 shares outstanding at December 30, 2011, 100 shares issued and outstanding at July 1, 2011.			—				—
Preferred stock, par value $0.01 per share, 100,000,000 shares authorized, none issued or outstanding at December 30, 2011 and July 1, 2011.			—				—
Additional paid-in capital			25,151				22,228
Retained earnings			4,314				3,535
Accumulated other comprehensive loss			(57	)			(18	)
Total stockholders’ equity attributable to DynaVox Inc.			29,513				25,839
Non-controlling interest			56,294				56,797
Non-controlling interest shareholder notes			(87	)			(87	)
Total stockholders’ equity			85,720				82,549
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	181,497			$	177,150

See notes to unaudited condensed consolidated financial statements.

 

5

---

Table of Contents

DYNAVOX INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share and per share amounts)

 

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		December 30, 2011				December 31, 2010				December 30, 2011				December 31, 2010
NET SALES		$	23,225			$	25,526			$	49,407			$	47,095
COST OF SALES			6,580				7,587				13,766				13,821
GROSS PROFIT			16,645				17,939				35,641				33,274
OPERATING EXPENSES:
Selling and marketing			8,041				8,747				17,604				17,484
Research and development			1,520				2,358				3,711				4,892
General and administrative			4,458				4,977				8,834				9,764
Amortization of certain intangibles			110				114				220				222
Total operating expenses			14,129				16,196				30,369				32,362
INCOME FROM OPERATIONS			2,516				1,743				5,272				912
OTHER INCOME (EXPENSE):
Interest income			9				4				15				13
Interest expense			(573	)			(663	)			(1,142	)			(1,346	)
Change in fair value and net loss on interest rate swap agreements			—				(9	)			—				(76	)
Other (expense) income—net			(31	)			33				(40	)			(235	)
Total other expense-net			(595	)			(635	)			(1,167	)			(1,644	)
INCOME (LOSS) BEFORE INCOME TAXES			1,921				1,108				4,105				(732	)
INCOME TAX EXPENSE (BENEFIT)			275				114				634				(7	)
NET INCOME (LOSS) ATTRIBUTABLE TO THE CONTROLLING AND NON-CONTROLLING INTERESTS		$	1,646			$	994			$	3,471			$	(725	)
Less: net (income) loss attributable to the non-controlling interests			(1,307	)			(842	)			(2,692	)			373
NET INCOME (LOSS) ATTRIBUTABLE TO DYNAVOX INC.		$	339			$	152			$	779			$	(352	)
Weighted-average shares of Class A common stock outstanding:
Basic			10,400,682				9,375,000				10,234,088				9,375,000
Diluted			10,400,682				9,375,000				10,234,088				9,375,000
Net income (loss) available to Class A common stock per share:
Basic		$	0.03			$	0.02			$	0.08			$	(0.04	)
Diluted		$	0.03			$	0.02			$	0.08			$	(0.04	)

See notes to unaudited condensed consolidated financial statements.

 

6

---

Table of Contents

DYNAVOX INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share amounts)

 

		Common A shares								Common B shares																Accumulated												Non- Controlling
		Number of Shares				Amount				Number of Shares				Amount				Additional Paid-in Capital				Retained Earnings				Other Comprehensive (Loss) Income				Comprehensive (Loss) Income				Non- Controlling Interest				Interest Shareholder Notes				Total Stockholders’ Equity
BALANCE—July 2, 2010			9,383,335			$	94				100			$	—			$	24,205			$	2,306			$	(46	)		$	—			$	51,392			$	(87	)		$	77,864
Equity-based compensation expense			—				—				—				—				1,059				—				—				—				—				—				1,059
Equity distributions			—				—				—				—				(1,609	)			—				—				—				—				—				(1,609	)
Net loss			—				—				—				—				—				(352	)			—				(352	)			(373	)			—				(725	)
Foreign currency translation gain			—				—				—				—				—				—				13				13				27				—				40
BALANCE—December 31, 2010			9,383,335			$	94				100			$	—			$	23,655			$	1,954			$	(33	)		$	(339	)		$	51,046			$	(87	)		$	76,629
BALANCE—July 1, 2011			9,383,335			$	94				100			$	—			$	22,228			$	3,535			$	(18	)		$	—			$	56,797			$	(87	)		$	82,549
Equity-based compensation expense			—				—				—				—				1,129				—				—				—				—				—				1,129
Equity distributions			—				—				—				—				(573	)			—				—				—				—				—				(573	)
Allocation of deferred tax assets and liabilities			—				—				—				—				146				—				—				—				—				—				146
Adjustment to give effect to the tax receivable agreement with DynaVox Holdings			—				—				—				—				(893	)			—				—				—				—				—				(893	)
Purchase of subsidiary shares from non-controlling interest			—				—				—				—				11				—				—				—				(18	)			—				(7	)
Exchange of subsidiary shares from non-controlling interest			1,110,334				11				(7	)			—				3,103				—				(3	)			—				(3,111	)			—				—
Net income			—				—				—				—				—				779				—				779				2,692				—				3,471
Foreign currency translation loss			—				—				—				—				—				—				(36	)			(36	)			(66	)			—				(102	)
BALANCE—December 30, 2011			10,493,669			$	105				93			$	—			$	25,151			$	4,314			$	(57	)		$	743			$	56,294			$	(87	)		$	85,720

See notes to unaudited condensed consolidated financial statements

 

7

---

Table of Contents

DYNAVOX INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

		Twenty-six Weeks Ended
		December 30, 2011				December 31, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) attributable to the controlling and non-controlling interests		$	3,471			$	(725	)
Depreciation			1,592				1,663
Amortization of certain intangibles			453				463
Amortization of deferred financing costs			340				318
Equity-based compensation expense			1,129				1,059
Change in fair value of interest rate swaps			—				(295	)
Bad debt expense			1,301				767
Change in fair value of acquisition contingencies			4				(183	)
Deferred taxes			495				(170	)
(Gain) loss on disposal of assets			(6	)			1
Changes in operating assets and liabilities:
Trade receivables			3,006				1,597
Inventories			(174	)			(142	)
Other assets			235				(6	)
Deferred revenue			(265	)			(148	)
Trade accounts payable			(1,830	)			(674	)
Accrued compensation			(562	)			(4,860	)
Accrued interest			8				(40	)
Related-party payable			—				(10	)
Disbursements on derivative instruments			—				(371	)
Other—net			272				188
Net cash provided by (used in) operating activities			9,469				(1,568	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment			(296	)			(2,325	)
Proceeds from sale of property and equipment			12				—
Net cash used in investing activities			(284	)			(2,325	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt agreements			—				(2,020	)
Payment on acquisition contingencies			(654	)			(570	)
Equity distributions			(573	)			(1,609	)
Deferred issuance costs			—				(149	)
Redemptions of management and common units			(7	)			—
Net cash used in financing activities			(1,234	)			(4,348	)
EFFECT OF CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			(102	)			40
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			7,849				(8,201	)
CASH AND CASH EQUIVALENTS:
Beginning of period			12,171				20,777
End of period		$	20,020			$	12,576
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Net interest paid		$	775			$	1,031
Net income taxes paid		$	220			$	499

The Company had non-cash investing activities of $20 for accrued capital costs for both twenty-six week periods ended December 30, 2011 and December 31, 2010. During the twenty-six weeks ended December 30, 2011, the Company had non-cash operating activity of $747 related to the effect of exchanges on the tax receivable liability and allocation of deferred tax assets and liabilities recorded through stockholders’ equity.

See notes to unaudited condensed consolidated financial statements.

 

8

---

Table of Contents

DYNAVOX INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except unit, share and per 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. The IPO closed on April 27, 2010. 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 Corporation’s Class B common stock. These transactions are collectively referred to as the “Recapitalization Transactions.” The Corporation and the DynaVox Holdings owners also entered into an exchange agreement under which (subject to the terms of the exchange agreement, as amended) the Holdings Units unitholders have the right to exchange their Holdings Units for shares of the Corporation’s Class A common stock on a one-for-one basis, subject to customary conversation rate adjustments for stock splits, stock dividends and reclassifications. Notwithstanding the foregoing, for so long as Holdings Unit unitholders other than the Corporation hold in excess of 25% of the outstanding Holdings Units (including Holdings Units held by the Corporation), Holdings Unit unitholders shall only be entitled to effect exchanges on the second Friday or the 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 unitholders could effect exchanges on a day that was 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 registration statement was declared effective on July 12, 2011.

Subsequent to the IPO and Recapitalization Transactions described above, the Corporation consolidated the financial results of DynaVox Holdings and its subsidiaries and reflected the ownership interest of the other members of DynaVox Holdings as a non-controlling interest in the Corporation’s consolidated financial statements beginning April 28, 2010. Non-controlling interest on the statement of operations represents the portion of earnings or loss attributable to the economic interest in the Corporation held by the non-controlling unitholders. Non-controlling interest on the balance sheet represents the portion of net assets of the Corporation attributable to the non-controlling unitholders, based on the portion of the Holdings Units owned by such unitholders.

Collectively, the Corporation and DynaVox Holdings are referred to as the “Company” and as such, references to the “Company” refer to the period subsequent to the IPO and Recapitalization Transactions.

Non-Controlling Interest

The table below sets forth the non-controlling interest ownership as of July 1, 2011 and December 30, 2011 and reflects the repurchase and cancellation of 6,498 unvested Holdings Units and the exchange of 1,110,334 vested Holdings Units for Class A common stock during the twenty-six weeks ended December 30, 2011.

 

		Non-controlling Unitholders Holdings Units				DynaVox Inc. Issued Common A Shares				Total *
July 1, 2011			20,416,193				9,391,680				29,807,873
December 30, 2011			19,299,361				10,504,818				29,804,179
Ownership percentage:
July 1, 2011			68.5	%			31.5	%			100	%
December 30, 2011			64.8	%			35.2	%			100	%

 

*	Assumes all of the holders of Holdings Units exchange their Holdings Units for shares of the Corporation’s Class A common stock on a one-for-one basis.

 

9

---

Table of Contents

Tax Receivable Agreement

As a result of both the initial purchase of Holdings Units from the DynaVox Holdings owners in connection with the IPO and subsequent exchanges of Holdings Units into Class A commons stock, DynaVox Inc. will become entitled to a proportionate share of the existing tax basis of the assets of DynaVox Holdings. In addition, DynaVox Holdings has made and intends to continue 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 into shares of Class A common stock occurs, which may result in an adjustment to the tax basis of the assets of DynaVox Holdings at the time of an exchange of Holdings Units. Both the initial and each subsequent exchange is expected to result in proportionate increases in the tax basis of the assets of DynaVox Holdings as a result of the election under Section 754 that otherwise would not have been available. Both this proportionate share of existing tax basis 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.

The Corporation entered into a tax receivable agreement (“TRA”) with the DynaVox Holdings owners that will provide for the payment by DynaVox Inc. to the DynaVox Holdings owners an amount equal to 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) these increases in tax basis 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.

As of December 30, 2011 and July 1, 2011, the liability representing the expected payments due relating to exchanges by DynaVox Holdings owners under the TRA was $44,058 and $39,790, respectively. During the fiscal year ending June 29, 2012, the Company expects to pay $250 of the total amount. Payments are anticipated to be made annually over 30 years, commencing from the date of each event that gives rise to the TRA benefits, beginning with the date of the closing of the IPO. The payments are made in accordance with the terms of the TRA. The timing of payments is subject to certain contingencies including DynaVox Inc. having sufficient taxable income to utilize all of the tax benefits defined in the TRA.

To determine the current amount of the payments due to DynaVox Holdings owners under the tax receivable agreement, the Company estimated the amount of taxable income that DynaVox Inc. has generated over the previous fiscal year. Next, the Company estimated the amount of the specified TRA deductions at year end. This was used as a basis for determining the amount of tax reduction that generates a TRA obligation. In turn, this was used to calculate the estimated payments due under the TRA that the Company expects to pay in the next fiscal year. These calculations are performed pursuant to the terms of the TRA.

The Company accounts for the income tax effects and corresponding TRA effects as a result of the initial purchase and sale of the units of DynaVox Holdings in connection with the IPO and subsequent exchanges of DynaVox Holdings units for the Company’s Class A common shares by recognizing a deferred tax asset for the estimated income tax effects of the increase in the tax basis of the assets owned by DynaVox Holdings, based upon enacted tax rates at the date of the transaction, less any tax valuation allowance the Company believes is required. The tax effects of transactions with stockholders that result in a change in the tax basis of the company’s assets and liabilities will be recognized in equity.

During the twenty-six week period ended December 30, 2011, the Company recorded an increase to the TRA liability of $4,268 related to the exchange of 1,110,334 units of DynaVox Holdings for Class A common stock. Of this increase, $3,375 represents 85% of the estimated tax benefits related to (i) the increases in tax basis as described above and (ii) the estimated payments under the tax receivable agreement and has been recorded as an increase to a long-term deferred tax asset. The remaining $893 is the difference between the recorded deferred tax asset and the computed TRA liability and is recorded as an adjustment to equity.

 

10

---

Table of Contents

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 Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2011. 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 1, 2011 financial information has been derived from the Company’s audited financial statements.

There have been no significant changes in our significant accounting policies and estimates that were disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2011.

Recently Issued Accounting Standards-In September 2011, the Financial Accounting Standards Board (“FASB”) issued amendments to the existing guidance related to testing goodwill for impairment. Under the amendments, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company does not expect the adoption to have any impact on the Company’s consolidated financial statements.

In December 2011, the Financial Accounting Standards Board (“FASB”) deferred the effective date of a previous accounting standard related to the presentation of comprehensive income. The previous standard, issued in June 2011, eliminated the current option to report other comprehensive income and its components in the statement of equity, and allowed two options for presenting the components of net income and other comprehensive income. In addition, reclassification adjustments for items that are reclassified from other comprehensive income to net income were required to be presented on the face of the financial statements. Additional information relating to the previous standard was disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2011. The recent guidance deferred the effective date pertaining to the presentation of reclassification adjustments out of other comprehensive income. All other requirements are not affected and will be applied on a retrospective basis for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company does not expect adoption to have a significant impact on the Company’s consolidated financial statements.

3. BALANCE SHEET ITEMS

Inventories as of December 30, 2011 and July 1, 2011 consist of the following:

 

		December 30, 2011				July 1, 2011
Raw materials		$	2,897			$	3,054
Work in progress			22				12
Finished goods			2,131				1,810
Inventories		$	5,050			$	4,876

The components of property and equipment as of December 30, 2011 and July 1, 2011 are as follows:

 

		December 30, 2011				July 1, 2011
Molds, machinery and equipment		$	8,891			$	8,744
Computer equipment and purchased software			5,026				4,725
Furniture, fixtures and office equipment			1,302				1,305
Leasehold improvements			641				644
Total property and equipment—gross		$	15,860			$	15,418
Less accumulated depreciation			(11,747	)			(10,161	)
Construction in process			37				260
Property and equipment—net		$	4,150			$	5,517

 

11

---

Table of Contents

Accumulated other comprehensive loss as of December 30, 2011 and July 1, 2011 are as follows:

 

		December 30, 2011				July 1, 2011
Accumulated other comprehensive loss attributable to DynaVox Inc.		$	(57	)		$	(18	)
Accumulated other comprehensive loss attributable to non-controlling interest		$	(105	)		$	(42	)

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.

4. GOODWILL AND INTANGIBLE ASSETS

As of December 30, 2011 and July 1, 2011, the carrying amount of the Company’s goodwill was $60,846.

The Company’s identifiable intangible assets with indefinite and finite lives are detailed below:

 

		December 30, 2011																July 1, 2011
		Gross Carrying Amount				Accumulated Impairment Loss				Accumulated Amortization				Net Carrying Amount				Gross Carrying Amount				Accumulated Impairment Loss				Accumulated Amortization				Net Carrying Amount
Acquired software technology		$	3,253			$	70			$	2,046			$	1,137			$	3,253			$	70			$	1,848			$	1,335
Commercial computer software			311				—				117				194				311				—				77				234
Acquired patent technology			4,330				—				865				3,465				4,330				—				650				3,680
Developed patent technology			244				244				—				—				244				244				—				—
Trade name			100				42				58				—				100				42				58				—
Symbols and trademarks (indefinite life)			25,300				700				—				24,600				25,300				700				—				24,600
		$	33,538			$	1,056			$	3,086			$	29,396			$	33,538			$	1,056			$	2,633			$	29,849

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. Goodwill is tested by comparing the carrying value of the reporting unit to its fair value. The Company estimates the fair value of the reporting unit utilizing income and market approaches. The income approach is based on projected future cash flow that is discounted to present value using factors that consider the timing and risk of the future cash flows. The income approach is based on a reporting units’ projection of operating results and cash flows that is discounted using a weighted-average cost of capital. The market approach is based on the Guideline Publicly Traded Company Method, which examines transactions in the marketplace involving the sale of the stocks of similar publicly owned companies. In addition to the above described valuation techniques, the Company also considers the Company’s aggregate fair value based upon the value of the Company’s outstanding shares of common stock.

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 1, 2011 and concluded that the fair value of its goodwill and intangibles with indefinite lives, exceeded their carrying value, and no impairment charge was necessary. No impairment indicators were identified for goodwill during the second quarter of fiscal 2012; therefore, no interim impairment testing was performed. No impairment indicators were identified for intangibles with indefinite lives; therefore, no interim impairment testing was performed for the Company’s remaining indefinite-lived intangibles.

Amortization expense related to intangibles for the thirteen week periods ended December 30, 2011 and December 31, 2010 was $226 and $234, respectively. Amortization expense related to intangibles for the twenty-six week periods ended December 30, 2011 and December 31, 2010 was $453 and $463, respectively. Estimated amortization expense for the remainder of fiscal year 2012 and each subsequent four fiscal years is as follows: 2012—$454; 2013—$906; 2014—$885; 2015—$600; and 2016—$433.

 

12

---

Table of Contents

5. LONG-TERM DEBT

Long-term debt as of December 30, 2011 and July 1, 2011 consists of the following:

 

		December 30, 2011				July 1, 2011
2008 Credit Facility		$	36,200			$	36,200
Total debt			36,200				36,200
Less current installments			—				—
Long-term debt—less current installments		$	36,200			$	36,200

2008 Credit Facility

On June 23, 2008, the Company entered into a secured credit facility (“2008 Credit Facility”) with GE Business Financial Services Inc. (formerly known as Merrill Lynch Capital) and BMO Capital Markets Financing Inc. (formerly known as Harris NA), as amended. As of December 30, 2011 and July 1, 2011, the 2008 Credit Facility provides $52,000 of term loans, up to $12,925 of revolving loans and letters of credit and up to $12,000 available for restricted distributions provided the Company is in compliance with certain financial and non-financial covenants. Principal amortization began 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. As a result of the $8,975 of voluntary prepayments made during fiscal 2011, which were applied in the direct order of maturity, the Company has no current obligations due under the term loan.

Effective April 27, 2010, the agent and lenders under the 2008 Credit Facility consented to the transfer of all of DynaVox Holdings 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 (Note 1). All obligations under the 2008 Credit Facility are unconditionally guaranteed by the immediate holding Company parent of DynaVox Systems LLC and each of DynaVox Systems LLC’s existing and future wholly-owned domestic subsidiaries. The 2008 Credit Facility and the related guarantees are secured by substantially all of DynaVox Systems LLC’s present and future assets, all present and future assets of each guarantor on a first lien basis and 65% of the equity in foreign subsidiaries.

On December 14, 2011, the Company entered into a fourth amendment to the 2008 Credit Facility. The amendment (1) modifies the calculation of the ratios of net senior debt to adjusted EBITDA and net total debt to adjusted EBITDA enabling the Company to utilize cash and cash equivalents of up to $5,000 to reduce total debt and senior debt, to derive net senior debt and net total debt without the imposition of additional conditions or requirements; and (2) enables the Company to make a restricted payment of a maximum of $5,000 in the aggregate to repurchase shares of its equity interests provided that before and after giving effect to such restricted payment, no event of default shall have occurred and be continuing. Prior to any repurchase of its shares, the Company intends to seek approval from its Board of Directors. No such approval has been sought or received at this time.

The 2008 Credit Facility provides the option of borrowing at London InterBank Offered Rate (LIBOR), plus a credit spread (4.3% as of December 30, 2011 and 4.2% as of July 1, 2011) or the Prime rate, plus a credit spread (6.3% as of both December 30, 2011 and July 1, 2011) 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 Company’s ratio of net total debt to EBITDA (as defined) after December 31, 2008. As of December 30, 2011 and July 1, 2011, the Company’s credit spreads were as follows:

 

		December 30, 2011								July 1, 2011
		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 December 30, 2011 and July 1, 2011, the commitment fee was 0.375% on the unused portion of the revolving credit facility.

Revolver Draw Under 2008 Credit Facility

At December 30, 2011 and July 1, 2011 the Company had no outstanding letters of credit and the amount available from the revolving credit facility was $12,925 on both days.

 

13

---

Table of Contents

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 is required to provide monthly financial statements to the lenders within 30 days of the end of each month. The Company was in compliance with all financial covenants as required under the 2008 Credit Facility, as amended, at December 30, 2011 and July 1, 2011. The 2008 Credit Facility contains certain mandatory prepayments, including an excess cash flow provision. As a result of voluntary prepayments in fiscal 2011 no excess cash flow payment was required for fiscal 2011.

Note Payable

The Company had a $1,095 note payable related to an acquisition in 2004 that 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.

6. INCOME TAXES

The Company’s effective tax rate is summarized in the following table:

 

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		December 30, 2011				December 31, 2010				December 30, 2011				December 31, 2010
Income tax expense		$	275			$	114			$	634			$	(7	)
Effective income tax rate			14.32	%			10.29	%			15.44	%			0.96	%

The tax provision for the current period is based on an estimate of the Company’s annualized income tax rate. The effective tax rate is calculated by dividing the provision for income taxes by income before income taxes. The Company’s effective tax rate includes a rate benefit attributable to the fact that the Company’s subsidiaries operate as a limited liability company which is not subject to federal or state income tax. Accordingly, a portion of the Company’s 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 thirteen and twenty-six weeks ended December 30, 2011, the Company recorded discrete items that resulted in income tax expense which related to interest associated with the reserve for uncertainties in income tax positions.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is summarized as follows:

 

Balance as of July 1, 2011		$	70
Increases in prior period tax positions			6
Balance as of December 30, 2011		$	76

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 2008—2011 are currently open for examination. Foreign tax returns associated with fiscal years 2007—2010 also remain open under the statute.

7. 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.

 

14

---

Table of Contents

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 Company’s internal market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1—Inputs to the valuation methodology are based on quoted prices for an identical asset or liability in an active market.

Level 2—Inputs 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 3—Inputs 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 Company’s 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.

Acquisition-related contingent considerations: Contingent consideration recorded from the Company’s acquisition of Eye Response Technologies, Inc. in fiscal 2010 include guaranteed minimum royalty and consulting payments due to the previous owner. The amount recorded for the guaranteed minimum royalty payments represents the fair value of expected consideration to be paid based on the Company’s forecasted sales of eye products over a three-year period. Expected consideration was valued based on three possible scenarios for projected sales of applicable products (the guaranteed minimum payment, a conservative forecasted sales case, and an optimistic forecasted sales case). Each case was assigned a probability, a discount rate was applied to future payments, and the aggregate result of the three scenarios was summarized to determine the fair value to be recorded. Acquisition related contingent consideration also includes a consulting agreement due to the previous owner related to future service during the three year period. The amount recorded represents the fair value of contractual consideration expected to be paid. The Company considers the acquisition related contingencies fair value measurements to be Level 3 inputs within the fair value hierarchy.

During the thirteen and twenty-six weeks ended December 30, 2011, the Company recorded a fair value adjustment of $4 and $1 recognized in other income and other expense, respectively, related to the royalty contingent considerations. During the thirteen and twenty-six weeks ended December 30, 2011, the Company recorded a fair value adjustment of $2 and $3 recognized in interest expense, respectively, related to the consulting agreement contingent considerations.

The following table presents assets and liabilities measured at fair value on a recurring basis at December 30, 2011 and July 1, 2011:

 

		As of December 30, 2011
Description		(Level 1)				(Level 2)				(Level 3)				Total
Assets
Cash equivalents		$	254			$	—			$	—			$	254
Total assets		$	254			$	—			$	—			$	254
Liabilities
Acquisition-related contingent considerations		$	—			$	—			$	1,999			$	1,999
Total liabilities		$	—			$	—			$	1,999			$	1,999

 

		As of July 1, 2011
Description		(Level 1)				(Level 2)				(Level 3)				Total
Assets
Cash equivalents		$	253			$	—			$	—			$	253
Total assets		$	253			$	—			$	—			$	253
Liabilities
Acquisition-related contingent considerations		$	—			$	—			$	2,649			$	2,649
Total liabilities		$	—			$	—			$	2,649			$	2,649

 

15

---

Table of Contents

The following table represents the change in the acquisition-related contingent consideration liabilities during the twenty-six weeks ended December 30, 2011:

 

Balance as of July 1, 2011		$	2,649
Losses included in earnings			4
Settlements			(654	)
Balance as of December 30, 2011		$	1,999

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 December 30, 2011 and July 1, 2011, the fair value of the Company’s debt instruments approximated their respective carrying value as the debt was comprised of variable rate debt. The fair value of the Company’s long-term debt was based upon borrowing rates then available to the Company for similar debt instruments with like terms and maturities.

8. EQUITY-BASED COMPENSATION

For a detailed description of past equity-based compensation activity, please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2011. There have been no significant changes in the Company’s equity-based compensation accounting policies and assumptions from those that were disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2011.

The Company recorded stock compensation expense related to stock option awards, restricted stock awards and management and director unit awards as follows:

 

		Thirteen Weeks Ended
		December 30, 2011																				December 31, 2010
		Cost of Sales				Selling and Marketing				Research and Development				General and Administrative				Total				Cost of Sales				Selling and Marketing				Research and Development				General and Administrative				Total
Legacy interest in DynaVox Holdings		$	—			$	7			$	3			$	7			$	17			$	—			$	7			$	3			$	8			$	18
Successor Options			7				64				71				392				534				4				33				61				382				480
Successor RSA’s			—				—				—				36				36				—				—				—				16				16
Total		$	7			$	71			$	74			$	435			$	587			$	4			$	40			$	64			$	406			$	514
		Twenty-six Weeks Ended
		December 30, 2011																				December 31, 2010
		Cost of Sales				Selling and Marketing				Research and Development				General and Administrative				Total				Cost of Sales				Selling and Marketing				Research and Development				General and Administrative				Total
Legacy interest in DynaVox Holdings		$	—			$	14			$	6			$	14			$	34			$	—			$	19			$	7			$	16			$	42
Successor Options			11				104				134				776				1,025				8				74				131				765				978
Successor RSA’s			—				—				—				70				70				—				—				—				39				39
Total		$	11			$	118			$	140			$	860			$	1,129			$	8			$	93			$	138			$	820			$	1,059

 

16

---

Table of Contents

A summary of the Company’s stock option activity under the 2010 Long-Term Incentive Plan (“2010 Plan”) for the twenty-six weeks ended December 30, 2011 is as follows:

 

		Options				Range of Exercise Prices				Weighted-Average Exercise Price				Weighted-Average Remaining Contractual Life				Aggregate Intrinsic Value
														(in years)				(in thousands)
Outstanding—July 1, 2011			1,384,000			$	4.10-$15.00			$	14.75				8.8			$	75
Granted			205,500				5.47				5.47
Exercised			—				—
Forfeited			(33,300	)			4.10-15.00
Outstanding—December 30, 2011			1,556,200			$	4.10-$15.00			$	13.66				8.5			$	—
Exercisable at December 30, 2011			280,200			$	4.10-$15.00			$	14.91				8.3			$	—

The weighted-average grant date fair value of stock options granted during the twenty-six weeks ended December 30, 2011 was $3.67 per share.

The fair value of the stock options issued under the 2010 Plan was estimated based on the closing market price of the Company’s common stock on the date of grant using a Black-Scholes option valuation model with the following assumptions:

 

		Twenty-six Weeks Ended
		December 30, 2011
Black-Scholes Option Valuation Assumptions:
Dividend yield(1)			0	%
Expected volatility(2)			75.4	%
Risk-free interest rates(3)			1.5	%
Expected term of options (in years)(4)			6.3

 

(1)	The expected dividend yield was based on our expectation of not paying dividends on the restricted units for the foreseeable future.

(2)	The expected volatility was based on the historical volatility of the Company’s 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 sufficient 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 December 30, 2011, there was $6,779 of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized over a weighted-average period of 3.2 years.

A summary of the Company’s restricted stock award activity under the 2010 Plan for the twenty-six weeks ended December 30, 2011 is as follows:

 

		Restricted Shares of Class A Common Stock				Weighted- Average Grant Fair Value				Weighted- Average Remaining Contractual Life				Aggregate Fair Value
										(in years)				(in thousands)
Non-vested Outstanding—July 1, 2011			12,512			$	10.99				0.8			$	95
Granted			2,804				5.35								15
Vested			—				—
Forfeited			—				—
Non-vested Outstanding—December 30, 2011			15,316			$	9.96				0.9			$	56

As of December 30, 2011, there was $59 of unrecognized compensation expense related to non-vested restricted share awards that is expected to be recognized over a weighted-average period of 0.9 years.

 

17

---

Table of Contents

A summary of the changes in non-vested Holdings Units outstanding during the twenty-six weeks ended December 30, 2011 is detailed in the following table below:

 

		Number of Awards				Weighted-Average Per Unit Grant Date Fair Value				Aggregate Intrinsic Value
										(in thousands)
Holdings Units:
Non-vested units as of July 1, 2011			88,039			$	3.02			$	15
Granted			—				—
Vested			(16,133	)			2.87
Forfeited			(6,498	)			2.19
Redeemed			—				—
Non-vested units as of December 30, 2011			65,409			$	3.15			$	—

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 December 30, 2011, there was $91 of unrecognized compensation expense related to non-vested Holdings Units that is expected to be recognized over a weighted-average vesting period of 2.2 years.

9. NET INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net income (loss) per common share:

 

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		December 30, 2011				December 31, 2010				December 30, 2011				December 31, 2010
Numerator:
Numerator for basic and diluted net income (loss) per Class A common share-net income (loss) attributable to DynaVox Inc.		$	339			$	152			$	779			$	(352	)
Denominator:
Denominator for basic net income (loss) per Class A common share-weighted average shares			10,400,682				9,375,000				10,234,088				9,375,000
Effect of dilutive securities:
Options and restricted stock			—				—				—				—
Denominator for diluted net income (loss) per common share-adjusted weighted average shares			10,400,682				9,375,000				10,234,088				9,375,000
Basic net income (loss) attributable to DynaVox Inc. per common share		$	0.03			$	0.02			$	0.08			$	(0.04	)
Diluted net income (loss) attributable to DynaVox Inc. per common share		$	0.03			$	0.02			$	0.08			$	(0.04	)

Weighted-average shares of stock options, which were anti-dilutive and thus not included in the computation of weighted-average diluted common share amounts, were 1,563,532 and 1,574,273 for the thirteen and twenty-six week period ended December 30, 2011, respectively, and 1,380,694 and 1,376,729 for the thirteen and twenty-six week period ended December 31, 2010, respectively. Weighted-average shares of restricted stock, which were anti-dilutive and thus not included in the computation of weighted-average diluted common share amounts, were 15,316 and 14,186 for the thirteen and twenty-six week period ended December 30, 2011, respectively, and 8,335 for the thirteen and twenty-six week period ended December 31, 2010, respectively.

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.

10. 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. In management’s opinion, resolution of these matters is not expected to have a material adverse impact on the Company’s results of operations, cash flows or its financial position. However, 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.

 

18

---

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion in conjunction with our unaudited condensed consolidated financial statements included elsewhere herein. 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 Company’s 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 1, 2011, 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 2012” refer to the 52-week period ending on June 29, 2012. Fiscal year 2012 and fiscal year 2011 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 technologies—speech generating technologies and special education software.

Sales of our speech generating technologies is our largest source of revenue. In fiscal years 2011, 2010 and 2009, sales of speech generating technologies produced approximately 81%, 79% and 82%, respectively, of our net sales. Our revenue from sales of speech generating technologies has grown to $87.4 million in fiscal year 2011 from $75.0 million in fiscal year 2009. 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 primary source of revenue is sales of special education software. In fiscal years 2011, 2010 and 2009, sales of special education software produced approximately 19%, 21% and 18%, 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.

As previously disclosed, we experienced a softening of demand, as compared to our recent historical growth rates, for both our speech generating devices and software products beginning in fiscal year 2011. Although demand improved in the first quarter of fiscal year 2012 as net sales increased 21.4% compared to the first quarter of fiscal year 2011, we experienced less demand in the second quarter of fiscal year 2012 as net sales decreased 9.0% compared to the second quarter of fiscal year 2011. We believe that reduced domestic government funding, and particularly more constrained state and local government funding of school budgets, adversely affect our product sales in the United States during periods of lower demand. We also believe that constraints in government spending in the Company’s key international markets, including Canada and the United Kingdom, had a similar effect on our product sales in those regions.

To address these shifts in market dynamics that began in fiscal year 2011, we altered certain sales strategies including reallocating sales and marketing resources primarily in the U.S. device market to increase our focus on the adult market and committing additional resources to our direct sales channel for our educational software products. In both devices and software, we have been focusing our efforts more on the U.S. market than the international markets where we operate.

During the thirteen week period ended December 30, 2011 we also experienced a funding shift, as an alternative payor elected to discontinue its role as primary payor for speech generating devices and assumed the role of secondary payor behind other third party payors, such as Medicare, Medicaid and private insurance. As a result of the funding shift, we recorded $1.7 million less in devices sales in the second quarter of fiscal year 2012 compared to the first quarter of fiscal year 2012 and $1.1 million less in the second quarter of fiscal year 2012 as compared to the second quarter of fiscal year 2011 from this funding source. Our expectation is that we will continue to supply patients impacted by the funding shift with devices in the future through other third party payors, which historically have averaged between three and six months for final authorization compared to approximately 30 days for this specific alternative payor.

 

19

---

Table of Contents

We believe the strategic changes discussed above related to our U.S. device market helped offset the impact of the shift in funding by an alternative payor. Further, we believe the additional resources we committed to our direct sales channel for our educational software products were adversely impacted by ongoing school budget constraints during the thirteen week period ended December 30, 2011 as compared to the thirteen week period ended December 31, 2010.

We have experienced significant volatility in our market dynamics during the first half of fiscal year 2012, which makes predicting our near-term sales performance difficult. For example, net sales decreased 9.0%, or $2.3 million, to $23.2 million for the thirteen week period ended December 30, 2011 from $25.5 million for the thirteen week period ended December 31, 2010. For the thirteen week period ended September 30, 2011 net sales increased 21.4%, or $4.6 million, to $26.2 million from $21.6 million for the thirteen week period ended October 1, 2010. For the twenty-six week period ended December 31, 2011 net sales increased 4.9%, or $2.3 million, to $49.4 million from $47.1 million for the twenty-six week period ended December 31, 2010.

We currently do not anticipate significant net sales declines in fiscal year 2012. However, if we experience net sales declines in the third or fourth fiscal quarter of 2012 similar to, or worse than, the 9.0% decrease in net sales we experienced for the thirteen week period ended December 30, 2011 compared to the thirteen week period ended December 31, 2010, our results of operations would be adversely affected and we may determine impairment indicators exist. Likewise, as we have disclosed in previous periods, we may determine that impairment indicators exist in the event that our stock price experiences a significant decline. Such a determination would require us to evaluate whether or not the carrying value of our long-lived assets and indefinite-lived intangible assets, including goodwill, are recoverable. We conduct impairment tests of our goodwill and intangible assets with indefinite-lives at least annually on the last day of each fiscal year, or more frequent when events or other changes in circumstances indicate that the carrying amount of the assets may not be recoverable. As of December 30, 2011, 49.7% of our assets, or $90.2 million, were either goodwill or other intangible assets. Downward shifts in our net sales could impact our profitability and ultimately result in the potential impairment of all or a portion of our goodwill and other intangible assets.

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) 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 December 30, 2011 there were 19,299,361 Holdings Units held by parties other than DynaVox Inc. which upon exercise of the right to exchange would exchange for 19,229,361 shares of Class A common stock.

Initial Public Offering

On April 21, 2010, a registration statement relating to shares of Class A common stock was declared effective. 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.

 

20

---

Table of Contents

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 will provide 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 the 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 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. As of December 30, 2011, the liability representing the expected payments due under the tax receivable agreement was $44.1 million. During the twenty-six week period ended December 30, 2011, the Company recorded a $4.3 million increase to the tax receivable agreement liability related to the exchange of 1,110,334 units of DynaVox Holdings for 1,110,334 shares of the Company’s Class A common stock. Of this increase, $3.4 million has been recorded as an increase to a long-term deferred tax asset and represents 85% of the estimated tax benefits related to an increase in tax basis and the estimated payments under the tax receivable agreement. The remaining $0.9 million is the difference between the recorded deferred tax asset and the computed TRA liability and is recorded as an adjustment to equity.

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 1, 2011.

 

21

---

Table of Contents

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:

 

 

		Thirteen weeks ended								Twenty-Six weeks ended
		December 30, 2011				December 31, 2010				December 30, 2011				December 31, 2010
		(Amounts in thousands)								(Amounts in thousands)
Net sales
Speech generating devices		$	20,065			$	20,809			$	40,131			$	37,993
Special education software			3,160				4,717				9,276				9,102
		$	23,225			$	25,526			$	49,407			$	47,095
Percentage of net sales
Speech generating devices			86.4	%			81.5	%			81.2	%			80.7	%
Special education software			13.6	%			18.5	%			18.8	%			19.3	%
			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. Special education software sales for the twenty-six weeks ended December 30, 2011 includes a large international order of approximately $1.4 million.

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). Fourth quarter sales represented 30% and 29% of total annual sales for fiscal years 2011 and 2010, respectively. In our fiscal year ended July 1, 2011, 56% of our net sales occurred in the second half of our fiscal year compared to 54% of our net sales occurring in the second half of our fiscal year 2010. 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 mix between devices and 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 and processing), 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.

 

22

---

Table of Contents

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 and amortized over the estimated useful life of the patent related asset.

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, acquired patents, internally developed patents, trade names, and acquired backlog which are typically 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 10 years, acquired patents are amortized over 10 years, internally developed patents are amortized when granted, 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, patents 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 credit facilities.

Income 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. In addition, DynaVox Inc. is 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 (loss) 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 management’s 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 (loss) 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 and debt refinancing fees. 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 (loss), net sales, gross profit and income from operations, to measure operating performance.

 

23

---

Table of Contents

Non-Controlling Interest

The Company is 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. 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 condensed consolidated 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 condensed consolidated 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 December 30, 2011 is calculated as follows:

 

		Non- controlling Unitholders Holdings Units				DynaVox Inc. Outstanding Common A Shares				Total*
December 30, 2011			19,299,361				10,504,818				29,804,179
			64.8	%			35.2	%			100.00	%

 

*	Assumes all of the holders of Holdings Units exchange their Holdings Units for shares of the Corporation’s Class A common stock on a one-for-one basis.

 

24

---

Table of Contents

Results of Operations

The following table summarizes key components of our results of operations for the periods indicated:

 

		Thirteen weeks ended																Twenty-six weeks ended
		December 30, 2011				% of Net Sales				December 31, 2010				% of Net Sales				December 30, 2011				% of Net Sales				December 31, 2010				% of Net Sales
		(unaudited) (Dollar in thousands)
Net sales		$	23,225				100.0	%		$	25,526				100.0	%		$	49,407				100.0	%		$	47,095				100.0	%
Costs of goods sold			6,580				28.3	%			7,587				29.7	%			13,766				27.9	%			13,821				29.3	%
Gross profit			16,645				71.7	%			17,939				70.3	%			35,641				72.1	%			33,274				70.7	%
Operating expenses:
Selling and marketing			8,041				34.6	%			8,747				34.3	%			17,604				35.6	%			17,484				37.1	%
Research and development			1,520				6.5	%			2,358				9.2	%			3,711				7.5	%			4,892				10.4	%
General and administrative			4,458				19.2	%			4,977				19.5	%			8,834				17.9	%			9,764				20.7	%
Amortization of intangibles			110				0.5	%			114				0.4	%			220				0.4	%			222				0.5	%
Total operating expenses			14,129				60.8	%			16,196				63.4	%			30,369				61.5	%			32,362				68.7	%
Income from operations			2,516				10.8	%			1,743				6.8	%			5,272				10.7	%			912				1.9	%
Other Income (Expense):
Interest income			9				0.0	%			4				0.0	%			15				0.0	%			13				0.0	%
Interest expense, net			(573	)			-2.5	%			(663	)			-2.6	%			(1,142	)			-2.3	%			(1,346	)			-2.9	%
Change in fair value and net loss on interest rate swap agreements			—				0.0	%			(9	)			-0.0	%			—				0.0	%			(76	)			-0.2	%
Other income (expense)—net			(31	)			-0.1	%			33				0.1	%			(40	)			-0.1	%			(235	)			-0.5	%
Total other expense			(595	)			-2.6	%			(635	)			-2.5	%			(1,167	)			-2.4	%			(1,644	)			-3.5	%
Income (loss) before income taxes		$	1,921				8.3	%		$	1,108				4.3	%		$	4,105				8.3	%		$	(732	)			-1.6	%

 

25

---

Table of Contents

 

		Thirteen Weeks Ended								Twenty-six Weeks Ended
		December 30, 2011 (Unaudited)				December 31, 2010 (Unaudited)				December 30, 2011 (Unaudited)				December 31, 2010 (Unaudited)
		(Dollars in thousands)								(Dollars in thousands)
Other Financial Data
Adjusted EBITDA (1)		$	4,206			$	3,901			$	8,703			$	4,693

 

(1)	Adjusted EBITDA represents income (loss) before income taxes, interest income, interest expense, impairment loss, depreciation, amortization and the other adjustments noted in the table below.

 

		Adjusted EBITDA Reconciliation
		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		December 30, 2011 (Unaudited)				December 31, 2010 (Unaudited)				December 30, 2011 (Unaudited)				December 31, 2010 (Unaudited)
		(Dollars in thousands)								(Dollars in thousands)
Income (loss) before income taxes		$	1,921			$	1,108			$	4,105			$	(732	)
Depreciation			778				884				1,592				1,663
Amortization of certain intangibles			226				234				453				463
Interest income			(9	)			(4	)			(15	)			(13	)
Interest expense			573				663				1,142				1,346
Change in fair value and net loss on interest rate swap agreements			—				9				—				76
Other expense (income), net (1)			(8	)			(36	)			(6	)			201
Equity-based compensation			587				514				1,129				1,059
Employee severance and other costs			60				248				148				244
Acquisition costs (2)			—				209				—				241
Other adjustments (3)			78				72				155				145
Adjusted EBITDA		$	4,206			$	3,901			$	8,703			$	4,693

 

(1)	Excludes realized foreign currency gains or losses.

(2)

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.

(3)	Includes certain amounts related to other taxes.

 

26

---

Table of Contents

Thirteen Week Period Ended December 30, 2011 Compared to the Thirteen Week Period Ended December 31, 2010

Net Sales

Net sales decreased 9.0%, or $2.3 million, to $23.2 million for the thirteen week period ended December 30, 2011 from $25.5 million for the thirteen week period ended December 31, 2010. The decrease in device sales was $0.7 million, or 3.6%. Software sales decreased $1.6 million, or 33.0%, in the thirteen week period ended December 30, 2011 compared to the thirteen week period ended December 31, 2010. As previously disclosed, we experienced a softening of demand, as compared to our recent historical growth rates, for both our speech generating devices and software products beginning in fiscal year 2011. This softening of demand continued in the second quarter of fiscal year 2012. We believe that reduced domestic government funding, and particularly more constrained state and local government funding of school budgets, has adversely affected our product sales in the United States during this time period. We also believe that constraints in government spending in the Company’s key international markets, including Canada and the United Kingdom, had a similar effect on our product sales in those regions.

During the thirteen week period ended December 30, 2011 we also experienced a funding shift, as a large alternative payor elected to discontinue its role as primary payor for speech generating devices and assumed the role of secondary payor behind other third party payors, such as Medicare, Medicaid and private insurance. As a result of the funding shift, we recorded $1.1 million less in device sales in the second quarter of fiscal-year 2012 as compared to the second quarter of fiscal year 2011 from this funding source. Our expectation is that we will continue to supply patients impacted by the funding shift with devices in the future through other third party payors, which historically have averaged between three and six months for final authorization compared to approximately 30 days for this specific alternative payor.

Gross Profit and Gross Margin

Gross profit decreased 7.2%, or $1.3 million, to $16.6 million for the thirteen week period ended December 31, 2011 from $17.9 million for the thirteen week period ended December 31, 2010. The $1.3 million decrease in gross profit was due mainly to lower software sales of $1.6 million. Gross margin increased 140 basis points to 71.7% for the thirteen week period ended December 31, 2011 from 70.3% for the thirteen week period ended December 31, 2010. The improved gross margin was primarily a result of a more favorable product mix and lower device royalty costs relating primarily to our EyeMax product.

Operating Expenses

Selling and Marketing. Selling and marketing expenses decreased 8.1%, to $8.0 million for the thirteen week period ended December 30, 2011 from $8.7 million for the thirteen week period ended December 31, 2010. The $0.7 million net decrease reflects approximately $0.5 million of lower headcount costs and lower variable compensation of $0.2 million. The $0.5 million decrease in headcount cost was caused primarily as a result of lower sales and marketing staffing during the thirteen week period ended December 31, 2011 as compared to the thirteen week period ended December 31, 2010. The decrease in variable compensation was primarily a result of the 9.0% lower net sales in the thirteen week period ended December 30, 2011 compared to the thirteen week period ended December 31, 2010. Selling and marketing expenses for the thirteen week period ended December 30, 2011 include $0.5 million for a direct to consumer marketing initiative undertaken by the Company during the second half of fiscal year 2011 for which there was no corresponding expense in the thirteen week period ended December 31, 2010. The $0.5 million of additional expense was offset by lower trade show and travel costs coupled with reductions in other selling and marketing items. Selling and marketing expenses totaled 34.6% and 34.3% of net sales for the thirteen week periods ended December 30, 2011 and December 31, 2010, respectively.

Research and Development. Research and development expenses decreased 35.6%, or $0.8 million, to $1.5 million for the thirteen week period ended December 30, 2011 from $2.3 million for the thirteen week period ended December 31, 2010. This net decrease was due primarily to a $0.7 million reduction in both internal and external development resources as development requirements retracted subsequent to the launch of our Maestro device in October 2010. Lower variable compensation of $0.1 million also contributed to the reduction in research and development expenses. Research and development expenses totaled 6.5% and 9.2% of net sales for the thirteen week periods ended December 30, 2011 and December 31, 2010, respectively.

General and Administrative. General and administrative expenses decreased 10.4%, or $0.5 million, to $4.5 million for the thirteen week period ended December 30, 2011 from $5.0 million for the thirteen week period ended December 31, 2010. The net decrease includes a $0.2 million reduction in professional services, $0.2 million of lower restructuring expense and $0.2 million less in acquisition costs. A $0.1 million decrease in variable compensation also contributed to the $0.5 million net decrease, which was offset, to some degree, by a $0.2 million increase in bad debt expense. These costs as a percentage of net sales were 19.2% and 19.5% for the thirteen week periods ended December 30, 2011 and December 31, 2010, respectively.

Amortization of Certain Intangibles. Amortization of certain intangibles remained relatively consistent at $0.1 million for the thirteen week period ended December 30, 2011 compared to $0.1 million for the thirteen week period ended December 31, 2010.

Income From Operations. Income from operations was $2.5 million for the thirteen week period ended December 30, 2011 compared to $1.7 million for the thirteen week period ended December 31, 2010. The change in income from operations was due to the reasons discussed above.

 

27

---

Table of Contents

Interest Expense. Interest expense decreased $0.1 million to $0.6 million for the thirteen week period ended December 30, 2011 from $0.7 million for the thirteen week period ended December 31, 2010 primarily as a result of $8.9 million in voluntary debt repayments in fiscal year 2011 and $3.1 million of regularly schedule debt repayments in fiscal year 2011.

Adjusted EBITDA. Adjusted EBITDA increased $0.3 million to $4.2 million for the thirteen week period ended December 30, 2011 compared to $3.9 million for the thirteen week period ended December 31, 2010. The $0.3 million increase was primarily a result of the $2.3 million decrease in net sales, a $1.0 million reduction in cost of goods sold and lower operating expenses. Adjusted EBITDA represents income (loss) before income taxes, interest income, interest expense, impairment loss, depreciation, amortization and the other adjustments noted in the table above.

Twenty-Six Week Period Ended December 30, 2011 Compared to the Twenty-Six Week Period Ended December 31, 2010

Net Sales

Net sales increased 4.9%, or $2.3 million, to $49.4 million for the twenty-six week period ended December 30, 2011 from $47.1 million for the twenty-six week period ended December 31, 2010. The increase in device sales was $2.1 million, or 5.6%. Software sales increased $0.2 million, or 1.9%, in the twenty-six week period ended December 30, 2011 compared to the twenty-six week period ended December 31, 2010. Software sales for the twenty-six week period ended December 30, 2011 included a large international order of approximately $1.4 million. Excluding the large international order, overall net sales increased $0.9 million, or 2.0% and software sales decreased $1.2 million, or 13.3%. As previously disclosed, we experienced a softening of demand, as compared to our recent historical growth rates, for both our speech generating devices and software products beginning in fiscal year 2011. Although demand improved in the first quarter of fiscal year 2012 as net sales increased 21.4% compared to the first quarter of fiscal year 2011, we experienced less demand in the second quarter of fiscal year 2012 as net sales decreased 9.0% compared to the second quarter of fiscal year 2011. We believe that reduced domestic government funding, and particularly more constrained state and local government funding of school budgets, adversely affect our product sales in the United States during periods of lower demand. We also believe that constraints in government spending in the Company’s key international markets, including Canada and the United Kingdom, had a similar effect on our product sales in those regions.

During the twenty-six week period ended December 30, 2011 we also experienced a funding shift, as a large alternative payor elected to discontinue its role as primary payor for speech generating devices and assumed the role of secondary payor behind other third party payors, such as Medicare, Medicaid and private insurance. As a result of the funding shift, we recorded $1.1 million less in device sales in the first half of fiscal year 2012 as compared to the first half of fiscal year 2011 from this funding source. Our expectation is that we will continue to supply patients impacted by the funding shift with devices in the future through other third party payors, which historically have averaged between three and six months for final authorization compared to approximately 30 days for this specific alternative payor.

Gross Profit and Gross Margin

Gross profit increased 7.1%, or $2.4 million, to $35.6 million for the twenty-six week period ended December 31, 2011 from $33.2 million for the twenty-six week period ended December 31, 2010. The $2.4 million increase in gross profit was due mainly to higher device sales of $2.1 million. Gross margin increased 140 basis points to 72.1% for the thirteen week period ended December 31, 2011 from 70.7% for the twenty-six week period ended December 31, 2010. The improved gross margin was primarily a result of a more favorable product mix.

Operating Expenses

Selling and Marketing. Selling and marketing expenses increased 0.7%, to $17.6 million for the twenty-six week period ended December 30, 2011 from $17.5 million for the twenty-six week period ended December 31, 2010. The $0.1 million net increase reflects $0.7 million of lower headcount offset by higher variable compensation of $0.7 million. The $0.7 million decrease in headcount costs was caused primarily as a result of lower sales and marketing staffing during the twenty-six week period ended December 31, 2011 as compared to the twenty-six week period ended December 31, 2010. The increase in variable compensation was primarily a result of the 4.9% higher net sales in the twenty-six week period ended December 30, 2011 compared to the twenty-six week period ended December 31, 2010. Selling and marketing expenses for the twenty-six week period ended December 30, 2011 include $1.0 million for a direct to consumer marketing initiative undertaken by the Company during the second half of fiscal year 2011 for which there was no corresponding expense in the twenty-six week period ended December 31, 2010. The $1.0 million of additional expense was offset primarily by lower advertising and trade show costs coupled with reductions in other selling and marketing items. Selling and marketing expenses totaled 35.6% and 37.1% of net sales for the twenty-six week periods ended December 30, 2011 and December 31, 2010, respectively.

Research and Development. Research and development expenses decreased 24.1%, or $1.2 million, to $3.7 million for the twenty-six week period ended December 30, 2011 from $4.9 million for the twenty-six week period ended December 31, 2010. This net decrease was due primarily to a $1.5 million reduction in both internal and external development resources as development requirements retracted subsequent to the launch of our Maestro device in October 2010. Higher variable compensation of $0.2 million offset the reduction in development resources to some degree. Research and development expenses totaled 7.5% and 10.4% of net sales for the twenty-six week periods ended December 30, 2011 and December 31, 2010, respectively.

 

28

---

Table of Contents

General and Administrative. General and administrative expenses decreased 9.5%, or $0.9 million, to $8.8 million for the twenty-six week period ended December 30, 2011 from $9.7 million for the twenty-six week period ended December 31, 2010. The net decrease includes a $0.9 million reduction in professional services, $0.2 million of lower restructuring expense and $0.2 million less in acquisition costs. A $0.3 million increase in variable compensation and $0.5 million of higher bad debt expense offset, to some extent, the decreases discussed above. A $0.2 million reduction in information technology expense also contributed to the net decrease. These costs as a percentage of net sales were 17.9% and 20.7% for the twenty-six week periods ended December 30, 2011 and December 31, 2010, respectively.

Amortization of Certain Intangibles. Amortization of certain intangibles remained consistent at $0.2 million for the twenty-six week period ended December 30, 2011 compared to $0.2 million for the twenty-six week period ended December 31, 2010.

Income From Operations. Income from operations was $5.3 million for the twenty-six week period ended December 30, 2011 compared to $0.9 million for the twenty-six week period ended December 31, 2010. The change in income from operations was due to the reasons discussed above.

Interest Expense. Interest expense decreased $0.2 million to $1.1 million for the twenty-six week period ended December 30, 2011 from $1.3 million for the twenty-six week period ended December 31, 2010 primarily as a result of $8.9 million in voluntary debt repayments in fiscal year 2011 and $3.1 million of regularly schedule debt repayments in fiscal year 2011.

Adjusted EBITDA. Adjusted EBITDA increased $4.0 million to $8.7 million for the twenty-six week period ended December 30, 2011 compared to $4.7 million for the twenty-six week period ended December 31, 2010. The $4.0 million increase was primarily a result of the $2.3 million increase in net sales and the $2.0 million decrease in operating expenses. Adjusted EBITDA represents income (loss) 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.

 

		As of
		December 30, 2011				December 31, 2010
		(Amounts in thousands)
Cash and cash equivalents		$	20,020			$	12,576
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. Any borrowings under the revolving loan facility is either at the London InterBank Offered Rate (LIBOR), plus a credit spread or the Prime rate, plus a credit spread, at the Company’s 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 Company’s 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 the DynaVox Holdings owners that provides for the payment from time to time by DynaVox Inc. to the DynaVox Holdings 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 (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.

 

29

---

Table of Contents

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 for the periods indicated are shown in the following table:

 

		Twenty-Six weeks ended
		December 30, 2011				December 31, 2010
		(Amounts in thousands)
Cash flow summary
Provided by (used in) operating activities		$	9,469			$	(1,568	)
Used in investing activities			(284	)			(2,325	)
Used in financing activities			(1,234	)			(4,348	)
Effect of exchange rate changes on cash			(102	)			40
Increase (decrease) in cash		$	7,849			$	(8,201	)

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.

 

30

---

Table of Contents

The principal factors impacting net cash provided by or used in operating activities are the operation of our business and the management of our working capital as shown below for the twenty-six week periods ended December 30, 2011 and December 31, 2010:

 

		Twenty-Six weeks ended
		December 30, 2011				December 31, 2010
		(Amounts in thousands)
Operating activities
Net income (loss)		$	3,471			$	(725	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			2,385				2,444
Equity-based compensation expense			1,129				1,059
Change in fair value of interest rate swaps			—				(295	)
Bad debt expense			1,301				767
Change in fair value of acquisition contingencies			4				(183	)
Deferred taxes			495				(170	)
(Gain) loss on disposal of assets			(6	)			1
			8,779				3,623
Changes in operating assets and liabilities			690				(4,466	)
Net cash provided by (used in) operating activities		$	9,469			$	(1,568	)

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:

 

		Twenty-six weeks ended
		December 30, 2011				December 31, 2010
		(Amounts in thousands)
Changes in operating assets and liabilities details:
Trade receivables		$	3,006			$	1,597
Inventories			(174	)			(142	)
Trade accounts payable			(1,830	)			(674	)
Accrued expenses and other current liabilities			(554	)			(4,900	)
Other			242				(347	)
Changes in operating assets and liabilities		$	690			$	(4,466	)

Our net cash provided by operating activities for the twenty-six week period ended December 30, 2011 was $9.5 million and consisted primarily of net income of $3.5 million, depreciation and amortization of $2.4 million, equity-based compensation of $1.1 million and bad debt expense of $1.3 million. Net cash used in operating activities for the twenty-six week period ended December 31, 2010 was $1.6 million and consisted primarily of a net loss of $0.7 million, a decrease in operating assets and liabilities of $4.4 million, partially offset by depreciation and amortization of $2.4 million and equity-based compensation of $1.1 million.

Investing Activities

Investing activities for the twenty-six week periods ended December 30, 2011 and December 31, 2010 consisted mainly of capital expenditures.

 

		Twenty-six weeks ended
		December 30, 2011				December 31, 2010
		(Amounts in thousands)
Investing activities
Capital expenditures		$	(296	)		$	(2,325	)
Proceeds from sale of property and equipment			12				—
Net cash used in investing activities		$	(284	)		$	(2,325	)

 

31

---

Table of Contents

Net cash used in investing activities consists mainly of capital expenditures for each twenty-six week period presented. Capital expenditures for the twenty-six weeks ended December 31, 2010 included the purchase of $1.7 million of our then new Maestro speech generating devices to be used primarily as demonstration devices by our sales personnel.

Management anticipates that capital expenditures during fiscal year 2012 will range between $0.5 million and $1.0 million.

Financing Activities

Financing activities for the twenty-six week periods ended December 30, 2011 and December 31, 2010 consisted primarily of shareholder distributions, payment of acquisition contingencies and repayments of our outstanding indebtedness.

 

		Twenty-six weeks ended
		December 30, 2011				December 31, 2010
		(Amounts in thousands)
Financing activities
Repayment of debt agreements		$	—			$	(2,020	)
Payment on acquisition contingencies			(654	)			(570	)
Deferred Issuance Costs			—				(149	)
Equity distributions			(573	)			(1,609	)
Redemption of management and common units			(7	)			—
Net cash used in financing activities		$	(1,234	)		$	(4,348	)

Net cash of $1.2 million was required for financing activities during the twenty-six week period ended December 30, 2011 compared to $4.3 million required in the twenty-six week period ended December 31, 2010. The $3.1 million decrease in cash used in financing activities was mainly a result of $2.0 million less in debt repayments and $1.0 million less in equity distributions during the twenty-six weeks ended December 30, 2011 compared to the twenty-six week period ended December 31, 2010. The debt repayment of $2.0 million for the twenty-six weeks ended December 30, 2010 included a $1.1 million note payable related to an acquisition in 2004.

Financing Agreements

As of December 30, 2011, we were in compliance in all material respects with all covenants contained in our financing agreements, as amended. We are not required to make debt payments during the 12 months starting December 31, 2011 as a result of $8.9 million of voluntary prepayments made during fiscal year 2011.

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 December 30, 2011, $36.2 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 LLC’s 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

 

32

---

Table of Contents

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.

On December 14, 2011, we entered into a fourth amendment to our credit facility which became effective immediately. The amendment modified the calculation of the ratios of net senior debt to adjusted EBITDA and net total debt to adjusted EBITDA by allowing us to utilize cash and cash equivalents of up to $5.0 million to reduce total debt and senior debt and to derive net senior debt and net total debt without the imposition of additional conditions or requirements. The amendment also allows us to make a restricted payment of a maximum of $5.0 million in the aggregate to the Company to repurchase shares of its equity interests provided that before and after giving effect to such restricted payment, no event of default shall have occurred and be continuing. Prior to any repurchase of its shares, the Company intends to seek approval from its Board of Directors. No such approval has been sought or received at this time.

All obligations under the credit facility are unconditionally guaranteed by the immediate holding company parent of DynaVox Systems LLC and each of DynaVox Systems LLC’s existing and future wholly-owned domestic subsidiaries. The credit facility and the related guarantees are secured by substantially all of DynaVox Systems LLC’s 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 2011 as a result of the $8.9 million of additional voluntary debt repayments made during fiscal year 2011.

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 increased to 1.25 to 1.00 as of the last day of the first quarter of fiscal year 2012 and then increases 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 2012 is $9.5 million which includes a $3.5 million carryover from the prior fiscal year.

As of December 30, 2011, the ratio of net senior debt to Adjusted EBITDA for the twelve-month period then ended was 1.34 to 1.00, the ratio of net total debt to Adjusted EBITDA for the twelve-month period then ended was 1.34 to 1.00 and the Fixed Charge Coverage Ratio for the twelve-month period then ended was 4.01 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. As of December 30, 2011, net senior debt and net total debt were both $31.2 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), net cash taxes paid, scheduled principal payments on all debt and restricted cash distributions (which items totaled $5.5 million for the twelve months ended December 30, 2011) by operating cash flow. 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 December 30, 2011 was $22.1 million.

 

33

---

Table of Contents

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 first twenty-six weeks of fiscal year 2012, as defined in the agreement, were $0.2 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 affects 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.

Critical Accounting Policies

Management’s 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 1, 2011, filed with the Securities and Exchange Commission (the “SEC”) on September 27, 2011.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements.

 

34

---

Table of Contents

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

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 30, 2011. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act, is recorded, processed , summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 30, 2011, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

Management has not identified any changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended December 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

35

---

Table of Contents

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

As of the date of this report, there were no material proceedings underway. In the ordinary course of business, we are from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation. In management’s opinion, resolution of those matters is not expected to have a material adverse impact on the Company’s results of operations, cash flows or its financial position. However, 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.

Item 1A. Risk Factors

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 1, 2011.

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. Mine Safety Disclosures

None.

Item 5. Other Information

Not Applicable.

 

36

---

Table of Contents

Item 6. Exhibits

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 Number				Description of Exhibit
	3.1			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)).
	3.2			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)).
	10.1	*		Fourth Amendment, dated December 14, 2011, to the Third Amended and Restated Credit Agreement
	31.1	*		Certification required by Rule 13a-14(a).
	31.2	*		Certification required by Rule 13a-14(a).
	32.1	**		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	**		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101	**		The following financial information from DynaVox Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 30, 2011 formatted in XBRL: (i) Condensed Consolidated Balance Sheets as of December 30, 2011 and July 1, 2011; (ii) Condensed Consolidated Statements of Operations for the thirteen and twenty-six week periods ended December 30, 2011 and December 31, 2010; (iii) Condensed Consolidated Statements of Stockholders’ Equity for the twenty-six week periods ended December 31, 2010 and December 30, 2011; (iv) Condensed Consolidated Statements of Cash Flows for the twenty-six week periods ended December 30, 2011 and December 31, 2010; and (v) Notes to Condensed Consolidated Financial Statements.

 

*	Filed herewith.

**	Furnished herewith.

 

37

---

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

				DynaVox Inc.
Date: February 8, 2012				By		/s/ Edward L. Donnelly
						Edward L. Donnelly
						Chief Executive Officer
Date: February 8, 2012				By		/s/ Kenneth D. Misch
						Kenneth D. Misch
						Chief Financial Officer

 

38