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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 2, 2009

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 333-116673

 

 

DA-LITE SCREEN COMPANY, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Indiana   35-1013951

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

 

3100 North Detroit Street, P.O. Box 137

Warsaw, Indiana

  46581-0137
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (574) 267-8101

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act, or a smaller reporting company (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

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

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

As of November 4, 2009, there were 5,389.62 shares of the registrant’s common stock outstanding (all of which are privately owned and are not traded on any public market).

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page
PART I  

Financial Information

  
Item 1.  

Condensed Consolidated Financial Statements (unaudited)

   1
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   10
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

   18
Item 4.  

Controls and Procedures

   19
PART II  

Other Information

  
Item 1A.  

Risk Factors

   20
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

   20
Item 6.  

Exhibits

   20
 

Signatures

   21
 

Exhibit Index

   22

 

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PART I

FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements.

DA-LITE SCREEN COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value amount)

 

     (Unaudited)
As of
October 2,

2009
    As of
December 26,

2008
 
Assets     

Current Assets:

    

Cash and cash equivalents

   $ 1,295      $ 1,633   

Accounts receivable, less allowance for doubtful accounts

     14,555        16,033   

Inventories

     9,046        14,442   

Prepaid expenses and other

     2,039        2,614   

Prepaid income taxes

     854        623   
                

Total current assets

     27,789        35,345   
                

Property, plant and equipment

     59,399        60,160   

Less accumulated depreciation

     42,677        42,531   
                

Net property, plant, and equipment

     16,722        17,629   
                

Goodwill

     20,440        26,353   

Other assets, net

     605        1,620   
                
   $ 65,556      $ 80,947   
                
Liabilities and Stockholders’ Deficit     

Current liabilities:

    

Line of credit

   $ 2,200      $ —     

Accounts payable

     2,614        4,029   

Accrued expenses

    

Interest

     3,709        1,295   

Other

     5,062        4,935   
                

Total accrued expenses

     8,771        6,230   
                

Total current liabilities

     13,585        10,259   

Long-term debt

     101,955        119,730   
                

Total liabilities

     115,540        129,989   
                

Commitments and contingencies (note 9)

    

Stockholders’ deficit:

    

Common stock, $1 par value. Authorized 1,000,000 shares; issued 10,686 shares

     11        11   

Additional paid-in capital

     1,710        1,710   

Accumulated deficit

     (30,587     (29,052

Accumulated other comprehensive income

     4,334        3,741   

Less treasury stock, 5,296.38 shares at October 2, 2009 and December 26, 2008 at cost

     (25,452     (25,452
                

Total stockholders’ deficit

     (49,984     (49,042
                
   $ 65,556      $ 80,947   
                

See accompanying notes to condensed consolidated financial statements.

 

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DA-LITE SCREEN COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, unaudited)

 

    

13 Weeks
Ended

October 2,

2009

   

13 Weeks
Ended

September 26,
2008

  

40 Weeks
Ended

October 2,

2009

   

39 Weeks
Ended

September 26,
2008

              

Net sales

   $ 33,793      $ 42,952    $ 98,890      $ 129,847

Cost of sales

     20,714        26,883      63,558        79,820
              

Gross profit

     13,079        16,069      35,332        50,027

Selling, general, and administrative expenses

     4,418        4,888      14,957        16,911

Goodwill impairment

     —          —        5,926        —  
              

Operating income (loss)

     8,661        11,181      14,449        33,116
              

Other expense (income):

         

Interest

     2,914        3,044      9,295        9,361

Miscellaneous, net

     (786     60      (2,075     85
              

Total other expense

     2,128        3,104      7,220        9,446
              

Income (loss) before income taxes

     6,533        8,077      7,229        23,670
              

Income tax expense (benefit)

     (4     204      (276     800
              

Net income (loss)

   $ 6,537      $ 7,873    $ 7,505      $ 22,870
              

See accompanying notes to condensed consolidated financial statements.

 

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DA-LITE SCREEN COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, unaudited)

 

     40 weeks
Ended

October 2,
2009
    39 weeks
Ended

September 26,
2008
 

Cash flows from operating activities:

    

Net income

   $ 7,505      $ 22,870   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     2,177        2,404   

Amortization and write-off of debt issuance costs

     1,014        618   

Goodwill impairment

     5,926        —     

Gain on disposal of assets

     —          (43

Change in:

    

Accounts receivable

     1,803        (914

Inventories

     5,497        (13

Prepaid expenses and other

     584        (132

Accounts payable

     (1,692     (488

Accrued expenses

     2,277        3,435   

Other

     —          32   
                

Net cash provided by operating activities

     25,091        27,769   
                

Cash flows from investing activities:

    

Proceeds from sale of assets

     —          43   

Payments for purchase of minority shares

     —          (956

Purchase of property, plant and equipment

     (1,036     (1,317

Purchase of short-term investments

     —          (5,000

Maturities of short-term investments

     —          2,550   
                

Net cash used in investing activities

     (1,036     (4,680
                

Cash flows from financing activities:

    

Proceeds from revolving credit facility

     12,700        —     

Payments on revolving credit facility

     (10,500     —     

Payment to retire senior notes

     (17,775     (4,250

Distributions to stockholders

     (9,040     (20,440

Repurchase of common stock

     —          (651

Exercise of common stock options

     —          132   
                

Net cash used in financing activities

     (24,615     (25,209
                

Effect of foreign currency exchange rate changes on cash and cash equivalents

     222        (296
                

Net change in cash and cash equivalents

     (338     (2416

Cash and cash equivalents at beginning of period

     1,633        5,704   
                

Cash and cash equivalents at end of period

   $ 1,295      $ 3,288   
                

See accompanying notes to condensed consolidated financial statements.

 

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DA-LITE SCREEN COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Basis of Presentation

The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in the annual report on Form 10-K filed by Da-Lite Screen Company, Inc. (together with all of its subsidiaries, the “Company” or “Da-Lite”) for the fiscal year ended December 26, 2008. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all of the adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. In accordance with Accounting Standards Codification (“ASC”) 855 in preparing the condensed consolidated financial statements, the Company has evaluated events and transactions occurring subsequent to the financial statement date through the financial statement issuance date of November 4, 2009 for potential recognition or disclosure. Results for interim periods should not be considered indicative of results for the full year.

The accompanying consolidated financial statements include the accounts of Da-Lite Screen Company, Inc. (Da-Lite), Da-Lite International, Inc., a domestic international sales corporation, and Projecta B.V. (Projecta), a Netherlands limited liability company, and Projecta’s wholly-owned subsidiary Procolor S.A.S. (Procolor), a French corporation. All intercompany accounts and transactions have been eliminated.

The Company operates on a 52/53-week fiscal year ending on the last Friday of December. The third quarters of 2009 and 2008 were 13-week periods and the first three quarters of 2009 and 2008 were 39–week and 40–week periods, respectively. The Company’s 2009 and 2008 fiscal years will be 53-week and 52-week years, respectively.

 

2. Summary of Significant Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires that management make a number of assumptions and estimates that affect the reported amounts of assets, liabilities, revenue and expenses in the consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the Company in the future, actual results may differ from these estimates and assumptions. The Company’s critical accounting policies are those that affect its consolidated financial statements materially and involve a significant level of judgment by management.

Revenue Recognition

The Company recognizes revenue when it has received an order from a customer, title has transferred to customer, the sales price is fixed or determinable and the collectability of sales price is reasonably assured. All amounts billed to customers in a sales transaction related to shipping and handling are recorded as revenue, and costs incurred by the Company for shipping and handling are recorded as cost of sales. Provision for customer sales allowances, returns and warranties are made at the time of shipment. The Company does not have any post-shipment obligations related to its sales such as installation, training or customer acceptance.

 

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Table of Contents

Allowance for Doubtful Accounts

The financial status of customers is routinely checked and monitored by the Company when granting credit. The Company provides an allowance for doubtful accounts based upon historical experience and management’s estimate of amounts to be collected from past due accounts.

Goodwill

Goodwill represents the excess of purchase price over the fair value of identifiable net assets acquired. The Company applies the provisions of ASC 350 “Intangibles-Goodwill and Other”, and management tests goodwill for impairment to determine whether its carrying value exceeds its implied fair value at least annually or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. The Company has three reporting units (Da-Lite US, Procolor S.A.S, and Projecta BV) of which only Da-Lite US and Projecta BV had goodwill as of December 26, 2008. As of October 2, 2009 the goodwill relates only to the Da-Lite reporting unit. The Company’s annual impairment testing date is the last day of the fiscal year.

The goodwill impairment test involves a two-step process. The first step is a comparison of each reporting unit’s fair value to its carrying value. The Company estimates fair value based on a combination of the market value approach and income approach using discounted cash flows. These valuations are based on assumptions and estimates including projected future cash flows, discount rates, and determination of appropriate market comparables. The fair value of each reporting unit is estimated using both methods and each method is given equal weighting in arriving at the fair value of the reporting unit.

The second step, if needed, requires the Company to allocate the fair value of the reporting unit derived in the first step to the fair value of the reporting unit’s net assets to calculate the implied value of the goodwill. If the carrying value of the reporting unit’s goodwill is in excess of the implied fair value of goodwill, an impairment charge is taken to reduce the goodwill to its implied fair value.

Disclosures About Fair Value of Financial Instruments

Financial instruments are described as cash or contractual obligations or rights to pay or receive cash. The fair value of certain financial instruments approximates the carrying value because of the short-term maturity of these instruments. The estimated fair value of long-term debt is approximately $92.5 million and $105 million based upon the quoted market value at October 2, 2009 and December 26, 2008, respectively.

Recent Accounting Pronouncements

There were various accounting standards and interpretations issued recently, none of which are expected to have a material impact on the company’s financial position, operations or cash flows.

In June 2009, the FASB issued SFAS No. 168 (“SFAS 168”), “Accounting Standards Codification ™ and the Hierarchy of Generally Accepted Accounting Principles”. The FASB Accounting Standards Codification ™ (“Codification”) has become a source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. However, rules and interpretive releases of the Securities Exchange Commission (“SEC”) issued under the authority of federal securities laws will continue to be sources of

 

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authoritative GAAP for SEC registrants. SFAS 168 is effective for interim and annual reporting periods ending after September 15, 2009. Therefore, beginning with our quarter ended October 2, 2009, all references made by it to GAAP in its consolidated financial statements now use the new Codification numbering system. The Codification does not change or alter existing GAAP and, therefore, it is not having an impact on our financial position, results of operations and cash flows.

 

3. Notes Payable, Revolving Credit Agreement and Long-term Debt

The Company issued $160 million of 9 1/2% senior unsecured notes due in May 2011 during fiscal year 2004, which were subsequently exchanged for substantially identical notes that were registered with the Securities and Exchange Commission (the “9 1/2% Senior Notes due 2011” or “Notes”). The net proceeds from the issuance of the Notes were used during fiscal year 2004 to retire approximately $15.0 million of indebtedness outstanding under a then-existing credit facility, to pay a special distribution to stockholders of approximately $134.6 million and for general corporate purposes. The Company currently may redeem any of the Notes at a redemption price of 102.375% of their principal amount plus accrued interest. Any outstanding principal is due in May 2011 and interest is payable semi-annually in arrears on May 15 and November 15 of each year.

In the Indenture related to the 9 1/2% Senior Notes due 2011, the Company agreed to covenants that limit it and its restricted subsidiaries’ (i.e., Projecta B.V., Procolor S.A.S.) ability, among other things, to: (a) incur additional debt and issue preferred stock, (b) pay dividends, acquire shares of capital stock, make payments on subordinated debt or make investments, (c) place limitations on distributions from restricted subsidiaries, (d) issue or sell capital stock of restricted subsidiaries, (e) issue guarantees, (f) sell or exchange assets, (g) enter into transactions with stockholders and affiliates, (h) create liens and (i) effect mergers. In addition, if a change of control occurs, each holder of Notes will have the right to require the Company to repurchase all or part of the holder’s Notes at a price equal to 101% of their principal amount, plus any accrued interest to the date of purchase. The Company was in compliance with all covenants at October 2, 2009 and December 26, 2008.

On April 20, 2009, the Company entered into a new two-year arrangement for an unsecured revolving credit facility, with maximum possible borrowings equal to $19.5 million, with Lake City Bank (the “Bank”). The terms of the new two-year unsecured revolving credit facility are substantially similar to a pre-existing credit facility with the Bank that allowed for maximum borrowings of $15.0 million and which was due to expire on May 1, 2010. Interest on any outstanding borrowings related to the new line of credit is calculated at the prime rate, subject to an interest rate floor of 4.00%. As the prime rate is below the floor, the interest rate in effect as of October 2, 2009 was 4.00%. As of October 2, 2009, $2.2 million of borrowings were outstanding under this facility.

The Company’s Dutch subsidiary, Projecta, has an overdraft line of credit with maximum possible borrowings equal to 1.5 million Euros. Interest on outstanding borrowings in Europe related to Projecta’s overdraft line of credit is calculated at the Fortis Basic Rate plus 1.50%, the sum of which was 6.50% on October 2, 2009. At October 2, 2009, and December 26, 2008, Projecta had no outstanding balances under this credit facility

The Company has provided an insurance carrier with a standby letter of credit for $0.5 million for self-insured amounts under its insurance program.

 

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4. Stock Options

The Company has a nonqualified stock option plan under which options are granted to certain employees. Options under the plan generally vest one-fifth each year from the anniversary date. During 2004, the Company also granted options to certain employees that were immediately 100% vested. The options expire after ten years from the date of grant. Fair value calculations are based on highly subjective assumptions. The Company used the Black-Scholes option pricing model using the minimum value method and determined that the fair value of grants made during 2004 was not material. The Company did not grant awards during periods presented.

The stock option activity and weighted average exercise prices follow:

 

     Year to Date
     Options    Exercise Price    Aggregate
Intrinsic Value

(in thousands)

Outstanding at December 26, 2008

   55    $ 17,079   

Exercised

   —        —     
              

Outstanding at October 2, 2009

   55    $ 17,079    $ —  
              

Exercisable at October 2, 2009

   55    $ 17,079    $ —  

 

5. Inventories

The Company accounts for its inventory at the lower of cost or market using the first-in, first-out (FIFO) method. Inventory is comprised of the following (in thousands):

 

     October 2,
2009
   December 26,
2008

Raw materials

   $ 6,623    $ 9,195

Work in progress

     1,129      2,092

Finished goods

     1,294      3,155
             
   $ 9,046    $ 14,442
             

 

6. Accumulated Other Comprehensive Income

The only component of accumulated other comprehensive income as of October 2, 2009 and December 26, 2008 was for cumulative foreign exchange translation adjustments.

 

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7. Goodwill

The change in the carrying amount of goodwill by reportable segment is summarized as follows:

 

     US    Europe     Consolidated  
               

Balance at December 26, 2008

   $ 20,440    $ 5,913      $ 26,353   

Foreign currency

     —        13        13   

Impairment

     —        (5,926     (5,926
               

Balance at October 2, 2009

   $ 20,440    $ —        $ 20,440   
               

During the second quarter of 2009, management determined that the sustained decline in revenues and the continued deterioration of the global economy were indicators of impairment as described in ASC 350 and as such, the Company performed a step one test for the potential impairment of the goodwill related to the Da-Lite US and Projecta BV reporting units. The Da-Lite US reporting unit passed the step one test and a step two test was not required.

The Projecta BV reporting unit failed the step one test and as a result the step two analysis was performed to determine the implied fair value of the reporting unit’s goodwill. As a result of the step two calculation, the goodwill of $5,926 at the Projecta BV reporting unit was deemed to be fully impaired and a resulting impairment charge was recorded in the thirteen week period ended July 3, 2009. The Company finalized the step two analysis during the third quarter and no adjustments to the financial statements were necessary as a result of this process.

The goodwill impairment charge is non-cash and does not affect the Company’s liquidity or compliance with debt covenants.

 

8. Segment Information

The Company primarily manufactures projection screens and other meeting room equipment that are sold throughout the United States and Europe. Based on its operations, the Company has established two reportable segments: United States and Europe. The United States segment includes the operations of Da-Lite excluding its foreign subsidiaries. The Europe segment includes the operations of Projecta and Procolor. All intersegment transactions have been eliminated. Information regarding the sales of specific product categories within the Company’s geographic business segments is not presented because it is not practical to determine these amounts.

Operating cash flow is the measure reported to the chief operating decision maker for use in assessing segment performance and allocating resources. Operating cash flow for assessing segment performance is net sales less cost of sales and selling, general, and administrative expenses excluding depreciation and amortization. The Company does not allocate costs between segments.

 

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The following table presents financial information by segment for the periods stated (in thousands):

 

For the period ended:    13 Weeks
Ended
October 2,
2009
   13 Weeks
Ended

September 26,
2008
   40 Weeks
Ended
October 2,
2009
    39 Weeks
Ended

September 26,
2008

Net sales:

          

United States

   $ 28,747    $ 36,368    $ 84,299      $ 107,060

Europe

     5,046      6,584      14,591        22,787
                            

Total net sales

   $ 33,793    $ 42,952    $ 98,890      $ 129,847
                            

Operating income (loss):

          

United States

   $ 8,267    $ 10,369    $ 20,985      $ 29,965

Europe

     394      812      (6,536     3,151
                            

Total operating income (loss)

   $ 8,661    $ 11,181    $ 14,449      $ 33,116
                            
As of:    October 2,
2009
   December 26,
2008
    

Total assets

        

United States

   $ 48,461    $ 56,430   

Europe

     17,095      24,517   
                

Total assets

   $ 65,556    $ 80,947   
                

 

9. Commitments and Contingencies

The Company is subject to certain legal proceedings and claims that have arisen in the ordinary course of business. In the opinion of management, the Company does not have a potential liability related to any of these other current legal proceedings and claims that should individually or in the aggregate have a material adverse effect on its financial condition, liquidity or results of operations.

However, the results of legal proceedings cannot be predicted with certainty. Should the Company fail to prevail in legal matters, it is possible that its results of operations or financial condition could be materially adversely affected.

 

10. Subsequent Events

Subsequent to October 2, 2009, the Company repurchased $4.0 million of the outstanding $102.0 million principal amount of its 9 1/2% Senior Notes due 2011 from the open market using cash on hand for an aggregate purchase price of $3.8 million. The Company retired these Notes and expects that the discount recorded on the transaction will more than offset the write-off of deferred financing costs related to the repurchase.

 

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

Forward Looking Statements

This quarterly report on Form 10-Q contains certain statements that may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this report are forward-looking statements. When used in this report, the words “may,” “will,” “should,” “would,” “anticipate,” “estimate,” “expect,” “plan,” “believe,” “predict,” “potential,” “intend,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, changes in sales or industry trends, changes in economic conditions, competition, retention of senior management and other key personnel, availability of materials or components, ability to make continued product innovations, casualty or work stoppages at the Company’s facilities, adverse results of lawsuits against the Company and currency exchange rates, the availability of financing and other factors described under Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 26, 2008 and in Item 1A herein. Forward-looking statements are based on assumptions and assessments made by the Company’s management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Readers of this report are cautioned not to place undue reliance on these forward-looking statements, as there can be no assurance that these forward-looking statements will prove to be accurate. Management undertakes no obligation to update any forward-looking statements. This cautionary statement is applicable to all forward-looking statements contained in this report.

Overview

Da-Lite is one of the world’s leading manufacturers and distributors of projection screens. Da-Lite’s projection screens, which are focused on the premium end of the large screen market, are used in a wide range of settings including conference rooms, educational institutions, live entertainment venues, meeting rooms, training facilities, houses of worship and private homes. Da-Lite’s products provide the viewer with an enhanced visual experience in settings where a large screen adds to the communication of information or entertainment. The Company’s products are versatile and can be customized to fit the needs of unique viewing venues.

 

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Critical Accounting Policies

Goodwill

The Company applies the provisions of ASC 350 “Intangibles- Goodwill and Other”, and management tests goodwill for impairment at least annually or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. The Company’s annual impairment testing date is the last day of the fiscal year.

The goodwill impairment test involves a two-step process. The first step is a comparison of each reporting unit’s fair value to its carrying value. The Company estimates fair value based on a combination of the market value approach and income approach using discounted cash flows. The fair value of each reporting unit is estimated using both methods and each method is given equal weighting in arriving at the fair value of the reporting unit. The income approach uses management’s best estimates of economic and market conditions over the projected period including growth rates in sales, costs, estimates of future expected changes in operating margins and cash expenditures. The market value approach requires the Company to make assumptions about the appropriate market comparables.

The second step, if needed, requires the Company to allocate the fair value of the reporting unit derived in the first step to the fair value of the reporting unit’s net assets to calculate the implied value of the goodwill. If the carrying value of the reporting unit’s goodwill is in excess of the implied fair value of goodwill, an impairment charge is taken to reduce the goodwill to its implied fair value.

In the second quarter of 2009, management determined that impairment indicators had been identified for the Company’s reporting units (Da-Lite US and Projecta BV) and the step one goodwill impairment test was performed as of July 3, 2009. The Da-Lite US reporting unit had a fair value significantly in excess of the carrying value of equity at July 3, 2009 and no step two impairment test was required. A hypothetical decrease of 20% in the fair value would have no impact on the goodwill impairment analysis at July 3, 2009 for the Da-Lite US reporting unit.

Projecta BV failed the step one test and the step two impairment test was performed to determine the implied fair value of goodwill. To calculate the amount of the impairment charge, the Company allocated the fair value of the Projecta BV reporting unit to all of its assets and liabilities, including recognized and unrecognized intangible assets, in order to determine the implied fair value of goodwill. This allocation process required judgment and the use of additional valuation assumptions in deriving the individual fair values of Projecta BV’s assets and liabilities as if the reporting unit had been acquired in a business combination. As a result of the step two calculation, the goodwill of $5,926 at the Projecta BV reporting unit was deemed to be fully impaired and a resulting impairment charge was recorded in the thirteen week period ended July 3, 2009. The Company finalized the step two analysis during the third quarter and no adjustments to the financial statements were necessary as a result of this process.

Changes in the market value, cash flow projections, and assumptions surrounding the fair value of assets and liabilities of the Company could have a significant impact on whether or not goodwill is impaired and the amount of the impairment. Fair value estimates are made at a specific point in time, based on the relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements.

 

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There were no other changes in the forty week period ended October 2, 2009 to the application of critical accounting policies and estimates as described in our Annual Report on Form 10-K for the year ended December 26, 2009.

Recent Accounting Pronouncements

There were various accounting standards and interpretations issued recently, none of which are expected to have a material impact on the company’s financial position, operations or cash flows.

In June 2009, the FASB issued SFAS No. 168 (“SFAS 168”), “Accounting Standards Codification ™ and the Hierarchy of Generally Accepted Accounting Principles”. The FASB Accounting Standards Codification ™ (“Codification”) has become a source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. However, rules and interpretive releases of the Securities Exchange Commission (“SEC”) issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for interim and annual reporting periods ending after September 15, 2009. Therefore, beginning with our quarter ended October 2, 2009, all references made by it to GAAP in its consolidated financial statements now use the new Codification numbering system. The Codification does not change or alter existing GAAP and, therefore, it is not having an impact on our financial position, results of operations and cash flows.

 

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Results of Operations

Thirteen Weeks Ended October 2, 2009, Compared with Thirteen Weeks Ended September 26, 2008

Net Sales. Net sales were $33.8 million for the 13 weeks ended October 2, 2009, as compared to $43.0 million for the 13 weeks ended September 26, 2008, a decrease of $9.2 million or 21.4%. Net sales by the Company’s United States (U.S.) operations decreased 21.0%. In the U.S., electric screen sales decreased $2.8 million, wall screen sales decreased $1.6 million, and portable screen sales decreased $2.6 million, reflecting primarily decreases in volume. Sales were impacted by a slowdown in the economy, including the housing, Business/IT and Hospitality markets. Portable screen sales, in particular, were affected by declining demand from the rental and staging markets within the broader Hospitality market. Results also reflected increased competition from imports and larger plasma screens. Sales of other products decreased $0.7 million from 2008 levels. Net sales from the Company’s European subsidiaries decreased $1.5 million or 23.4%. Sales in Europe were also impacted by a slowdown in the economy. The stronger dollar produced a decrease of $0.2 million.

Cost of Sales. The cost of sales was $20.7 million for the 13 weeks ended October 2, 2009, as compared to $26.9 million for the 13 weeks ended September 26, 2008, a decrease of $6.2 million, or 23.0%. As a percentage of net sales, the cost of sales represented 61.3% in the 13 weeks ended October 2, 2009 and 62.6% for the 13 weeks ended September 26, 2008. This constitutes a 1.3 percentage point increase in margins. Margins at our U.S. facilities increased 1.5 points while margins at our European operations decreased 1.3 points. The increase at our U.S. facilities resulted from material cost savings. The European decreases resulted primarily from the decrease in product volumes.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $4.4 million for the 13 weeks ended October 2, 2009, as compared to $4.9 million for the 13 weeks ended September 26, 2008. Selling, general and administrative expenses in the U.S. decreased $0.4 million primarily as a result of a decrease in marketing costs.

Interest. Interest expense totaled $2.9 million for the 13 weeks ended October 2, 2009, as compared to $3.0 million for the 13 weeks ended September 26, 2008, a decrease of $0.1 million. The decrease was a result of a reduction in the outstanding amount of the 9.5% Senior Notes due 2011.

Miscellaneous, net. Miscellaneous, net was income of $0.8 million for the 13 weeks ended October 2, 2009, as compared to $0.1 million in expense for the 13 weeks ended September 26, 2008, an increase in income of $0.8 million reflecting the repurchase of debt at a discount in the 2009 period.

Income Taxes. As a subchapter S corporation for United States tax purposes, the Company is generally not subject to United States federal and state income taxation. Rather, the Company’s income, gains, losses, deductions and credits flow through to its stockholders, and the Company makes distributions to them to meet their tax obligations at an assumed maximum federal and state tax rate (based on the state with the highest tax rate in which any of the Company’s stockholders reside). This assumed rate was 40.4% for the 13 weeks ended October 2, 2009 and for the 13 weeks ended September 26, 2008. The Company pays foreign income taxes on the earnings of its European subsidiaries.

Net Income. As a result of the aforementioned factors, net income decreased $1.4 million from $7.9 million for the 13 weeks ended September 26, 2008 to $6.5 million for the 13 weeks ended October 2, 2009.

 

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Results of Operations

Forty Weeks Ended October 2, 2009, Compared with Thirty Nine Weeks Ended September 26, 2008

Net Sales. Net sales were $98.9 million for the 40 weeks ended October 2, 2009, as compared to $129.8 million for the 39 weeks ended September 26, 2008, a decrease of $30.9 million or 23.8%. Net sales by the Company’s United States (U.S.) operations decreased 21.3%. In the U.S., electric screen sales decreased $7.6 million, wall screen sales decreased $4.1 million, and portable screen sales decreased $8.6 million, reflecting primarily decreases in volume. Sales were impacted by a slowdown in the economy, including the housing, Business/IT and Hospitality markets. Portable screen sales, in particular, were affected by declining demand from the rental and staging markets within the broader Hospitality market. Results also reflected increased competition from imports and larger plasma screens. Sales of other products decreased $2.6 million from 2008 levels. Net sales from the Company’s European subsidiaries decreased $8.2 million or 36.0%. Sales in Europe were also impacted by a slowdown in the economy. The stronger dollar produced a decrease of $1.6 million.

Cost of Sales. The cost of sales was $63.6 million for the 40 weeks ended October 2, 2009, as compared to $79.8 million for the 39 weeks ended September 26, 2008, a decrease of $16.2 million, or 20.4%. As a percentage of net sales, the cost of sales represented 64.3% in the 40 weeks ended October 2, 2009 and 61.5% for the 39 weeks ended September 26, 2008. This constitutes a 2.8 percentage point decrease in margins. Margins at our U.S. facilities decreased 1.9 points while margins at our European operations decreased 8.5 points. These decreases resulted primarily from the decrease in product volumes.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $15.0 million for the 40 weeks ended October 2, 2009, as compared to $16.9 million for the 39 weeks ended September 26, 2008. Selling, general and administrative expenses in the U.S. decreased $1.8 million as a result of a decrease in legal fees reflecting the settlement of patent litigation in 2008, and a decrease in marketing costs.

Goodwill Impairment. The goodwill impairment charge totaled $5.9 million for the 40 weeks ended October 2, 2009 as a result of the impairment charge taken at the Projecta BV reporting unit. There were no impairment charges in the 39 weeks ended September 26, 2008.

Interest. Interest expense totaled $9.3 million for the 40 weeks ended October 2, 2009, as compared to $9.4 million for the 39 weeks ended September 26, 2008, a decrease of $0.1 million. The decrease was a result of a reduction in the outstanding amount of the 9.5% Senior Notes due 2011.

Miscellaneous, net. Miscellaneous, net was an income of $2.1 million for the 40 weeks ended October 2, 2009, as compared to $0.1 million of expense in the 39 weeks ended September 26, 2008, an increase of $2.2 million, reflecting the increase in the repurchase of debt at a discount in the 2009 period.

Income Taxes. As a subchapter S corporation for United States tax purposes, the Company is generally not subject to United States federal and state income taxation. Rather, the Company’s income, gains, losses, deductions and credits flow through to its stockholders, and the Company makes distributions to them to meet their tax obligations at an assumed maximum federal and state tax rate (based on the state with the highest tax rate in which any of the Company’s stockholders reside). This assumed rate was 40.4% for the 40 weeks ended October 2, 2009 and for the 39 weeks ended September 26, 2008. The Company pays foreign income taxes on the earnings of its European subsidiaries.

Net Income. As a result of the aforementioned factors, net income decreased $15.4 million from $22.9 million for the 39 weeks ended September 26, 2008 to $7.5 million for the 40 weeks ended October 2, 2009.

 

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Liquidity and Capital Resources

The Company expects to be able to fund its working capital requirements, interest expense, capital expenditures and its distributions to stockholders with cash generated from operations, although there can be no assurances in this regard. The financial results for the 40 weeks ended October 2, 2009 showed a substantial reduction from the results reported for the 39 weeks ended September 26, 2008, reflecting difficult economic conditions. As a result, the Company has been seeking to conserve resources. In this regard, the Company discontinued making cash distributions to its stockholders (other than distributions to pay estimated taxes) after having made a distribution of $137.50 per share in April of 2009.

The Company’s bank debt and senior notes become due in May of 2011. Although the Company expects that it will be able to generate cash from operations to pay or prepay a portion of this indebtedness, it expects that it will need to refinance most of this indebtedness on or before the respective maturity dates. Credit market conditions, as well as other economic conditions are difficult. There is no assurance that such new financing will be available when needed or as to the cost or other terms of this financing.

The Company explores from time to time alternatives to establish new financing arrangements, which could be used to purchase or retire all or part or its outstanding senior notes. No assurance can be given as to the availability or terms of any such potential financing arrangements or whether the Company will elect to go forward with any financing arrangements that may be available.

In March 2009, the Company repurchased $5.0 million of the outstanding principal amount of its 9  1/2% senior notes from the open market for an aggregate purchase price of $4.3 million. In April 2009, the Company repurchased an additional $2.3 million principal amount of such notes for an aggregate purchase price of $2.0 million. In May 2009, the Company repurchased an additional $2.0 million principal amount of such notes for an aggregate purchase price of $1.7 million. In July 2009 the Company repurchased $3.3 million principal amount of such notes for an aggregate purchase price of $2.9 million. In August, 2009 the Company repurchased an additional $5.2 million principal amount of such notes for an aggregate purchase price of $4.7 million. The Company retired these notes and wrote-off the related deferred financing costs and recorded a gain of $2.2 million during the 40 weeks ended October 2, 2009 relating to the repurchase. In October 2009 the Company repurchased an additional $4.0 million principal amount of such notes for an aggregate purchase price of $3.8 million. Depending on the Company’s expected cash needs, the prevailing prices of its 9 1/2% senior notes and other factors, the Company may repurchase some amount of its outstanding 9 1/2 % senior notes from time to time in the open market or otherwise.

Management believes the principal indicators of the Company’s liquidity are its cash position (total cash and cash equivalents), remaining availability under its bank credit facilities and its excess working capital. At October 2, 2009, the Company’s cash position was $1.3 million, a decrease of $0.3 million from December 26, 2008. Additionally, the Company had an unsecured revolving credit facility, with maximum possible borrowings equal to $19.5 million, which expires in May 2011. Interest on any outstanding borrowings related to this line of credit is calculated at the prime rate, subject to a floor of 4.00%. As the prime rate is below the floor, the interest rate in effect as of October 2, 2009 was 4.00%. At October 2, 2009, the Company had a $2.2 million outstanding balance under this line of credit. Da-Lite’s working capital position decreased to $14.2 million (including $1.3 million of total cash and cash equivalents) at October 2, 2009, from $25.1 million (including $1.6 million of total cash and cash equivalents) at December 26, 2008.

The Company’s Dutch subsidiary, Projecta, has an overdraft line of credit, with maximum possible borrowings equal to 1.5 million Euros. Interest on outstanding borrowings in Europe related to Projecta’s overdraft line of credit is calculated at the Fortis Basic Rate plus 1.50%, the sum of which was 6.50% on October 2, 2009. At October 2, 2009, Projecta had no outstanding balances under this credit facility.

 

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Cash Flows

For the 40 weeks ended October 2, 2009, cash provided by operating activities was $25.1 million, as compared to $27.8 million for the 39 weeks ended September 26, 2008, a decrease of $2.7 million or 9.8%, reflecting reduced net income. Cash used in investing activities was $1.0 million for the 40 weeks ended October 2, 2009, as compared to $4.7 million for the 39 weeks ended September 26, 2008. Cash used in investing activities in 2009 resulted from capital expenditures of $1.0 million. In 2008, cash used in investing activities resulted from the purchase of short-term investments of $5.0 million, capital expenditures of $1.3 million, and purchase of minority shares of $1.0 million partially offset by maturities in short-term investments of $2.6 million. Cash used in financing activities was $24.6 million during the 40 weeks ended October 2, 2009, as compared to $25.2 million for the 39 weeks ended September 26, 2008. The decrease in cash used in financing activities in 2009 was related to the receipt of proceeds from borrowings under the revolving credit facility of $2.2 million, and a reduction in distributions to stockholders of $11.4 million, partially offset by a $13.5 million increase in retirement of the 9.5% Senior Notes due 2011.

Capital Expenditures

Capital expenditures were $1.0 million for the forty weeks ended October 2, 2009 compared to $1.3 million for the thirty nine weeks ended September 26, 2008. The Company’s management currently expects to spend approximately $1.5 million on capital expenditures in 2009, using cash generated from operations.

Contractual Obligations

The following table sets forth, as of October 2, 2009, certain of the Company’s contractual obligations:

 

     Payments due by period

Contractual Obligations

   Total    Less than
1 year
   1-3 years    3-5 years    More than
5 years
     (in millions)

Interest and principal payments for senior debt

   $ 121.3    $ 9.7    $ 111.6    —      —  

Interest and principal for line of credit

     2.3      .1      2.2    —      —  

Self-insurance letter of credit

     0.5      0.5      —      —      —  
                              

Total

   $ 124.1    $ 10.3    $ 113.8    —      —  
                              

 

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Distributions

As a subchapter S corporation under the Internal Revenue Code of 1986, Da-Lite is not subject to U.S. federal income taxes. Instead, such taxes are payable by Da-Lite’s stockholders. Distributions are made by Da-Lite to its stockholders to pay estimated taxes relating to taxable income allocated to them by the Company on a quarterly basis. Tax related distributions were $5.9 million and $10.7 million for the 40 weeks ended October 2, 2009 and the 39 weeks ended September 26, 2008, respectively.

The Company paid regular distributions to its stockholders in 2009 at a monthly rate of $150 per share or $0.8 million in the aggregate for the months of January through March. The Company reduced the regular distribution to its stockholders to a monthly rate of $137.50 per share or $0.7 million in the aggregate in April of 2009 and discontinued making regular distributions thereafter. The Company paid regular distributions to its stockholders in 2008 at a monthly rate of $200 per share or $1.1 million in the aggregate, subject to the covenants contained in the indenture. The Company plans to continue making distributions to its stockholders to pay estimated taxes.

Inflation

The Company manages its inflation risks by ongoing review of product selling prices and production costs. Management does not believe that inflation risks are material to the Company’s business, its consolidated financial position, results of operations or cash flows. However, there can be no assurance that future inflation will not have an adverse impact on the Company’s operating results and financial condition.

Environmental

The Company has incurred, and in the future will continue to incur, expenditures for matters relating to environmental control, remediation, monitoring and compliance. The Company’s management believes that compliance with current environmental laws and regulations is not likely to have a material adverse effect on the Company’s financial condition, the results of its operations or its liquidity; however, environmental laws and regulations have changed rapidly in recent years and the Company may become subject to more stringent environmental laws and regulations in the future.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.

The Company maintains cash and cash equivalents with well-capitalized financial institutions.

The Company’s sales are not materially dependent on a single customer or a small group of customers. No one individual customer balance represented more than 11% of the Company’s total outstanding receivables as of October 2, 2009. Credit risk associated with the Company’s receivables is representative of the geographic, industry and customer diversity associated with the Company’s global business.

The Company also maintains credit controls for evaluating and granting customer credit. As a result, the Company may require that customers provide some type of financial guarantee in certain circumstances.

Foreign Currency Risk

Da-Lite routinely uses forward exchange contracts to economically hedge raw material purchases from vendors outside of the country of purchase.

Interest Rate Risk

The Company has two credit facilities available for general corporate purposes that are subject to variable interest rates. Interest related to any outstanding balances on the Company’s $19.5 million revolving credit facility in the U.S. is calculated at 4.00% on October 2, 2009. At October 2, 2009, the Company had an outstanding balance of $2.2 million under this revolving credit facility. Interest on outstanding borrowings in Europe, related to Projecta’s overdraft line of credit, is calculated at the Fortis Basic Rate plus 1.50%, the sum of which was 6.50% on October 2, 2009. At October 2, 2009, Projecta had no outstanding balances under this credit facility.

At October 2, 2009, the Company had $102.0 million in fixed-rate long-term debt outstanding. There is no interest rate risk associated with the Company’s fixed rate debt. The fair market value of the fixed-rate debt (based on discounted cash flows reflecting borrowing rates currently available for debt with similar terms and maturities) varies with fluctuations in interest rates. A 10% decrease in interest rates would have changed the fair market value of the fixed-rate debt to approximately $94.9 million from the fair value of approximately $92.5 million at October 2, 2009. Note that financial instruments are described as cash or contractual obligations or rights to pay or receive cash. The fair value of all other financial instruments approximates the carrying value because of the short-term maturity of these instruments.

 

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Item 4. Controls and Procedures.

 

(a) Evaluation of Disclosure Controls and Procedures. Based on the evaluation required by Rule 15d-15(e) under the Securities Exchange Act of 1934, the principal executive officer and principal financial officer of the Da-Lite have concluded that the Company’s disclosure controls and procedures (as defined in Rule 15d-15(e)) as of the end of the period covered by this report were effective to ensure that the information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures

 

(b) Changes in Internal Control Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II

OTHER INFORMATION

 

Item 1A. Risk Factors.

The following supplements the risk factors set forth in Item 1A of the Company’s Annual Report of Form 10-K for the year ended December 26, 2008

We have been adversely affected by the current difficult economic and market conditions, including conditions in the residential and commercial real estate, Business/IT and Hospitality markets, and the continuation or worsening of these conditions could further negatively impact our results and financial condition.

The Company’s success depends to a significant extent on numerous factors affecting business and consumer spending and residential and commercial construction, including economic conditions relating to the markets we serve. In the current weak economy, our customers have reduced their level of discretionary spending or investment which has materially adversely affected our business and results of operations. Our results have been adversely affected in recent periods by a decline in residential construction, which reduces the demand for projection screens for home theaters, the declines in commercial construction and business investment generally, which reduces the demand in the Business/IT market, and the decline in convention activity has adversely affected the demand in the Hospitality market. The continuation or worsening of difficult economic and market conditions could further negatively impact our business, financial condition, results of operations and cash flows.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

 

Item 6. Exhibits

 

Exhibit No.

 

Description

31.1

  Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

  Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

  Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

  Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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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.

 

DA-LITE SCREEN COMPANY, INC.

    (Registrant)

By:   /S/    JERRY C. YOUNG        
  Jerry C. Young
 

Vice President – Finance and Chief Financial Officer

(Principal Financial and Accounting Officer)

Date: November 4, 2009

 

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EXHIBIT INDEX

 

Exhibit No.

 

Description

31.1

  Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

  Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

  Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

  Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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