SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission File Number: 33-93464
--------
DICTAPHONE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3838908
(State of Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3191 Broadbridge Avenue
Stratford, CT 06497
(203) 381-7000
(Address of principal executive offices,
including zip code, and 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 ____
-------
Number of Shares of Common Stock, Par Value $.01, outstanding as of May 8, 1996:
9,500,000
The Common Stock of the registrant is not publicly traded.
<PAGE>
DICTAPHONE CORPORATION
----------------------
INDEX
-----
Page No.
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. Condensed Consolidated Financial Statements
DICTAPHONE CORPORATION (Successor Company)
Condensed Consolidated Statement of Operations
for the Three Months Ended March 31, 1996 (Unaudited) 2
Condensed Consolidated Balance Sheets as of March 31, 1996
(Unaudited) and December 31, 1995 3
Condensed Consolidated Statement of Cash Flow for the
Three Months Ended March 31, 1996 (Unaudited) 4
Notes to Consolidated Financial Statements (Unaudited) 5-13
DICTAPHONE CORPORATION (Predecessor Company)
Combined Statement of Income for the Three Months
Ended March 31, 1995 (Unaudited) 14
Combined Statement of Cash Flow for the Three Months
Ended March 31, 1995 (Unaudited) 15
Notes to Combined Financial Statements (Unaudited) 16 - 17
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18 - 22
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings 22
ITEM 6. Exhibits and Reports on Form 8-K 22 - 23
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share amount)
Three Months
Ended
March 31, 1996
--------------
Revenues:
Sales and rentals $ 57,984
Support services 22,475
---------
Total revenue 80,459
---------
Costs and expenses:
Cost of sales and rentals 33,482
Selling, service and administrative 39,598
Amortization of intangibles 10,928
Research and development 3,587
---------
Operating loss (7,136)
Interest expense 11,005
Other (income) expense - net 13
---------
Loss before income taxes (18,154)
Income tax benefit 6,724
---------
Net loss (11,430)
Stock dividends on PIK Preferred Stock 525
---------
Net loss applicable to Common Stock $ (11,955)
=========
Net loss per share of Common Stock $ (1.26)
=========
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE>
DICTAPHONE CORPORATION (Successor Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
December 31, 1995 March 31, 1996
----------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash $14,279 $ 8,554
Accounts receivable, less allowances
of $1,462, and $1,337, respectively 57,256 51,292
Inventories 66,341 62,586
Other current assets 9,152 8,216
------- --------
Total current assets 147,028 130,648
Property, plant and equipment, net 45,690 42,913
Deferred financing costs, net of accumulated
amortization of $900, and $2,563,
respectively 18,799 17,136
Intangibles, net of accumulated amortization
of $16,968, and $27,896, respectively 307,964 298,493
Prepaid repurchases, leased equipment 7,279 6,655
Other assets 23,930 31,182
--------- --------
Total assets $550,690 $527,027
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,932 $ 7,701
Interest payable 10,922 5,612
Accrued liabilities 42,640 29,788
Advance billings 34,466 34,027
Current portion of long-term debt 7,750 8,750
-------- --------
Total current liabilities 103,710 85,878
Long-term debt 342,250 347,500
Other liabilities 10,227 10,732
-------- --------
Total liabilities $456,187 $444,110
-------- --------
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock ($.01 par value; 10,000,000
shares authorized; 1,500,000 shares of 14%
PIK perpetual preferred stock
issued and outstanding, liquidation
value $16,340) 15,815 16,340
Common stock ($.01 par value; 20,000,000
shares authorized; 9,500,000 shares
outstanding) 95 95
Notes receivable from stockholders (1,160) (1,162)
Additional paid-in capital 94,905 94,905
Treasury stock, at cost (100) ---
Accumulated deficit (14,689) (26,644)
Accumulated translation adjustment (363) (617)
------- --------
Total stockholders' equity 94,503 82,917
------- --------
Total liabilities and stockholders' equity $ 550,690 $ 527,027
========== =========
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
DICTAPHONE CORPORATION (Successor Company)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)
(Dollars in thousands)
THREE MONTHS
ENDED
March 31, 1996
--------------
Operating activities:
Net loss $(11,430)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization (including $3,689
of nonrecurring charge) 20,888
Provision for deferred income taxes (6,791)
Changes in assets and liabilities:
Accounts receivable 5,796
Inventories (32)
Other current assets 901
Accounts payable and accrued liabilities (10,247)
Advance billings (415)
Other assets and other (1,837)
---------
Net cash used in operating activities (3,167)
---------
Investing activities:
Payment for acquisition (8,000)
Net investment in fixed assets (883)
----
Net cash used in investing activities (8,883)
------
Financing activities:
Repayment under term loan facility (1,750)
Borrowings under revolving credit facility 8,000
Other 97
---------
Net cash provided by financing activities 6,347
---------
Effect of exchange rate changes on cash (22)
---------
Decrease in cash (5,725)
Cash, beginning of period 14,279
---------
Cash, end of period $ 8,554
=========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 14,623
=========
Income taxes paid $ 678
=========
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE>
DICTAPHONE CORPORATION (Successor Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands, except share amounts)
1. THE ACQUISITION
On April 25, 1995, Dictaphone Corporation (Successor Company) (the
"Company") entered into a Stock and Asset Purchase Agreement, as amended
August 11, 1995 (the "Acquisition Agreement") with Pitney Bowes Inc.
("Pitney Bowes") for the purpose of acquiring (the "Acquisition")
Dictaphone Corporation, the U.S. Dictaphone Subsidiary of Pitney Bowes
("Dictaphone U.S. (Predecessor Company)") and certain foreign affiliates
("Dictaphone Non-U.S. (Predecessor Company)") as set forth in the
Acquisition Agreement (collectively, "Dictaphone Corporation (Predecessor
Company)" or the "Predecessor Company"). On August 11, 1995, the Company
acquired the Predecessor Company for $462.2 million, including certain
post-closing adjustments as defined in the Acquisition Agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The capital structure and accounting basis of
---------------------
the assets and liabilities of the Company as of August 12, 1995 and
thereafter differ from those of the Predecessor Company in prior periods as
a result of the Acquisition. The Acquisition is being accounted for under
the purchase method of accounting in accordance with Accounting Principles
Board Opinion No. 16, "Accounting for Business Combinations." The total
purchase price has been allocated to tangible and intangible assets and
liabilities of the Company based on estimates of their respective fair
values. Accordingly, the allocation of the purchase price reflected in the
accompanying consolidated balance sheet may be adjusted upon final results
of gathering certain necessary information. The final asset and liability
values may differ from those set forth in the March 31, 1996 balance sheet,
however, the changes are not expected to have a material effect on the
results of operations and financial position of the Company. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The condensed consolidated financial statements of the Company are
unaudited, as of and for the three month period ended March 31, 1996, but
in the opinion of management contain all adjustments which are of a normal
and recurring nature necessary to present fairly the financial position and
results of operations and cash flows for the periods presented.
In 1996, the Company adopted SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". The Company will evaluate the carrying value of its long lived assets
and identifiable intangibles, including goodwill, in accordance with SFAS
121 when events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. The effect of adopting this
new standard did not have a material effect on the Company's consolidated
financial position or results of operations during the first quarter of
1996.
-5-
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In 1996, the Company adopted the provisions of SFAS No. 123
"Accounting for Stock-Based Compensation". The Company, as provided for
by SFAS 123, will continued to apply Accounting Principles Board Opinion
No. 25, "Accounting for Stock issued to Employees" for employee stock
compensation measurement and will provide the required pro forma footnote
disclosures.
Costs and expenses. Operating expenses of field sales and service
------------------
offices are included in selling, service and administrative expenses
because no meaningful allocation of such expenses to cost of sales or
support services is practicable.
Loss per share. The weighted average number of shares of common stock
--------------
outstanding used in the computation of loss per share for the three months
ended March 31, 1996 was 9,500,000.
3. INVENTORIES
Inventories consist of the following:
December 31 March 31,
1995 1996
----------- ------
Raw materials and work in process $ 18,437 $ 18,707
Supplies and service parts 19,249 19,113
Finished products 28,655 24,766
--------- ---------
Total inventories $66,341 $ 62,586
========= =========
4. INTANGIBLES
The following summarizes intangible assets, net of accumulated
amortization of $16,968 and $27,896 at December 31, 1995 and March
31, 1996, respectively. Amortization expense for the three months ended
March 31, 1996 was $10,928.
December 31, March 31,
1995 1996
-------------- ----------
Goodwill $ 140,006 $ 140,634
Tradenames 77,104 76,617
Service contracts 34,499 29,913
Non-compete agreement 47,202 42,672
Patents 9,153 8,657
-------- ----------
$307,964 $ 298,493
======== =========
-6-
<PAGE>
5. EQUITY AND STOCK OPTIONS
Preferred Stock
During the period, the Company accrued the 14% pay-in-kind dividend and
charged accumulated deficit $525 as a result of the required dividend
representing 52,500 shares of the Company's 14% Pay-In-Kind Perpetual
Preferred Stock. Such stock dividends have not been issued as of March 31,
1996.
6. INCOME TAXES
The benefit for income taxes for the three months ended March 31,
1996 is $6,724.
The Company has recorded a deferred tax asset of $27.8 million included in
other assets reflecting the benefit of net operating loss carryforwards and
various book tax temporary differences. The net operating loss
carryforward for federal income tax purposes as of March 31, 1996 is
approximately $26.4 million which will expire beginning in the year 2011.
Realization is dependent on generating sufficient taxable income prior to
expiration of the net operating loss carryforwards. Although realization
is not assured, management believes it is more likely than not that all of
the deferred tax asset will be realized. Accordingly, no valuation
allowance has been established as of March 31, 1996. The amount of the
deferred tax asset considered realizable could be reduced if estimates of
future taxable income during the net operating loss carryforward period are
reduced.
7. COMMITMENTS AND CONTINGENCIES
On February 14, 1995, Pitney Bowes filed a complaint against Sudbury
Systems, Inc. ("Sudbury") in the United States District Court for the
District of Connecticut alleging intentional and wrongful interference with
Pitney Bowes's plans to sell the Company. The complaint seeks damages and
a declaratory judgment relating to the validity of Sudbury's patent and the
alleged infringement thereof by the Company. Sudbury responded by
answering the complaint and filing a third-party complaint against the
Company alleging patent infringement and seeking preliminary and permanent
injunctive relief and treble damages. The third-party complaint filed by
Sudbury did not quantify the amount of damages sought. The litigation is
still in preliminary stages and the Company cannot currently make a
reasonable estimate of the amount of damages that will be sought by
Sudbury. Management believes the Company has meritorious defenses to the
claims against it. Consequently, the Company has not provided for any loss
exposure in connection with this complaint. Additionally, regardless of
the outcome of this litigation, Pitney Bowes has agreed to defend this
action and to indemnify the Company for any liabilities arising from such
litigation.
On June 23, 1995, a complaint was filed in the United States District Court
for the Northern District of Illinois by Failsafe Disk Company ("Failsafe")
against the Company. The complaint alleges that the Company violated
Sections 1 and 2 of the Sherman Antitrust Act (the "Sherman Act") by
preventing Failsafe from selling 10 through 60 channel recording tapes
which, according to the complaint, are equal in quality to and lower in
price than 10 through 60 channel tapes sold by the Company and others. On
July 5, 1995, the complaint was served upon the Company. The complaint
seeks damages of $19.2 million, subject to being trebled in accordance with
the provisions of the Sherman Act, together with Failsafe's costs and
expenses, including reasonable attorneys' fees. Certain preliminary
discovery activities took place in late 1995 and early 1996. The Company
does not believe that it has engaged in any violations of the Sherman Act
and intends to
-7-
<PAGE>
7. COMMITMENTS AND CONTINGENCIES (Continued)
vigorously contest this litigation. Although it is not possible to predict
the outcome of any litigation with any assurance, based on allegations
stated in the complaint, discovery proceedings to date and preliminary
settlement discussions, the Company does not believe this action will have
a material adverse effect on the Company's financial condition and results
of operations.
The Company is subject to federal, state and local laws and regulations
concerning the environment, and is currently participating in
administrative proceedings as a participant in a group of potentially
responsible parties in connection with two third party disposal sites.
These proceedings are at a preliminary stage, for which it is impossible to
reasonably estimate the potential costs of remediation, the timing and
extent of remedial actions which may be required by governmental
authorities, and the amount of the liability, if any, of the Company alone
or in relation to that of any other responsible parties. When it is
possible to make a reasonable estimate of the Company's liability with
respect to such a matter, a provision will be made as appropriate.
Additionally, the Company has settled and paid its liability at three other
third party disposal sites. At a fourth site, the Company has paid
approximately $10,000 for its share of the costs of the first phase of the
clean up of the site and management believes that it has no continuing
material liability for any later phases of the cleanup. Consequently,
management believes that its future liability, if any, for these four sites
is not material. In addition, regardless of the outcome of such matters,
Pitney Bowes has agreed to indemnify the Company in connection with
retained environmental liabilities and for breaches of the environmental
representations and warranties in the Acquisition Agreement, subject to
certain limitations.
The Company is a defendant in a number of additional lawsuits and
administrative proceedings, none of which will, in the opinion of
management, have a material adverse effect on the Company's consolidated
financial position or results of operations.
The Company does not believe that the ultimate resolution of the
litigation, administrative proceedings and environmental matters described
above in the aggregate will have a material adverse effect on the Company's
consolidated financial position or results of operations.
8. PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA
The following pro forma combined statement of operations of Dictaphone
Corporation for the three months ended March 31, 1995 has been presented to
give effect to the Acquisition, described in Note 1, as if it had occurred
on January 1, 1995. The pro forma operating results include the historical
results of Dictaphone Corporation (Predecessor Company) shown herein
adjusted for interest costs on borrowings to finance the Acquisition and
purchase accounting adjustments.
-8-
<PAGE>
8. PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA (Continued)
March 31, 1995
__________________________________________
Dictaphone
Predecessor Pro Forma Corporation
Company Adjustments Pro Forma
----------- ----------- -----------
Total revenue $ 88,427 $ --- $ 88,427
--------- -------- ---------
Net (loss) income $ 9,275 $(16,884) $ (7,609)
--------- -------- ---------
Net loss applicable to
common stock $ 9,275 $(17,409) $ (8,134)
--------- -------- ---------
Earnings per share $ 0.97 $ (1.83) $ (0.86)
--------- -------- --------
9. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION
Dictaphone U.S. has fully and unconditionally guaranteed the repayment of
$200,000 of senior subordinated notes (the "Notes") issued to finance the
Acquisition. The Notes are subordinate to financing of the Credit
Agreement, dated August 7, 1995 (the "Credit Agreement"), and other senior
indebtedness as defined in the indenture pursuant to which the Notes were
issued (the "Note Indenture"). Dictaphone Non-U.S. is not a guarantor of
the Notes. Separate financial statements of Dictaphone U.S. are not
presented because management has determined that they would not be
meaningful to investors in the Notes.
-9-
<PAGE>
9. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (Continued)
The following are the supplemental consolidating statement of operations
and cash flows for the three month period ended March 31, 1996 and the
supplemental consolidating balance sheets as of December 31, 1995 and
March 31, 1996.
Dictaphone Corporation (Successor Company)
Supplemental Consolidating Statement of Operations
Three Months Ended March 31, 1996
<TABLE><CAPTION>
Dictaphone Dictaphone Dictaphone Consolidating
Corporation U.S. Non-U.S. Adjustments Consolidated
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue from:
Sales and rentals $ --- $ 50,392 $ 11,016 $ (3,424) $ 57,984
Support services --- 19,650 2,825 --- 22,475
---------- --------- -------- -------- --------
Total revenues --- 70,042 13,841 (3,424) 80,459
---------- --------- -------- -------- --------
Costs and expenses:
Cost of sales and rentals --- 30,592 6,206 (3,316) 33,482
Selling, service
and administrative 38 42,896 7,577 15 50,526
Research and development --- 3,587 --- --- 3,587
Interest expense-
net and other 853 9,481 685 (1) 11,018
---------- --------- -------- --------- --------
Total costs and expenses 891 86,556 14,468 (3,302) 98,613
---------- --------- -------- --------- --------
Equity (loss) earnings (4,415) --- --- 4,415 ---
---------- --------- -------- --------- --------
(Loss) income before
income taxes (5,306) (16,514) (627) 4,293 (18,154)
Income tax benefit 259 6,407 10 48 6,724
---------- --------- -------- --------- --------
Net (loss) income $ (5,047) $ (10,107) $ (617) $ 4,341 $ (11,430)
========== ========= ======== ========= =========
</TABLE>
-10-
<PAGE>
9. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (Continued)
Dictaphone Corporation (Successor Company)
Supplemental Consolidating Balance Sheet
December 31, 1995
<TABLE><CAPTION>
Dictaphone Dictaphone Dictaphone Consolidating
Corporation U.S. Non-U.S. Adjustments Consolidated
----------- ---------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ --- $ 11,591 $ 2,688 $ --- $ 14,279
Accounts receivable 7,509 50,623 8,567 (9,443) 57,256
Inventories --- 56,139 11,035 (833) 66,341
Other current assets --- 5,718 3,499 (65) 9,152
-------- --------- -------- ------ ---------
Total current assets 7,509 124,071 25,789 (10,341) 147,028
Note receivable --- 6,821 --- (6,821) ---
Investments in subsidiaries 446,228 --- --- (446,228) ---
Property, plant and equipment,
net --- 42,907 2,783 --- 45,690
Intangibles, net 2,455 286,043 19,466 --- 307,964
Deferred financing costs, net 18,799 --- --- --- 18,799
Other assets 1,936 27,633 1,640 --- 31,209
-------- --------- -------- ------ ---------
Total assets $ 476,927 $ 487,475 $ 49,678 $ (463,390) $ 550,690
=========== =========== ========= ============ ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable, interest
payable and accrued
liabilities $18,996 $ 42,375 $ 9,953 $ (9,830) $ 61,494
Advance billings --- 30,531 3,935 --- 34,466
Current portion of
long-term debt 7,750 --- --- --- 7,750
------- ------ ------ ------- ------
Total current liabilities 26,746 72,906 13,888 (9,830) 103,710
Long-term debt 349,086 332,494 17,491 (356,821) 342,250
Other liabilities --- 9,748 479 --- 10,227
Stockholders' equity 101,095 72,327 17,820 (96,739) 94,503
------- ------ ------ ------- ------
Total liabilities
and stockholders' equity $476,927 $487,475 $49,678 $(463,390) $550,690
======== ======== ======= ========= ========
</TABLE>
-11-
<PAGE>
9. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (Continued)
<TABLE><CAPTION>
Dictaphone Corporation (Successor Company)
Supplemental Consolidating Balance Sheet
March 31, 1996
Dictaphone Dictaphone Dictaphone Consolidating
Corporation U.S. Non-U.S. Adjustments Consolidated
----------- ---------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ --- $ 6,700 $ 1,854 --- $ 8,554
Accounts receivable 4,034 42,957 10,741 (6,440) 51,292
Inventories --- 54,049 9,492 (955) 62,586
Other current assets --- 4,328 3,922 (34) 8,216
-------- -------- ------- --------- --------
Total current assets 4,034 108,034 26,009 (7,429) 130,648
Note receivable --- 15,850 --- (15,850) ---
Investments in subsidiaries 448,063 --- --- (448,063) ---
Property, plant and equipment,
net --- 40,373 2,540 --- 42,913
Intangibles, net 2,440 277,207 18,846 --- 298,493
Deferred financing costs, net 17,136 --- --- --- 17,136
Other assets 2,237 33,882 1,718 --- 37,837
-------- -------- ------- --------- --------
Total assets $473,910 $475,346 $49,113 $(471,342) $527,027
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable, interest
payable and accrued
liabilities $5,649 $34,362 $9,934 $(6,844) $43,101
Advance billings --- 29,756 4,271 --- 34,027
Current portion of
long-term debt 8,750 --- --- --- 8,750
------ ------ ------ ------- ------
Total current liabilities 14,399 64,118 14,205 (6,844) 85,878
Long-term debt 363,365 338,744 17,491 (372,100) 347,500
Other liabilities --- 10,264 468 --- 10,732
Stockholders' equity 96,146 62,220 16,949 (92,398) 82,917
------ ------ ------ ------- ------
Total liabilities
and stockholders' equity $473,910 $475,346 $49,113 $(471,342) $527,027
======== ======== ======= ========= ========
</TABLE>
-12-
<PAGE>
9. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (Continued)
Dictaphone Corporation (Successor Company)
Supplemental Consolidating Statement of Cash Flows
First Quarter Ended March 31, 1996
<TABLE><CAPTION>
Dictaphone Dictaphone Dictaphone Consolidating
Corporation U.S. Non-U.S. Adjustments Consolidated
----------- ---------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss $(5,047) $(10,107) $(617) $4,341 $(11,430)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,679 17,956 1,253 --- 20,888
Provision for deferred
income taxes (301) (6,407) (83) --- (6,791)
Change in assets and liabilities:
Accounts receivable 3,475 7,665 (2,342) (3,002) 5,796
Inventories --- (1,420) 1,266 122 (32)
Other current assets --- 1,390 (458) (31) 901
Accounts payable and
accrued liabilities (5,347) (8,012) 127 2,985 (10,247)
Advance billings --- (775) 360 --- (415)
Other assets and other 4,415 (1,595) (242) (4,415) (1,837)
------ ------ ------ ------ ------
Net cash used in operating
activities (1,126) (1,305) (736) --- (3,167)
------ ------ ------ ------ ------
Investing activities:
Payment for acquisition (8,000) --- --- --- (8,000)
Net investment in fixed assets --- (807) (76) --- (883)
------ ---- --- --- ------
Net cash used in investing
activities (8,000) (807) (76) --- (8,883)
------ ------ ------ ------ ------
Financing activities:
Repayment under term loan
facility (1,750) --- --- --- (1,750)
Borrowing from promissory notes (6,250) 6,250 --- --- ---
Borrowing from subsidiary 9,029 (9,029) --- --- ---
Borrowing from revolving
credit facility 8,000 --- --- --- 8,000
Other 97 --- --- --- 97
------ ------ ------ ------ ------
Net cash provided by (used in)
financing activities 9,126 (2,779) --- --- 6,347
------ ------ ------ ------ ------
Effect of exchange rate
changes on cash --- --- (22) --- (22)
------ ------ ------ ------ ------
Decrease in cash --- (4,891) (834) --- (5,725)
Cash, beginning of period --- 11,591 2,688 --- 14,279
------ ------ ------ ------ ------
Cash, end of period $--- $6,700 $1,854 $--- $8,554
====== ====== ======= ====== ======
</TABLE>
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<PAGE>
DICTAPHONE CORPORATION (Predecessor Company)
COMBINED STATEMENT OF INCOME (Unaudited)
(Dollars in thousands)
Three Months
Ended
March 31, 1995
--------------
Revenue from:
Sales $ 57,615
Sales to Pitney Bowes Inc. 7,956
Rentals 452
Support services 22,404
---------
Total revenue 88,427
---------
Cost and expenses:
Cost of sales 24,940
Cost of sales to Pitney Bowes Inc. 7,413
Cost of rentals 117
Selling, service and administrative 38,429
Research and development 2,622
---------
Total cost and expenses 73,521
---------
Operating profit 14,906
Interest income (534)
---------
Income before income taxes 15,440
Provision for income taxes 6,165
---------
Net income $ 9,275
=========
See accompanying notes to combined financial statements.
-14-
<PAGE>
DICTAPHONE CORPORATION (Predecessor Company)
COMBINED STATEMENT OF CASH FLOW (Unaudited)
(Dollars in thousands)
Three Months
Ended
March 31, 1995
--------------
Cash flows from operating activities:
Net income $9,275
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,000
Increase in deferred income taxes 57
Changes in assets and liabilities:
Accounts receivable (3,218)
Inventories 171
Other current assets and prepayments (2,148)
Accounts payable and accrued liabilities 131
Advance billings 821
Other assets and other (8,929)
-------
Net cash used in operating activities (1,840)
-------
Cash flows from investing activities:
Net investment in fixed assets (3,458)
Effect of exchange rate changes on cash 438
-------
Net cash flow financed by Pitney Bowes Inc. $(4,860)
=======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 3
=======
Income taxes paid $ 122
=======
See accompanying notes to combined financial statements.
-15-
<PAGE>
DICTAPHONE CORPORATION (Predecessor Company)
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands or as otherwise indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. On April 25, 1995, Dictaphone Corporation
---------------------
(Successor Company) (the "Company") entered into a Stock and Asset Purchase
Agreement, as amended August 11, 1995 (the "Acquisition Agreement"), with
Pitney Bowes Inc. ("Pitney Bowes") for the purpose of acquiring (the
"Acquisition") Dictaphone Corporation, the U.S. Dictaphone subsidiary of
Pitney Bowes ("Dictaphone U.S. (Predecessor Company)") and certain foreign
affiliates ("Dictaphone Non-U.S. (Predecessor Company)") as set forth in
the Acquisition Agreement. Dictaphone U.S. (Predecessor Company) and
Dictaphone Non-U.S. (Predecessor Company) are collectively referred to as
"Dictaphone Corporation (Predecessor Company)" or (the "Predecessor
Company"). Effective August 11, 1995, the Predecessor Company was sold to
the Company. The combined consolidated financial statements of the Company
are unaudited, but in the opinion of management contain all adjustments
which are of a normal and recurring nature necessary to present fairly the
financial position and results of operations and cash flows for the periods
presented.
2. SUPPLEMENTAL COMBINING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION
The following are the supplemental combining statement of income and
combining statement of cash flows for the three months ended March 31,
1995.
Dictaphone Corporation (Predecessor Company)
Supplemental Combining Statement of Income
Three Months Ended March 31, 1995
Dictaphone Dictaphone Combining
U.S. Non-U.S. Adjustments Combined
----------- ----------- --------- --------
Revenue from:
Sales and rentals $57,977 $10,410 $(2,364) $66,023
Support services 18,363 4,041 --- 22,404
------ ----- ------ ------
Total revenue 76,340 14,451 (2,364) 88,427
------ ------ ------ ------
Costs and expenses:
Cost of sales and rentals 29,279 5,532 (2,341) 32,470
Selling, service and
administrative 31,398 7,031 --- 38,429
Research and development 2,622 --- --- 2,622
Interest (income) expenses,
net (24) (510) --- (534)
------ ------ ------ ------
Total costs and expenses 63,275 12,053 (2,341) 72,987
------ ------ ------ ------
Income before income taxes 13,065 2,398 (23) 15,440
Provision for income taxes 5,387 817 (39) 6,165
------ ------ ------ ------
Net income $7,678 $1,581 $16 $9,275
====== ====== === =======
-16-
<PAGE>
2. SUPPLEMENTAL COMBINING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (Continued)
Dictaphone Corporation (Predecessor Company)
Supplemental Combining Statement of Cash Flows
Three Months Ended March 31, 1995
<TABLE><CAPTION>
Dictaphone Dictaphone Combining
U.S. Non-U.S. Adjustments Combined
-------------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $7,678 $1,581 $16 $9,275
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,678 322 --- 2,000
Increase (decrease) in deferred income
taxes 299 (242) --- 57
Change in assets and liabilities:
Accounts receivable (1,240) (1,775) (203) (3,218)
Inventories (384) 532 23 171
Other current assets (1,760) (360) (28) (2,148)
Accounts payable and accrued
liabilities (479) 418 192 131
Advance billings 541 280 --- 821
Other assets and other (8,907) (22) --- (8,929)
------ ----- ------- ------
Net cash (used in) provided by operating
activities (2,574) 734 --- (1,840)
------ ----- ------- ------
Cash flows from investing activities:
Net investment in fixed assets (2,929) (529) --- (3,458)
------ ----- ------- ------
Effect of exchange rate changes on cash --- 438 --- 438
------ ----- ------- ------
Net cash flow available to Pitney Bowes
Inc. $(5,503) $ 643 $ --- $(4,860)
====== ===== ======= ======
</TABLE>
-17-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
AND FINANCIAL CONDITION
-----------------------
Overview
On April 25, 1995, the Company entered into the Acquisition Agreement with
Pitney Bowes Inc. for the purpose of the Acquisition. On August 11, 1995, the
Company acquired the Predecessor Company for $462.2 million, including certain
post-closing adjustments as defined in the Acquisition Agreement.
The capital structure and accounting basis of the assets and liabilities of the
Company as of August 12, 1995 and thereafter differ from those of the
Predecessor Company in prior periods as a result of the Acquisition. Financial
data of the Predecessor Company for periods prior to August 12, 1995 are
presented on a historical cost basis. Financial data of the Company as of
August 12, 1995 and thereafter reflect the Acquisition under the purchase method
of accounting, under which the purchase price has been allocated to assets and
liabilities based upon their estimated fair values.
Three Months Ended
March 31,
----------------------
1996 1995
----- ----
(in millions)
Total revenue $80.5 $88.4
Cost of sales and rentals (*) 33.5 32.5
Selling, service and administrative 50.5 38.4
Research and development 3.6 2.6
----- -----
Operating profit (loss) (7.1) 14.9
----- -----
Net interest expense (income) and other 11.0 (0.5)
(Benefit) provision for income tax (6.7) 6.1
----- -----
Net (loss) income $(11.4) $9.3
===== =====
* Cost of sales and rentals do not include operating expenses of field
sales and service offices because no meaningful allocation of such
expenses to this line item is practicable.
-18-
<PAGE>
Overview (Continued)
Three Months Ended
March 31,
---------------------
1996 1995
------ -----
(in millions)
Revenue from:
Sales:
U.S. Integrated Voice Systems $18.3 $22.3
U.S. Communication Recording Systems 13.7 18.6
U.S. Customer Service parts 4.4 4.4
Contract Manufacturing
(including sales to Pitney Bowes Inc.) 10.1 10.0
International Operations 11.0 10.3
---- ----
Total sales 57.5 65.6
---- ----
Rentals 0.5 0.4
---- ----
Total sales and rentals 58.0 66.0
---- ----
Service:
U.S. Customer Service 19.7 18.4
International Operations 2.8 4.0
---- ----
Total support service 22.5 22.4
---- ----
Total revenue $80.5 $88.4
==== ====
Results of Operations - First Quarter 1996 vs. First Quarter 1995
Total revenue for the first three months of 1996 decreased 9.0% to $80.5 million
from $88.4 million during the first three months of 1995. The decline in
revenue is attributable to lower sales revenue from U.S. Integrated Voice
Systems and U.S. Communications Recording Systems and lower revenue from
International Operations offset in part by an increase in U.S. Customer Service
revenue.
U.S. Integrated Voice Systems revenue declined 17.2% to $18.3 million from $22.3
million on lower systems billings (down 19.8%) and lower desktop and portable
revenue (down 13.4%). First quarter 1996 results were negatively impacted by
fourth quarter, 1995 incentives provided to the field sales organization which
accelerated backlog closure and billings in that quarter, and a reorganization
of the field sales organization in the first quarter of 1996 which temporarily
diverted energies from selling efforts. Total U.S. Customer Service revenue
(including sale of parts) increased 5.4% to $24.1 million from $22.8 million due
to increased proprietary product service contract revenue (up 7.4%) as well as
higher third party maintenance revenue (up $0.4 million). U.S. Communications
Recording Systems declined 26.5% to $13.7 million from $18.6 million on lower
Prolog billings. This reduction in revenue was attributable to a reduction in
orders taken rate (total orders declined 20.1%). Total revenue from
International Operations declined 3.9% as higher revenue in Germany, Canada and
Switzerland due to increased Communications Recording System billings, plus
favorable currency exchange ($0.1 million) were offset by lower service revenue
in the United Kingdom (down 18.9%). Lower service revenue in the United Kingdom
resulted from the expiration of a significant one-time third party maintenance
contract which was in place during the first quarter of 1995. Contract
manufacturing revenue was 1.7% higher than last year.
-19-
<PAGE>
Results of Operations - First Quarter 1996 vs. First Quarter 1995 (Continued)
Cost of sales and rentals increased 3.1% to $33.5 million (41.6% of total
revenue) versus $32.5 million (36.7% of total revenue)) for 1995. Excluding
additional depreciation and amortization expense related to purchase accounting
adjustments associated with the Acquisition of $4.4 million, cost of sales and
rentals represented 36.1% of total revenue. Cost of sales and rentals as a
percentage of total revenue decreased due to an increased content of high margin
U.S. Customer Service revenue and lower inventory adjustments partially offset
by higher manufacturing costs.
Selling, service and administrative expenses for the first three months of 1996
increased 31.5% to $50.5 million (62.8% of total revenue) from $38.4 million
(43.5% of total revenue) for the comparable period in 1995. Excluding
additional depreciation and amortization expense associated with purchase
accounting adjustments related to the Acquisition in the amount of $11.6
million, selling, service and administrative expenses increased slightly (48.4%
of total revenue) versus the first three months of 1995. This increase is
attributable to higher U.S. Customer Service expenses (up $0.5 million), higher
U.S. Headquarters expenses for taxes not based on income, higher marketing and
advertising expenses, the elimination of allocations to Pitney Bowes Inc., and
increases in international expenses due to branch sales office expansion in
France and Italy, and higher sales compensation on increased revenue and higher
advertising expenses in Germany. Lower Integrated Voice Systems selling
expenses (down $1.4 million) due to lower sales compensation on lower sales
revenue and reduced manpower partially offset these increases.
Research and development expenses of $3.6 million were 36.8% higher than the
comparable period in 1995 due to headcount increases and $0.5 million of
purchase accounting charges.
The Company recorded an operating loss of $7.1 million during the first quarter
of 1996 compared to an operating profit of $14.9 million for the comparable
period in 1995. Excluding purchase accounting adjustments associated with the
Acquisition of $16.5 million, operating profit declined by 37.2%. This
reduction reflects the impact of lower revenue and higher expenses partially
offset by improved margins associated with the impact of a favorable mix shift
to higher margin U.S. Customer Service revenue and lower inventory adjustments.
The Company has recorded a deferred tax asset of $27.8 million of which $7.4
million was recorded in the first quarter and provided for the increase in other
assets. The deferred tax asset reflects the benefit of net operating loss
carryforwards and various book tax temporary differences. The net operating
loss carryforward for federal income tax purposes as of March 31, 1996 is
approximately $26.4 million which will expire beginning in the year 2011.
Realization is dependent on generating sufficient taxable income prior to
expiration of the net operating loss carryforwards. Although realization is not
assured, management believes it is more likely than not that all of the deferred
tax asset will be realized. Accordingly, no valuation allowance has been
established as of March 31, 1996. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the net operating loss carryforward period are
reduced.
Liquidity and Capital Resources
The Company's liquidity requirements consists primarily of scheduled payments of
principal and interest on its indebtedness, working capital needs and capital
expenditures. In addition, Dictaphone made its final required cash payment
($8.0 million) to Pitney Bowes Inc. in the first quarter of 1996 which related
to certain post-closing adjustments to the purchase price for the Company. This
final payment and the reduction of an advance payment made by Pitney Bowes Inc.
account for the reduction in accrued liabilities in the first quarter.
-20-
<PAGE>
Liquidity and Capital Resources (Continued)
At March 31, 1996, the Company had outstanding term loans of $148.25 million
(the "Term Loans") and a $8.0 million loan outstanding under the $40.0 million
revolving credit facility (the "Revolving Credit Facility"). Availability under
the Revolving Credit Facility at March 31, 1996 was $32 million. Scheduled
annual principal payments will be $7.75 million in 1996, $11.75 million in 1997,
$15.75 million in 1998 and 1999, and $19.75 million in 2000. There are no
scheduled reductions in the $40.0 million Revolving Credit Facility over the
next five years; however, the Company is required to reduce loans outstanding
under the Revolving Credit Facility to $15.0 million for a period of not less
than 30 consecutive days during each consecutive 12-month period.
In connection with the terms of the Credit Agreement, the Company entered into
interest rate swap agreements in November 1995, effective February 16, 1996,
with an aggregate notional principal amount equivalent to $75 million maturing
on February 16, 1999. The swap will effectively convert that portion of the
Company's Term Loans to a fixed rate component of 5.8%; thus, reducing the
impact of changes in interest rates, converting the total effective interest
rate on fifty percent of the Term Loans to 8.8%. No funds under the swap
agreements are actually borrowed or are to be repaid. Amounts due to or from
the counterparties will be reflected in interest expense in the periods in which
they accrue.
In addition, the Credit Agreement contains covenants that significantly limit or
prohibit, among other things, the ability of the Company and Dictaphone U.S. to
incur indebtedness, make prepayments of certain indebtedness, pay dividends,
make investments, engage in transactions with stockholders and affiliates,
create liens, sell assets and engage in mergers and consolidations and requires
that the Company maintain certain financial ratios.
The Company had $200.0 million of Notes outstanding as of March 31, 1996. The
Notes are subordinated to the Credit Agreement financings and other senior
indebtedness, as defined in the Note Indenture. The Notes contain covenants
similar to the Credit Agreement and provides for each noteholder to have the
right to require that the Company repurchase the Notes at 101% of the principal
amount upon a change of control as defined in the Note Indenture. The Notes
bear interest of 11-3/4% per annum, payable semi-annually on each February 1 and
August 1. The Notes mature on August 1, 2005. At March 31, 1996, the carrying
amount of the Notes approximated fair value based upon dealer quotes.
First quarter capital expenditures totaled $0.9 million. The Company does not
expect the limitation on capital expenditures in the Credit Agreement to
restrict capital expenditures in a material manner.
The Company believes that cash flows from operating activities and its ability
to borrow under the Revolving Credit Facility will be adequate to meet the
Company's debt service obligations, working capital needs and planned capital
expenditures for the foreseeable future.
In 1996, the Company adopted SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Company
will evaluate the carrying value of its long lived assets and identifiable
intangibles, including goodwill, in accordance with SFAS 121 when events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. The effect of adopting this new standard did not have a
material effect on the Company's consolidated financial position or results of
operations during the first quarter of 1996.
-21-
<PAGE>
Liquidity and Capital Resources (Continued)
In 1996, the Company adopted the provisions of SFAS No. 123 "Accounting for
Stock-Based Compensation". The Company, as provided for by SFAS 123, will
continued to apply Accounting Principles Board Opinion No. 25, "Accounting for
Stock issued to Employees" for employee stock compensation measurement and will
provide the required pro forma footnote disclosures.
The Company's quarterly revenues and other operating results have been and will
continue to be affected by a wide variety of factors that could have a material
adverse effect during any particular period, including the level of orders that
are received and shipped by the Company in any given quarter, the rescheduling
and cancellation of orders by customers, availability and cost of materials, the
Company's ability to enhance its existing products and to develop, manufacture
and market new products, new product developments by the Company's competitors,
market acceptance of products of both the Company and its competitors,
competitive pressures on prices, and significant damage to or prolonged delay in
operations at the Company's sole manufacturing facility.
The Company may, from time to time, provide estimates as to future performance.
These forward looking statements will be estimates, and may or may not be
realized by the Company. The Company undertakes no duty to update such forward
looking statements. Many factors could cause actual results to differ from
these forward looking statements, including, but not limited to, loss of market
share through competition, introduction of competing products by other firms,
pressure on prices from competition or purchasers of the Company's products, and
interest rate and foreign exchange fluctuations.
PART II - OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
-----------------
See Note 7 to the Condensed Consolidated Statements of Operations (Unaudited) of
Dictaphone Corporation (Successor Company), which is incorporated herein by
reference.
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
--------
10.13 Amendment No. 1 to the Dictaphone Corporation Management
Stock Option Plan
10.14 Form of Letter Agreement amending the Subscription Agreement for
Management Private Placement, dated as of August 7, 1995 and the
Stockholders Agreement, dated as of August 11, 1995.
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
There were no Reports on Form 8-K filed during the three months ended
March 31, 1996.
-22-
<PAGE>
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.
Dated: May 14, 1996 Dictaphone Corporation
--------------------------------
(Registrant)
By: /s/ John H. Duerden
---------------------------------
Name: John H. Duerden
Title: Chairman, Chief Executive
Officer and President
(Principal Executive Officer)
By: /s/ Joseph D. Skrzypczak
----------------------------------
Name: Joseph D. Skrzypczak
Title: Vice President, Chief
Financial Officer and Director
(Principal Financial and
Accounting Officer)
-23-
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibits Description Numbered Page
*10.13--Amendment No. 1 to the Dictaphone Corporation
Management Stock Option Plan
*10.14--Form of Letter Agreement amending the Subscription
Agreement for Management Private Placement, dated
as of August 7, 1995 and the Stockholders Agreement,
dated as of August 11, 1995.
*27 .--Financial Data Schedule
______________________
* Filed herewith.
-24-
AMENDMENT NUMBER 1
TO THE
DICTAPHONE CORPORATION
MANAGEMENT STOCK OPTION PLAN
----------------------------
AMENDMENT, dated as of April 27, 1996, to the Dictaphone Corporation Management
Stock Option Plan (the "Plan").
WITNESSETH:
-----------
WHEREAS, the Board of Directors (the "Board") of Dictaphone Corporation (the
"Company") has determined that it desires to amend the Plan to provide that
options granted thereunder shall vest on an accelerated basis in the event of
certain registered public offerings of the Company's common stock; and
WHEREAS, Section 11(b) of the Plan provides that the Board may amend the Plan
from time to time and that such amendment may be made effective as to
outstanding options so long as it is not adverse to the holders thereof;
NOW, THEREFORE, the Plan is hereby amended as follows:
1.Acceleration Upon the Occurrence of a Registered Public Offering. Section
-----------------------------------------------------------------
6(e) of the Plan ("Exercisability and Vesting of Options") is hereby amended by:
(a)inserting the words "or an IPO (as defined herein)" in the second
sentence of subsection (i) thereof after the words "Sale (as defined
herein)";
(b)inserting the following language at the end of the last sentence of
subsection (i) thereof:
, and the term "IPO" shall mean an initial offering of shares of
Common Stock pursuant to a registration statement under the Securities
Act of 1933, as amended (other than a registration statement on Form
S-8 or any successor thereto), which results in at least 15% of the
outstanding shares of the Common Stock being listed on a national
securities exchange or the NASDAQ/National Market System,
-25-
<PAGE>
; and
(c)inserting the words "or an IPO" in the second sentence of
subsection (ii) thereof after the word "Sale".
2.Effective Date. This Amendment Number 1 shall be effective as of the date
---------------
first above write, and shall apply with respect to both options currently
outstanding and those that may hereafter be granted pursuant to the Plan.
-26-
Dictaphone Corporation
3191 Broadbridge Avenue
Stratford, CT 06497-2559
203.381.7064
[Date]
Name
Address
City, State
Dear __________:
Reference is made to (a) the Management Stock Subscription Agreement, dated as
of August 7, 1995 (the "Subscription Agreement"), by and among Dictaphone
corporation (the "Company") and the Management Investors (as defined therein),
including you, and (b) the Stockholders Agreement, dated as of August 11, 1995
(the "Stockholders Agreement"), by and among the Company, the Stonington
Investor and the Institutional Investors (as such terms are defined in the
Stockholders Agreement).
As you are aware, pursuant to the Subscription Agreement in August of 1995 you
purchased the number of shares of common stock, par value $.01 per share, of the
Company set forth on the signature page hereof (the "Shares"). The Shares are
subject to the terms of the Stockholders Agreement.
In consideration of your services to the Company, the Company and the Stonington
Investor have agreed to amend certain provisions of the Stockholders Agreement
with respect to the Shares. The principal purpose of such amendments is to
remove certain provisions that permitted the Company to repurchase the Shares at
less than fair market value following a voluntary resignation by you. The
removal of these provisions will cause a taxable event with respect to the
Shares, but the Company believes that you will not recognize income because the
current fair market value of the Shares does not exceed the purchase price you
paid for them.
Accordingly, effective as of April 27, 1996, and subject to the execution of
this letter by you and the execution of substantially identical letters by other
Management Investors who, with you, hold a majority of the shares held by all
Management Investors, the Stockholders Agreement shall be amended as follows:
-27-
<PAGE>
Combining Voice & Data to Serve You
Name
Date
Page 2
1.Definitions. Article I of the Stockholders Agreement is hereby amended by
-----------
deleting the definition of "Protected Share" from such Article.
2.Call Rights. Section 3.2 (a) of the Stockholders Agreement is hereby amended
-----------
by (a) deleting from clause (ii) of the definition of "Share Call Price", the
words "(y) as to Call Shares that are "Protected Shares" on the date of the
occurrence of the "Call Event" and the words "and (z) as to Call Shares that are
not Protected Shares on the date of the occurrence of the Call Event, the lesser
of the original purchase price and the Fair Value Price," and (b) deleting the
last sentence of such Section 3.2(a).
Please indicate your agreement to the amendment set forth above by executing
this letter in the space provided below and returning one fully-executed
original to Kim Carpenter.
DICTAPHONE CORPORATION
By:
-----------------------------
Name:
Title:
STONINGTON PARTNERS INC. II
By: Stonington Partners, L.P., its
general partner
By: Stonington Partners, Inc. II, its
general partner
By:
------------------------------
Name:
Title:
-28-
<PAGE>
Name
Date
Page 3
Acknowledged and Agreed:
By:
Name:
Number of Shares:
stocks/options.ltr
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet of Dictaphone Corporation at March 31,
1996, and the condensed consolidated statement of operations for the three
months ended 1996, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 8,554
<SECURITIES> 0
<RECEIVABLES> 52,629
<ALLOWANCES> 1,337
<INVENTORY> 62,586
<CURRENT-ASSETS> 130,648
<PP&E> 56,556
<DEPRECIATION> 13,643
<TOTAL-ASSETS> 527,027
<CURRENT-LIABILITIES> 85,878
<BONDS> 347,500
<COMMON> 95
16,340
0
<OTHER-SE> 66,482
<TOTAL-LIABILITY-AND-EQUITY> 527,027
<SALES> 57,984
<TOTAL-REVENUES> 80,459
<CGS> 33,482
<TOTAL-COSTS> 87,595
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,005
<INCOME-PRETAX> (18,154)
<INCOME-TAX> 6,724
<INCOME-CONTINUING> (11,430)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,430)
<EPS-PRIMARY> (1.26)
<EPS-DILUTED> (1.26)
</TABLE>
