SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
/ / 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: 33-93464
DICTAPHONE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3838908
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3191 Broadbridge Avenue
Stratford, CT 06497
(203) 381-7000
(Address of principal executive offices,
including zip code, and telephone
number, including area code)
________________________________________________________
(Former name, former address and former fiscal year, if
changed since last report)
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
August 8, 1996: 9,483,000
The Common Stock of the registrant is not publicly traded.
<PAGE>
DICTAPHONE CORPORATION
INDEX
<TABLE>
<CAPTION>
<S> <C>
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
DICTAPHONE CORPORATION (Successor Company)
Condensed Consolidated Statements of
Operations for the Three and Six
Months Ended June 30, 1996 (Unaudited) 2
Condensed Consolidated Balance Sheets
as of June 30, 1996 (Unaudited) and
December 31, 1995 3
Condensed Consolidated Statement of
Cash Flow for the Six Months Ended
June 30, 1996 (Unaudited) 4
Notes to Consolidated Financial
Statements (Unaudited) 5 - 14
DICTAPHONE CORPORATION (Predecessor Company)
Combined Statements of Income for
the Three and Six Months Ended
June 30, 1995 (Unaudited) 15
Combined Statement of Cash Flow for
the Six Months Ended June 30, 1995
(Unaudited) 16
Notes to Combined Financial Statements
(Unaudited) 17 - 19
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 20 - 25
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 25
ITEM 6. Exhibits and Reports on Form 8-K 25
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DICTAPHONE CORPORATION (Successor Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share amount)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1996 June 30, 1996
------------- -------------
<S> <C> <C>
Revenues:
Sales and rentals $ 62,241 $ 120,225
Support services 23,011 45,486
----------- ---------
Total revenue 85,252 165,711
----------- ---------
Costs and expenses:
Cost of sales and
rentals 31,712 65,194
Selling, service
and administrative 40,868 80,466
Amortization of
intangibles 10,986 21,914
Research and development 3,996 7,583
----------- --------
Operating loss (2,310) (9,446)
Interest expense 10,454 21,459
Other (income)
expense - net (77) (64)
------------ ---------
Loss before income taxes (12,687) (30,841)
Income tax benefit 4,797 11,521
----------- ---------
Net loss (7,890) (19,320)
Stock dividends on
PIK Preferred Stock 607 1,132
----------- ---------
Net loss applicable to
Common Stock $ (8,497) $ (20,452)
============ ==========
Net loss per share of
Common Stock $ (0.90) $ (2.16)
============ ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
DICTAPHONE CORPORATION (Successor Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
---------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 14,279 $ 4,247
Accounts receivable, less
allowances of $1,462 and
$1,425, respectively 57,256 53,132
Inventories 66,341 61,203
Other current assets 9,152 9,771
---------- ---------
Total current assets 147,028 128,353
Property, plant and
equipment, net 45,690 40,642
Deferred financing costs,
net of accumulated amortization
of $900 and $3,721, respectively 18,799 15,980
Intangibles, net of accumulated
amortization of $16,968 and $38,882,
respectively 307,964 289,366
Prepaid repurchases,
leased equipment 7,279 6,217
Other assets 23,930 39,862
---------- ----------
Total assets $ 550,690 $ 520,420
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,932 $ 7,613
Interest payable 10,922 11,466
Accrued liabilities 42,640 29,256
Advance billings 34,466 32,729
Current portion of
long-term debt 7,750 9,781
---------- ----------
Total current liabilities 103,710 90,845
Long-term debt 342,250 343,872
Other liabilities 10,227 11,228
---------- ----------
Total liabilities $ 456,187 $ 445,945
========== ==========
Commitments and contingencies
(Note 6)
Stockholders' equity:
Cumulative 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 $16,947) 15,815 16,947
Common stock ($.01 par value;
20,000,000 shares authorized;
9,483,000 shares outstanding) 95 95
Notes receivable from stockholders (1,160) (1,077)
Additional paid-in capital 94,905 94,905
Treasury stock, at cost (100) (170)
Accumulated deficit (14,689) (35,140)
Accumulated translation
adjustment (363) (1,085)
----------- ------------
Total stockholders' equity 94,503 74,475
---------- ------------
Total liabilities and
stockholders' equity $ 550,690 $ 520,420
========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
DICTAPHONE CORPORATION (Successor Company)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months
Ended
June 30, 1996
-------------
<S> <C>
Operating activities:
Net loss $ (19,320)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation and amortization
(including $4,384 of nonrecurring charge) 38,110
Provision for deferred income taxes (12,758)
Changes in assets and liabilities:
Accounts receivable 3,649
Inventories 491
Other current assets (692)
Accounts payable and accrued liabilities (4,601)
Advance billings (1,701)
Other assets and other (6,547)
-----------
Net cash used in operating activities (3,369)
-----------
Investing activities:
Payment for acquisition (8,000)
Net investment in fixed assets (2,259)
-----------
Net cash used in investing activities (10,259)
-----------
Financing activities:
Repayment under term loan facility (3,500)
Borrowings under revolving credit facility 11,000
Repayment under revolving credit facility (4,000)
Other 132
-----------
Net cash provided by financing activities 3,632
-----------
Effect of exchange rate changes on cash (36)
-----------
Decrease in cash (10,032)
Cash, beginning of period 14,279
-----------
Cash, end of period $ 4,247
===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 18,065
===========
Income taxes paid $ 1,041
===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<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. 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 and six month periods ended June
30, 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.
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 and six month periods ended June 30, 1996 was 9,483,000.
<PAGE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------------ --------
<S> <C> <C>
Raw materials and work in process $ 18,437 $ 19,383
Supplies and service parts 19,249 18,928
Finished products 28,655 22,892
---------- ---------
Total inventories $ 66,341 $ 61,203
========== =========
</TABLE>
4. INTANGIBLES
The following summarizes intangible assets, net of accumulated
amortization of $16,968 and $38,882 at December 31, 1995 and June 30,
1996, respectively.
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
----------- ----------
<S> <C> <C>
Goodwill $ 140,006 $ 140,740
Tradenames 77,104 76,131
Service contracts 34,499 25,339
Non-compete agreement 47,202 38,995
Patents 9,153 8,161
---------- ----------
$ 307,964 $ 289,366
========== ==========
</TABLE>
5. INCOME TAXES
The benefit for income taxes for the three and six month
periods ended June 30, 1996 is $4,797 and $11,521, respectively.
The Company has recorded a deferred tax asset of $33.5 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 June
30, 1996 is approximately $29.4 million which will expire beginning in
the year 2010. 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 June 30, 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.
<PAGE>
6. 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 in the discovery stage
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 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 consolidated financial
condition or 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.
<PAGE>
7. PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA
The following pro forma combined statement of operations of
Dictaphone Corporation for the six months ended June 30, 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.
<TABLE>
<CAPTION>
June 30, 1995
________________________________________________
Dictaphone
Predecessor Pro Forma Corporation
Company Adjustments Pro Forma
------------- ------------ -----------
<S> <C> <C> <C>
Total revenue $ 171,143 $ --- $ 171,143
---------- ----------- -----------
Net (loss) income $ 17,270 $ (33,646) $ (16,376)
---------- ----------- -----------
Net loss applicable
to common stock $ 17,270 $ (34,778) $ (17,508)
---------- ----------- -----------
Earnings per share $ 1.82 $ (3.67) $ (1.85)
---------- ----------- -----------
</TABLE>
8. 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.
<PAGE>
8. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (Continued)
The following are the supplemental consolidating statements of
operations for the three and six month periods ended June 30, 1996 and
cash flows for the six month period ended June 30, 1996 and the
supplemental consolidating balance sheets as of December 31, 1995 and
June 30, 1996.
Dictaphone Corporation (Successor Company)
Supplemental Consolidating Statement of Operations
Three Months Ended June 30, 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 $ --- $ 56,635 $ 8,784 $ (3,178) $ 62,241
Support services --- 20,060 2,951 --- 23,011
-------- --------- -------- ---------- --------
Total revenues --- 76,695 11,735 (3,178) 85,252
-------- --------- -------- ---------- --------
Costs and expenses:
Cost of sales
and rentals --- 29,765 4,876 (2,929) 31,712
Selling, service
and administrative 69 43,959 7,841 (15) 51,854
Research and
development --- 3,996 --- --- 3,996
Interest expense
- net and other 404 9,428 530 15 10,377
-------- --------- -------- -------- ---------
Total costs
and expenses 473 87,148 13,247 (2,929) 97,939
-------- --------- -------- -------- --------
Equity (loss)
earnings (1,310) --- --- 1,310 ---
--------- --------- -------- -------- --------
(Loss) income
before income taxes (1,783) (10,453) (1,512) 1,061 (12,687)
Income tax benefit 113 3,896 685 103 4,797
-------- --------- ------- ------- --------
Net (loss) income $ (1,670) $ (6,557) $ (827) $ 1,164 $ (7,890)
========= ========== ======== ======= =========
</TABLE>
<PAGE>
8. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (Continued)
Dictaphone Corporation (Successor Company)
Supplemental Consolidating Statement of Operations
Six Months Ended June 30, 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 $ --- $ 107,027 $ 19,800 $ (6,602) $120,225
Support services --- 39,710 5,776 --- 45,486
-------- --------- -------- ---------- --------
Total revenues --- 146,737 25,576 (6,602) 165,711
-------- --------- -------- ---------- --------
Costs and expenses:
Cost of sales
and rentals --- 60,357 11,082 (6,245) 65,194
Selling, service
and administrative 107 86,855 15,418 --- 102,380
Research and development --- 7,583 --- --- 7,583
Interest expense - net
and other 1,257 18,909 1,215 14 21,395
-------- --------- -------- -------- --------
Total costs
and expenses 1,364 173,704 27,715 (6,231) 196,552
-------- --------- -------- -------- --------
Equity (loss) earnings (5,725) --- --- 5,725 ---
--------- --------- -------- -------- --------
(Loss) income before
income taxes (7,089) (26,967) (2,139) 5,354 (30,841)
Income tax benefit 372 10,303 695 151 11,521
-------- --------- ------- ------- --------
Net (loss) income $ (6,717) $ (16,664) $(1,444) $ 5,505 $(19,320)
========= ========== ======== ======= =========
</TABLE>
<PAGE>
8. 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
Deferred financing
costs, net 18,799 --- --- --- 18,799
Intangibles, net 2,455 286,043 19,466 --- 307,964
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>
<PAGE>
8. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (Continued)
Dictaphone Corporation (Successor Company)
Supplemental Consolidating Balance Sheet
June 30, 1996
<TABLE>
<CAPTION>
Dictaphone Dictaphone Dictaphone Consolidating
Corporation U.S. Non-U.S. Adjustments Consolidated
----------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ --- $ 3,867 $ 380 $ --- $ 4,247
Accounts receivable 10,385 45,645 9,110 (12,008) 53,132
Inventories --- 52,832 9,575 (1,204) 61,203
Other current assets --- 4,402 5,387 (18) 9,771
------- --------- --------- ---------- ---------
Total current assets 10,385 106,746 24,452 (13,230) 128,353
Note receivable --- 15,945 --- (15,945) ---
Investments in
subsidiaries 444,193 --- --- (444,193) ---
Property, plant
and equipment, net --- 38,264 2,378 --- 40,642
Deferred financing
costs, net 15,980 --- --- --- 15,980
Intangibles, net 2,467 268,694 18,205 --- 289,366
Other assets 2,351 41,469 1,786 473 46,079
--------- --------- -------- --------- ---------
Total assets $ 475,376 $ 471,118 $46,821 $(472,895) $520,420
========= ========= ======= ========== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable, interest
payable and accrued
liabilities $ 11,526 $ 40,010 $ 9,016 $(12,217) $ 48,335
Advance billings --- 28,667 4,062 --- 32,729
Current portion of
long-term debt 9,750 --- 31 --- 9,781
-------- ------- ------- -------- ---------
Total current
liabilities 21,276 68,677 13,109 (12,217) 90,845
Long-term debt 359,708 335,995 17,613 (369,444) 343,872
Other liabilities --- 10,783 445 --- 11,228
Stockholders' equity 94,392 55,663 15,654 (91,234) 74,475
-------- ------- ------- --------- ---------
Total liabilities
and stockholders'equity $ 475,376 $471,118 $ 46,821 $(472,895) $520,420
========= ======== ======== ========== ========
</TABLE>
<PAGE>
8. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (Continued)
Dictaphone Corporation (Successor Company)
Supplemental Consolidating Statement of Cash Flows
Six Months Ended June 30, 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 $ (6,717) $ (16,664) $ (1,444) $ 5,505 $ (19,320)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 2,853 32,924 2,333 --- 38,110
Provision for
deferred income taxes (415) (11,460) (410) (473) (12,758)
Change in assets
and liabilities:
Accounts receivable (2,876) 4,977 (1,018) 2,566 3,649
Inventories --- (891) 1,011 371 491
Other current assets --- 1,316 (1,961) (47) (692)
Accounts payable and
accrued liabilities 530 (2,365) (379) (2,387) (4,601)
Advance billings --- (1,864) 163 --- (1,701)
Other assets and other 8,335 (8,850) (497) (5,535) (6,547)
-------- ---------- --------- -------- ----------
Net cash used in
operating activities 1,710 (2,877) (2,202) --- (3,369)
-------- ---------- --------- -------- ----------
Investing activities:
Payment for acquisition (8,000) --- --- --- (8,000)
Net investment
in fixed assets --- (2,068) (191) --- (2,259)
--------- ---------- --------- -------- ---------
Net cash used in
investing activities (8,000) (2,068) (191) --- (10,259)
--------- ---------- --------- -------- ---------
Financing activities:
Repayment under term
loan facility (3,500) --- --- --- (3,500)
Borrowing from
promissory notes (6,345) 6,345 --- --- ---
Borrowing from
subsidiary 9,124 (9,124) --- --- ---
Borrowing under
revolving credit facility 11,000 --- --- --- 11,000
Repayment under revolving
credit facility (4,000) --- --- --- (4,000)
Other 11 --- 121 --- 132
--------- --------- --------- --------- ---------
Net cash provided by
(used in) financing
activities 6,290 (2,779) 121 --- 3,632
-------- --------- --------- --------- --------
Effect of exchange rate
changes on cash --- --- (36) --- (36)
--------- --------- -------- --------- --------
Decrease in cash --- (7,724) (2,308) --- (10,032)
Cash, beginning of period --- 11,591 2,688 --- 14,279
--------- --------- -------- --------- --------
Cash, end of period $ --- $ 3,867 $ 380 $ --- $ 4,247
========= ========= ======== ========== ========
</TABLE>
<PAGE>
9. SUBSEQUENT EVENT
On July 17, 1996, the Company and the lenders under its Bank
Credit Agreement, dated as of August 7, 1995, executed an amendment to
such credit agreement, dated as of June 28, 1996, modifying certain of
the covenants contained therein. The amendment lowered restrictions on
investments and joint ventures, and revised the financial covenants for
maximum leverage ratio, minimum consolidated EBITDA, and minimum
interest coverage ratio.
<PAGE>
DICTAPHONE CORPORATION (Predecessor Company)
COMBINED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1995 June 30, 1995
------------- -------------
<S> <C> <C>
Revenues:
Sales and rentals $ 60,548 $ 126,571
Support services 22,168 44,572
------------ -------------
Total revenue 82,716 171,143
------------ ------------
Cost and expenses:
Cost of sales and rentals 30,871 63,341
Selling, service and
administrative 36,121 74,550
Research and development 2,946 5,568
------------ ----------
Operating profit 12,778 27,684
Interest (income) expense - net (489) (1,023)
------------- -----------
Income before income taxes 13,267 28,707
Provision for income taxes 5,272 11,437
------------ -----------
Net income $ 7,995 $ 17,270
============ ===========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
DICTAPHONE CORPORATION (Predecessor Company)
COMBINED STATEMENT OF CASH FLOW (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months
Ended
June 30, 1995
-------------
<S> <C>
Cash flows from operating activities:
Net income $ 17,270
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,039
Increase in deferred income taxes 103
Changes in assets and liabilities:
Accounts receivable (489)
Inventories (3,415)
Other current assets and prepayments 228
Accounts payable and accrued liabilities (767)
Advance billings (240)
Other assets and other (12,183)
----------
Net cash used in operating activities 4,546
----------
Cash flows from investing activities:
Net investment in fixed assets (5,191)
Effect of exchange rate changes on cash (1,768)
----------
Net cash flow financed by Pitney Bowes Inc. $ (2,413)
==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 6
=========
Income taxes paid $ 13,381
=========
</TABLE>
See accompanying notes to combined financial statements.
<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 statements of
income for the three and six month periods ended June 30, 1995 and
combining statement of cash flows for the six month period ended June
30, 1995.
Dictaphone Corporation (Predecessor Company)
Supplemental Combining Statement of Income
Three Months Ended June 30, 1995
<TABLE>
<CAPTION>
Dictaphone Dictaphone Combining
U.S. Non-U.S. Adjustments Combined
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenue from:
Sales and rentals $ 53,079 $ 9,532 $ (2,063) $ 60,548
Support services 18,644 3,524 --- 22,168
-------- ------- -------- -------
Total revenue 71,723 13,056 (2,063) 82,716
======== ======= ======== =======
Costs and expenses:
Cost of sales and rentals 27,962 4,968 (2,059) 30,871
Selling, service and
administrative 29,551 6,570 --- 36,121
Research and development 2,946 --- --- 2,946
Interest (income)
expenses, net --- (489) --- (489)
-------- ------- ------ ------
Total costs and
expenses 60,459 11,049 (2,059) 69,449
-------- ------- -------- --------
Income before income taxes 11,264 2,007 (4) 13,267
Provision for income taxes 4,644 623 5 5,272
-------- ------- -------- -------
Net income $ 6,620 $ 1,384 $ (9) $ 7,995
======== ======= ======== ========
</TABLE>
<PAGE>
2. SUPPLEMENTAL COMBINING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (Continued)
Dictaphone Corporation (Predecessor Company)
Supplemental Combining Statement of Income
Six Months Ended June 30, 1995
<TABLE>
<CAPTION>
Dictaphone Dictaphone Combining
U.S. Non-U.S. Adjustments Combined
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenue from:
Sales and rentals $111,056 $19,942 $ (4,427) $126,571
Support services 37,007 7,565 --- 44,572
-------- ------- -------- -------
Total revenue 148,063 27,507 (4,427) 171,143
======== ======= ======== =======
Costs and expenses:
Cost of sales and rentals 57,241 10,500 (4,400) 63,341
Selling, service and
administrative 60,949 13,601 --- 74,550
Research and development 5,568 --- --- 5,568
Interest (income) expenses, net (24) (999) --- (1,023)
------- ------- ------ ------
Total costs and expenses 123,734 23,102 (4,400) 142,436
-------- ------- -------- --------
Income before income taxes 24,329 4,405 (27) 28,707
Provision for income taxes 10,031 1,440 (34) 11,437
-------- ------- -------- -------
Net income $ 14,298 $ 2,965 $ 7 $ 17,270
======== ======= ======== ========
</TABLE>
<PAGE>
2. SUPPLEMENTAL COMBINING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (Continued)
Dictaphone Corporation (Predecessor Company)
Supplemental Combining Statement of Cash Flows
Six Months Ended June 30, 1995
<TABLE>
<CAPTION>
Dictaphone Dictaphone Combining
U.S. Non-U.S. Adjustments Combined
---------- ---------- ----------- --------
<S> <S> <C> <C> <C>
Cash flows from operating
activities:
Net income $ 14,298 $ 2,965 $ 7 $ 17,270
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 3,379 660 --- 4,039
Increase (decrease) in
deferred income taxes --- 103 --- 103<PAGE>
Change in assets and
liabilities:
Accounts receivable 1,277 (1,879) 113 (489)
Inventories (5,155) 1,713 27 (3,415)
Other current assets 920 (640) (52) 228
Accounts payable and
accrued liabilities (1,043) 371 (95) (767)
Advance billings (513) 273 --- (240)
Other assets and other (11,852) (331) --- (12,183)
------- ------ ----- --------
Net cash (used in) provided
by operating activities 1,311 3,235 --- 4,546
------- ------ ----- --------
Cash flows from investing
activities:
Net investment in fixed assets (3,988) (1,203) --- (5,191)
-------- ------ ---- -------
Effect of exchange rate
changes on cash --- (1,768) --- (1,768)
------- ------ ----- -------
Net cash flow available
to Pitney Bowes Inc. $ (2,677) $ 264 $ --- $ (2,413)
========= ======== ========= ========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Total revenue $ 85.3 $ 82.7 $ 165.7 $ 171.1
Cost of sales and
rentals (1) 31.7 30.9 65.2 63.3
Selling, service
and administrative 51.9 36.1 102.3 74.5
Research and development 4.0 2.9 7.6 5.6
------- -------- ------- ------
Operating profit
(loss) (2.3) 12.8 (9.4) 27.7
------- -------- ------- ------
Net interest expense
(income) and other 10.4 (0.5) 21.4 (1.0)
(Benefit) provision
for income tax (4.8) 5.3 (11.5) 11.4
------ -------- ------- ----
Net (loss) income $ (7.9) $ 8.0 $ (19.3) $ 17.3
======== ======= ======== ====
EBITDA (2) $ 13.8 $ 14.8 $ 26.0 $ 31.7
======== ======= ======== ====
</TABLE>
------------------
(1) 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.
(2) EBITDA is defined as income before effect of changes in
accounting plus interest, income taxes, depreciation and
amortization. EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to incur and
service debt. However, EBITDA should not be considered in
isolation or as a substitute for net income or cash flow data
prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or
liquidity.
<PAGE>
Overview (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Revenue from:
Sales:
U.S. Integrated
Voice Systems $ 22.3 $ 21.7 $ 40.5 $ 44.0
U.S. Communication
Recording Systems 15.4 12.2 29.1 30.8
U.S. Customer
Service parts 4.5 4.7 8.9 9.1
Contract Manufacturing
(including sales to
Pitney Bowes Inc.) 10.8 11.9 20.9 21.9
International Operations 8.6 9.4 19.6 19.7
------ ------- ------- ------
Total sales 61.6 59.9 119.0 125.5
------ ------- ------- ------
Rentals 0.7 0.6 1.2 1.0
------ ------- ------- ------
Total sales
and rentals 62.3 60.5 120.2 126.5
------ ------- ------- ------
Service:
U.S. Customer Service 20.0 18.6 39.7 37.0
International Operations 3.0 3.6 5.8 7.6
------ ------- ------ ------
Total support
service 23.0 22.2 45.5 44.6
------ ------- ------ ------
Total revenue $ 85.3 $ 82.7 $165.7 $171.1
====== ======= ====== ======
</TABLE>
Results of Operations - Second Quarter 1996 vs. Second Quarter 1995
Total revenue for the second quarter of 1996 increased 3.1% to
$85.3 million from $82.7 million during the second quarter of 1995. The
increase in revenue is attributable to higher sales revenue from U.S.
Integrated Voice Systems ("U.S.I.V.S.") and U.S. Communications
Recording Systems ("U.S.C.R.S."), and an increase in U.S. Customer
Service revenue partially offset by lower revenue from Contract
Manufacturing and International Operations.
U.S.I.V.S. revenue increased 2.8% to $22.3 million from $21.7
million on higher systems billings (up 16.0%). U.S.I.V.S. orders
increased 3.8%. U.S. Customer Service revenue (including sale of parts)
increased 5.6% to $24.5 million from $23.3 million due to increased
proprietary product service contract revenue (up 4.6%) as well as higher
third party maintenance revenue (up $0.6 million). U.S.C.R.S. revenue
increased 25.3% from $12.2 million to $15.4 million on higher Guardian
and Sentinel billings. This increase in revenue is attributable to an
increase in orders taken rate (total orders increased 14.6%). Revenue
from International Operations declined 9.7% as higher revenue in Germany
and Canada was offset by lower revenue in the United Kingdom and
Switzerland, as well as $0.4 million of unfavorable currency exchange.
Contract Manufacturing revenue was 10.5% lower than the corresponding
period of 1995.
Cost of sales and rentals increased 2.7% to $31.7 million (37.2% of
total revenue) during the three months ended June 30, 1996 versus $30.9
million (37.3% of total revenue) for the three months ended June 30,
1995. Excluding additional depreciation and amortization expense of
$1.4 million related to purchase accounting adjustments associated with
the Acquisition, cost of sales and rentals would have represented 35.5%
of total revenue during the three months ended June 30, 1996. Cost of
sales and rentals as a percentage of total revenue decreased during the
three months ended June 30, 1996 due to an increased content of high
margin U.S. Customer Service revenue, a reduced content of low margin
Contract
<PAGE>
Manufacturing revenue, and lower inventory adjustments partially offset
by lower U.S.C.R.S. price realization.
Selling, service and administrative expenses for the second quarter
of 1996 increased 43.6% to $51.9 million (60.8% of total revenue) from
$36.1 million (43.7% of total revenue) for the comparable period in
1995. Excluding additional depreciation and amortization expense of
$11.7 million associated with purchase accounting adjustments related to
the Acquisition, selling, service and administrative expenses would have
increased 11.3% (47.2% of total revenue) versus the second quarter 1995.
This increase is attributable to higher U.S. Customer Service and
U.S.C.R.S. expenses (up $0.6 million), higher U.S. Headquarters expenses
for taxes not based on income, marketing and advertising expenses,
employee benefit and management compensation, and increases in
international expenses due to branch sales office expansion in France
and Italy as well as the establishment of an office for International
Operations in the United Kingdom. U.S.I.V.S. selling expenses (down
$0.9 million) due to reduced manpower partially offset these increases.
Research and development expenses of $4.0 million for the three
months ended June 30, 1996 were 35.6% higher than the comparable period
in 1995 due to headcount increases and $0.5 million of additional
depreciation associated with purchase accounting adjustments related to
the Acquisition.
The Company recorded an operating loss of $2.3 million during the
second quarter of 1996 compared to an operating profit of $12.8 million
for the second quarter of 1995. Excluding purchase accounting
adjustments of $13.5 million associated with the Acquisition, operating
profit would have declined by 12.2%. This reduction reflects the impact
of higher expenses partially offset by higher revenue and improved
margins.
The Company has recorded a deferred tax asset of $33.5 million,
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 June 30, 1996 is approximately $29.4
million which will expire beginning in the year 2010. Realization of
the net operating loss carryforward is dependent on generating
sufficient taxable income prior to expiration of the net operating loss
carryforwards. Although no assurance can be given that the Company will
be able to realize the full benefit of the net operating loss
carryforwards, management currently 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 June 30, 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.
Results of Operations - Six Months Ended June 30, 1996 vs. Six Months
Ended June 30, 1995
Total revenue for the first six months of 1996 decreased 3.2% to
$165.7 million from $171.1 million for the comparable period in 1995.
The decline in revenue is attributable to lower sales revenue from
U.S.I.V.S. and U.S.C.R.S. and lower sales revenue from International
Operations and Contract Manufacturing partially offset by an increase in
U.S. Customer Service revenue.
U.S.I.V.S. revenue declined 7.2% from $44.0 million during the six
months ended June 30, 1995 to $40.5 million during the six months ended
June 30, 1996 on lower system sales (down 2.5%) and desktop and portable
equipment sales (down 13.5%). U.S. Customer Service revenue (including
sale of parts) increased 5.5% to $48.6 million from $46.1 million due to
increased proprietary product service contract revenue (up 6.0%) as well
as higher third party maintenance revenue (up $1.0 million). U.S.C.R.S.
revenue for the first six months of 1996 declined 5.9% from $30.8
million to $29.1 million on lower Prolog billings. This reduction in
revenue is attributable to a reduction in orders taken rate in the first
quarter of 1996. Revenue from International Operations declined 6.6% as
revenue growth in Germany and Canada due primarily to higher
Communications Recording System revenue was offset by a decline in the
United
<PAGE>
Kingdom due to lower Communications Recording System and dictation
revenue and the expiration of a significant one-time third party
maintenance contract which was in place during the first half of 1995.
Lower revenue in Switzerland (down 14.0%), as well as $0.4 million of
unfavorable currency exchange also contributed to the decline. Contract
Manufacturing revenue was 5.0% lower than the corresponding period of
1995.
Cost of sales and rentals during the six months ended June 30, 1996
increased 2.9% to $65.2 million (39.3% of total revenue) versus $63.3
million (37.0% of total revenue) for the six months ended June 30, 1995.
Excluding additional depreciation and amortization expense of $5.8
million related to purchase accounting adjustments associated with the
Acquisition, cost of sales and rentals represented 35.8% of total
revenue during the six months ended June 30, 1996. Cost of sales and
rentals as a percentage of total revenue decreased during the first six
months of 1996 due to an increased content of high margin U.S. Customer
Service revenue, a reduced content of low margin Contract Manufacturing
revenue and lower inventory adjustments partially offset by lower
U.S.C.R.S. price realization.
Selling, service and administrative expenses for the first half of
1996 increased 37.3% to $102.3 million (61.8% of total revenue) from
$74.5 million (43.6% of total revenue) for the comparable period in
1995. Excluding additional depreciation and amortization expense of
$23.3 million during the first six months of 1996 associated with
purchase accounting adjustments related to the Acquisition, selling,
service and administrative expenses increased 6.1% (47.8% of total
revenue) versus the first six months of 1995. This increase is
attributable to higher U.S. Customer service expenses (up $0.7 million),
U.S.C.R.S. expenses (up $0.3 million), higher U.S. Headquarters expenses
for taxes not based on income, marketing and advertising expenses,
employee benefit and management compensation expense and increases in
auditing and consulting fees. Higher international expense was due to
branch sales office expansion in France and Italy as well as the
establishment of an office for International Operations in the United
Kingdom. Lower U.S.I.V.S. selling expenses (down $2.4 million)
primarily due to reduced manpower partially offset these increases.
Research and development expenses of $7.6 million for the six
months ended June 30, 1996 were 36.2% higher than the comparable period
in 1995 due to headcount increases and $0.9 million of additional
depreciation associated with purchase accounting adjustments related to
the Acquisition.
The Company recorded an operating loss of $9.4 million during the
first half of 1996 compared to an operating profit of $27.7 million for
the first half of 1995. Excluding purchase accounting adjustments of
$30.0 million associated with the Acquisition, operating profit declined
by 25.6%. This reduction reflects the impact of lower revenue and
higher expenses partially offset by improved margins.
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. 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.
At June 30, 1996, the Company had outstanding term loans of $146.5
million (the "Term Loans") and a $7.0 million loan outstanding under the
$40.0 million revolving credit facility (the "Revolving Credit
Facility"). Availability under the Revolving Credit Facility at June
30, 1996 was $33 million. It is expected that borrowing under the
Revolving Credit Facility will increase during the third quarter of 1996
in anticipation of the scheduled August 1 interest payment associated
with the Notes. Scheduled annual principal payments on the term loans
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
<PAGE>
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 initial outstanding 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.
On July 17, 1996, the Company and the lenders under its Bank Credit
Agreement, dated as of August 7, 1995, executed an amendment to such
credit agreement, dated as of June 28, 1996, modifying certain of the
covenants contained therein. The amendment lowered restrictions on
investments and joint ventures, and revised the financial covenants for
maximum leverage ratio, minimum consolidated EBITDA, and minimum
interest coverage ratio.
The Company had $200.0 million of Notes outstanding as of June
30,1996. 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 June 30, 1996, the fair value of the Notes
was favorable $11.0 million.
Capital expenditures for the first half of 1996 totaled $2.3
million. The Company does not expect the limitation on capital
expenditures contained 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.
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 on the Company's financial
performance 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
<PAGE>
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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 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
27 - Financial Data Schedule
(b) Reports on Form 8-K
On July 18, 1996, the Company filed a Current Report on
Form 8-K, dated July 17, 1996, reporting, under Item 5 thereof, the
amendment of certain of the covenants contained in the Company's senior
Bank Credit Agreement, dated as of August 7, 1995.
No other reports on Form 8-K were filed by the Company
during the quarter.
<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: August 13, 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)
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibits Description Numbered Page
-------- ----------- -------------
*27. -- Financial Data Schedule
______________________
* Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet of Dictaphone Corporation at June 30, 1996,
and the condensed consolidated statement of operations for the six months
ended June 30, 1996, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,247
<SECURITIES> 0
<RECEIVABLES> 54,557
<ALLOWANCES> 1,425
<INVENTORY> 61,203
<CURRENT-ASSETS> 128,353
<PP&E> 57,682
<DEPRECIATION> 17,040
<TOTAL-ASSETS> 520,420
<CURRENT-LIABILITIES> 90,845
<BONDS> 343,872
16,947
0
<COMMON> 95
<OTHER-SE> 57,433
<TOTAL-LIABILITY-AND-EQUITY> 520,420
<SALES> 120,225
<TOTAL-REVENUES> 165,711
<CGS> 65,194
<TOTAL-COSTS> 175,157
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,459
<INCOME-PRETAX> (30,841)
<INCOME-TAX> 11,521
<INCOME-CONTINUING> (19,320)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,320)
<EPS-PRIMARY> (2.16)
<EPS-DILUTED> (2.16)
</TABLE>
