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 September 30, 1997
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 33-93464
DICTAPHONE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3838908
(State or 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)
-----------------------------------------
(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 November 12,
1997: 9,452,000
The Common Stock of the registrant is not publicly traded.
<PAGE>
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
----------------------
INDEX
-----
PAGE NO.
PART I. FINANCIAL INFORMATION
- ------------------------------
<S> <C>
ITEM 1. Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 1997 and September 30, 1996 2
Unaudited Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 1997 and September 30, 1996 3
Condensed Consolidated Balance Sheets as of September 30, 1997
(Unaudited) and December 31, 1996 4
Unaudited Condensed Consolidated Statements of Cash Flow for the
Nine Months Ended September 30, 1997 and September 30, 1996 5
Notes to Unaudited Consolidated Financial Statements 6 - 17
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18 - 23
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings 24
ITEM 6. Exhibits and Reports on Form 8-K 24
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amount)
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Revenues:
Product sales and rentals $52,416 $49,488
Contract manufacturing sales 10,739 10,813
Support services 24,561 23,146
------- -------
Total revenue 87,716 83,447
------- -------
Costs and expenses:
Cost of sales and rentals 32,881 31,316
Selling, service and administrative 40,201 40,859
Amortization of intangibles 8,772 10,028
Research and development 3,813 3,839
------- -------
Operating profit (loss) 2,049 (2,595)
Interest expense 10,497 10,910
Other expense (income) - net 357 (203)
------- -------
Loss before income taxes (8,805) (13,302)
Income tax benefit 2,782 4,797
------- -------
Net loss (6,023) (8,505)
Stock dividends on PIK Preferred Stock 681 593
------- -------
Net loss applicable to Common Stock $(6,704) $(9,098)
======= =======
Net loss per share of Common Stock $ (0.71) $ (0.96)
======= =======
See accompanying notes to condensed consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amount)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Revenues:
Product sales and rentals $148,375 $148,862
Contract manufacturing sales 30,364 31,664
Support services 70,085 68,632
------- -------
Total revenue 248,824 249,158
------- -------
Costs and expenses:
Cost of sales and rentals 104,280 96,510
Selling, service and administrative 125,013 121,325
Amortization of intangibles 27,320 31,942
Research and development 11,146 11,422
------- -------
Operating loss (18,935) (12,041)
Interest expense 31,174 32,369
Other expense (income) - net 593 (267)
------- -------
Loss before income taxes (50,702) (44,143)
Income tax benefit 17,765 16,318
------- -------
Net loss (32,937) (27,825)
Stock dividends on PIK Preferred Stock 1,994 1,725
------- -------
Net loss applicable to Common Stock $(34,931) $(29,550)
======== =======
Net loss per share of Common Stock $ (3.70) $ (3.12)
======= =======
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash $ 7,927 $ 4,717
Accounts receivable, less allowances of $1,339 and $1,035, respectively 53,701 68,432
Inventories 56,840 44,223
Other current assets 9,833 11,546
------- --------
Total current assets 128,301 128,918
Property, plant and equipment, net 37,008 35,043
Deferred financing costs, net of accumulated amortization of $6,235
and $8,806, respectively 14,255 12,514
Intangibles, net of accumulated amortization of $58,177 and $85,497,
respectively 271,022 242,840
Prepaid repurchases, leased equipment 5,163 3,936
Other assets 49,086 67,094
-------- --------
Total assets $504,835 $490,345
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,634 $ 11,343
Interest payable 10,342 4,485
Accrued liabilities 29,961 25,458
Advance billings 34,808 34,213
Current portion of long-term debt 12,512 15,356
-------- --------
Total current liabilities 95,257 90,855
Long-term debt 340,086 363,211
Other liabilities 10,114 11,051
-------- --------
Total liabilities $445,457 $465,117
-------- --------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock ($.01 par value; 10,000,000 shares authorized;
1,500,000 shares of 14% PIK perpetual preferred stock
issued and outstanding, liquidation value at
September 30, 1997, $20,136) 18,142 20,136
Common stock ($.01 par value; 20,000,000 shares authorized;
9,452,000 shares outstanding) 95 95
Notes receivable from stockholders (1,052) (831)
Additional paid-in capital 94,905 94,905
Treasury stock, at cost (200) (480)
Accumulated deficit (51,676) (86,607)
Accumulated translation adjustment (836) (1,990)
-------- --------
Total stockholders' equity 59,378 25,228
-------- --------
Total liabilities and stockholders' equity $504,835 $490,345
========= =========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(Dollars in thousands)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
Operating activities:
Net loss $(27,825) $ (32,937)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization (including $5,079
and $1,706, respectively, of nonrecurring charges) 55,116 42,903
Provision for deferred income taxes (17,018) (17,804)
Non-cash provision for inventory obsolescence (Note 3) --- 10,491
Changes in assets and liabilities:
Accounts receivable 1,666 (15,569)
Inventories 816 (13)
Other current assets (1,723) (1,841)
Accounts payable and accrued liabilities (11,907) (6,064)
Advance billings (1,010) (443)
Other assets and other (8,004) (2,849)
--------- ----------
Net cash used in operating activities (9,889) (24,126)
--------- ----------
Investing activities:
Payment for acquisition (8,000) ---
Net investment in fixed assets (4,526) (3,935)
--------- ----------
Net cash used in investing activities (12,526) (3,935)
--------- ----------
Financing activities:
Repayment under term loan facility (5,250) (8,250)
Borrowings under revolving credit facility 30,500 71,300
Repayment under revolving credit facility (12,500) (36,800)
Other 489 (1,276)
--------- ---------
Net cash provided by financing activities 13,239 24,974
--------- ---------
Effect of exchange rate changes on cash (16) (123)
--------- ---------
Decrease in cash (9,192) (3,210)
Cash, beginning of period 14,279 7,927
--------- ---------
Cash, end of period $ 5,087 $ 4,717
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 34,467 $ 34,476
========= =========
Income taxes paid $ 1,289 $ 357
========= ========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
DICTAPHONE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except share amounts)
1. THE ACQUISITION
On April 25, 1995, Dictaphone Corporation (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 United
States 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. On
August 11, 1995, the Company acquired the Predecessor Company for $450.0
million, which was subject to certain post-closing adjustments as defined
in the Acquisition Agreement. On March 6, 1996, the Company and Pitney
Bowes reached agreement as to the final purchase adjustment. Total purchase
adjustments amounted to $12.2 million for an aggregate purchase price of
$462.2 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements of the Company are
unaudited, as of and for the three and nine month periods ended September
30, 1997 and September 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. These financial statements should be read
in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31,
1996. Certain amounts have been reclassified to conform to current year
presentation.
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.
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
and nine months ended September 30, 1997 was 9,452,000 and 9,455,000,
respectively.
DERIVATIVE FINANCIAL INSTRUMENTS. The Company has only limited
involvement with derivative financial instruments and does not use them for
trading purposes. The Company enters into interest rate swap agreements to
reduce its exposure to interest rate fluctuations. The net gain or loss
from exchange of interest payments is included in interest expense in the
consolidated financial statements and interest paid in the condensed
consolidated statements of cash flow.
6
<PAGE>
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Raw materials and work in process $14,881 $20,013
Supplies and service parts 19,946 10,312
Finished products 22,013 13,898
------- -------
Total inventories $56,840 $44,223
======= =======
In June 1997, the Company recorded a one time non-cash charge of $10.5
million associated with the provision for excess field service parts and
inventory related to the Company's Digital Express(TM) and Records
Express(TM) products. With the production of Enterprise Express(TM) in June
1997, the Company provided for excess inventory associated with those
products that the Enterprise Express(TM) product would replace, recording
this charge as an inventory provision.
4. INTANGIBLES
The following summarizes intangible assets, net of accumulated
amortization of $58,177 and $85,497 at December 31, 1996 and September 30,
1997, respectively. Amortization expense for the three and nine months
ended September 30, 1997 was $8,772 and $27,320, respectively.
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Goodwill $139,687 $136,228
Tradenames 75,158 73,697
Service contracts 18,951 10,851
Non-compete agreement 30,057 16,383
Patents 7,169 5,681
-------- --------
$271,022 $242,840
======== ========
5. INCOME TAXES
The benefit for income taxes for the three and nine months ended
September 30, 1997 is $2,782 and $17,765, respectively.
The Company has recorded a net deferred tax asset of $62.6 million
included in other assets reflecting the benefit of net operating loss
carryforwards and various book tax temporary differences. The net operating
loss carryforward as of September 30, 1997 is approximately $66.6 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 September 30, 1997. This conclusion is based upon (i) the
impact of purchase accounting adjustments which contribute to the current
taxable loss and will be substantially amortized by 1998, thereby returning
the Company to a taxable position, (ii) the long carryforward period
available for net operating loss utilization, and (iii) the Company's
expected future profitability. 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
<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 a patent owned by Sudbury
entitled "Rapid Simultaneous Multiple Access Information Storage and
Retrieval System" 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.
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
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION
Dictaphone U.S. (Predecessor Company) 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, as modified by
amendments to Credit Agreement, dated June 28, 1996, June 27, 1997 and July
21, 1997 (collectively, the "Credit Agreement"), and other senior
indebtedness as defined in the indenture pursuant to which the Notes were
issued (the "Note Indenture"). The Credit Agreement currently consists of a
$75.0 million Tranche A Term Loan due March 31, 2001 (the "Tranche A
Loan"), a $75.0 million Tranche B Term Loan due June 20, 2002 (the "Tranche
B Loan" and together with the Tranche A Loan, the "Term Loans") and a
six-year revolving credit facility of up to $40.0 million (the "Revolving
Credit Facility"). Dictaphone Non-U.S. (Predecessor Company) is not a
guarantor of the Notes. Separate financial statements of Dictaphone U.S.
(Predecessor Company) are not presented because management has determined
that they would not be meaningful to investors in the Notes.
The following are the supplemental consolidating statements of
operations for the three and nine month periods ended September 30, 1997
and 1996, the supplemental consolidating balance sheet information as of
December 31, 1996 and September 30, 1997, and cash flow information for the
nine month periods ended September 30, 1996 and 1997.
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
THREE MONTHS ENDED SEPTEMBER 30, 1997
Dictaphone Dictaphone Dictaphone Consolidating
Corporation U.S. Non-U.S. Adjustments Consolidated
----------- ---------- ---------- ------------- ------------
Revenue from:
<S> <C> <C> <C> <C> <C>
Product sales and rentals $ --- $47,939 $ 7,495 $(3,018) $52,416
Contract manufacturing sales --- 10,739 --- --- 10,739
Support services --- 22,074 2,487 --- 24,561
------ ------- -------- -------- --------
Total revenues --- 80,752 9,982 (3,018) 87,716
------ ------- -------- -------- --------
Costs and expenses:
Cost of sales and rentals --- 32,045 4,047 (3,211) 32,881
Selling, service and administrative 50 43,577 5,346 --- 48,973
Research and development --- 3,813 --- --- 3,813
Interest expense - net and other 269 9,662 923 --- 10,854
------- -------- -------- -------- --------
Total costs and expenses 319 89,097 10,316 (3,211) 96,521
------- --------- -------- -------- --------
Equity earnings (loss) 887 --- --- (887) ---
------ ------- -------- -------- --------
Income (loss) before income taxes 568 (8,345) (334) (694) (8,805)
Income tax benefit (expense) 38 2,967 (146) (77) 2,782
------ -------- -------- ---------- --------
Net income (loss) $ 606 $(5,378) $ (480) $ (771) $(6,023)
====== ======== ======== ========== ========
</TABLE>
9
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
THREE MONTHS ENDED SEPTEMBER 30, 1996
Dictaphone Dictaphone Dictaphone Consolidating
Corporation U.S. Non-U.S. Adjustments Consolidated
----------- ---------- ---------- ------------- ------------
Revenue from:
<S> <C> <C> <C> <C> <C>
Product sales and rentals $ --- $43,786 $ 8,204 $(2,502) $49,488
Contract manufacturing sales --- 10,813 --- --- 10,813
Support services --- 20,259 2,887 --- 23,146
-------- ------- -------- -------- --------
Total revenues --- 74,858 11,091 (2,502) 83,447
-------- ------- -------- -------- --------
Costs and expenses:
Cost of sales and rentals --- 29,502 4,355 (2,541) 31,316
Selling, service and administrative 44 42,448 8,395 --- 50,887
Research and development --- 3,839 --- --- 3,839
Interest expense - net and other 644 9,677 386 --- 10,707
-------- -------- -------- -------- --------
Total costs and expenses 688 85,466 13,136 (2,541) 96,749
-------- -------- -------- -------- --------
Equity (loss) earnings (1,614) --- --- 1,614 ---
-------- -------- -------- -------- --------
(Loss) income before income taxes (2,302) (10,608) (2,045) 1,653 (13,302)
Income tax benefit (expense) 250 3,867 695 (15) 4,797
-------- -------- -------- ---------- --------
Net (loss) income $(2,052) $(6,741) $(1,350) $ 1,638 $(8,505)
======== ======== ======== ========== ========
</TABLE>
10
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
NINE MONTHS ENDED SEPTEMBER 30, 1997
Dictaphone Dictaphone Dictaphone Consolidating
Corporation U.S. Non-U.S. Adjustments Consolidated
----------- ---------- ---------- ------------- ------------
Revenue from:
<S> <C> <C> <C> <C> <C>
Product sales and rentals $ --- $132,311 $ 24,706 $ (8,642) $ 148,375
Contract manufacturing sales --- 30,364 --- --- 30,364
Support services --- 62,059 8,026 --- 70,085
--------- --------- --------- --------- ---------
Total revenues --- 224,734 32,732 (8,642) 248,824
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales and rentals --- 97,653 15,591 (8,964) 104,280
Selling, service and administrative 339 135,431 16,563 --- 152,333
Research and development --- 11,146 --- --- 11,146
Interest expense - net and other 1,509 27,921 2,337 --- 31,767
--------- --------- --------- --------- ---------
Total costs and expenses 1,848 272,151 34,491 (8,964) 299,526
--------- --------- --------- --------- ---------
Equity (loss) earnings (12,430) --- --- 12,430 ---
--------- --------- --------- --------- ---------
(Loss) income before income taxes (14,278) (47,417) (1,759) 12,752 (50,702)
Income tax benefit (expense) 155 17,521 219 (130) 17,765
--------- --------- --------- ----------- ---------
Net (loss) income $(14,123) $(29,896) $ (1,540) $ 12,622 $(32,937)
========= ========= ========= =========== =========
</TABLE>
11
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
NINE MONTHS ENDED SEPTEMBER 30, 1996
Dictaphone Dictaphone Dictaphone Consolidating
Corporation U.S. Non-U.S. Adjustments Consolidated
----------- ---------- ---------- ------------- ------------
Revenue from:
<S> <C> <C> <C> <C> <C>
Product sales and rentals $ --- $129,962 $ 28,004 $ (9,104) $ 148,862
Contract manufacturing sales --- 31,664 --- --- 31,664
Support services --- 59,969 8,663 --- 68,632
--------- --------- --------- --------- ---------
Total revenues --- 221,595 36,667 (9,104) 249,158
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales and rentals --- 89,859 15,437 (8,786) 96,510
Selling, service and administrative 151 129,303 23,813 --- 153,267
Research and development --- 11,422 --- --- 11,422
Interest expense - net and other 1,901 28,586 1,601 14 32,102
--------- --------- --------- --------- ---------
Total costs and expenses 2,052 259,170 40,851 (8,772) 293,301
--------- --------- --------- --------- ---------
Equity (loss) earnings (7,339) --- --- 7,339 ---
--------- --------- --------- --------- ---------
(Loss) income before income taxes (9,391) (37,575) (4,184) 7,007 (44,143)
Income tax benefit 622 14,170 1,390 136 16,318
--------- --------- --------- ----------- ---------
Net (loss) income $ (8,769) $(23,405) $ (2,794) $ 7,143 $(27,825)
========= ========= ========= =========== =========
</TABLE>
12
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
DECEMBER 31, 1996
Dictaphone Dictaphone Dictaphone Consolidating
Corporation U.S. Non-U.S. Adjustments Consolidated
----------- ---------- ---------- ------------- ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash $ --- $ 6,569 $ 1,358 $ --- $ 7,927
Accounts receivable 9,896 49,259 8,165 (13,619) 53,701
Inventories --- 48,220 9,919 (1,299) 56,840
Other current assets 517 5,445 3,871 --- 9,833
--------- --------- -------- --------- --------
Total current assets 10,413 109,493 23,313 (14,918) 128,301
Note receivable --- 17,491 --- (17,491) ---
Investments in subsidiaries 440,601 --- --- (440,601) ---
Fixed assets, net --- 33,833 3,175 --- 37,008
Intangibles, net 2,131 250,872 18,019 --- 271,022
Deferred financing costs, net 14,255 --- --- --- 14,255
Other assets 3,246 48,571 1,919 513 54,249
--------- --------- -------- --------- ---------
Total assets $ 470,646 $ 460,260 $46,426 $(472,497) $ 504,835
========= ========= ======== ========== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable, interest payable
and accrued liabilities $ 10,660 $ 40,250 $ 10,793 $ (13,766) $ 47,937
Advance billings --- 31,246 3,562 --- 34,808
Current portion of long-term debt 11,750 --- 762 --- 12,512
-------- --------- -------- ---------- ---------
Total current liabilities 22,410 71,496 15,117 (13,766) 95,257
Long-term debt 357,005 333,745 18,077 (368,741) 340,086
Other liabilities --- 9,790 324 --- 10,114
Stockholders' equity 91,231 45,229 12,908 (89,990) 59,378
------ --------- -------- --------- ---------
Total liabilities
and stockholders' equity $470,646 $ 460,260 $ 46,426 $(472,497) $ 504,835
========== ========= ======== ========== =========
</TABLE>
13
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
SEPTEMBER 30, 1997
Dictaphone Dictaphone Dictaphone Consolidating
Corporation U.S. Non-U.S. Adjustments Consolidated
----------- ---------- ---------- ------------- ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash $ --- $ 3,518 $ 1,199 $ --- $ 4,717
Accounts receivable 4,326 60,524 8,546 (4,964) 68,432
Inventories --- 41,232 3,968 (977) 44,223
Other current assets --- 7,008 4,538 --- 11,546
--------- --------- -------- --------- --------
Total current assets 4,326 112,282 18,251 (5,941) 128,918
Note receivable --- 17,562 --- (17,562) ---
Investments in subsidiaries 454,154 --- --- (454,154) ---
Fixed assets, net --- 32,299 2,744 --- 35,043
Intangibles, net 2,090 225,385 15,365 --- 242,840
Deferred financing costs, net 12,514 --- --- --- 12,514
Other assets 3,549 65,139 1,959 383 71,030
--------- --------- -------- --------- ---------
Total assets $ 476,633 $ 452,667 $38,319 $(477,274) $ 490,345
========= ========= ======== ========== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable, interest payable
and accrued liabilities $ 4,508 $ 35,259 $ 6,483 $ (4,964) $ 41,286
Advance billings --- 31,315 2,898 --- 34,213
Current portion of long-term debt 14,750 --- 606 --- 15,356
-------- --------- -------- ---------- ---------
Total current liabilities 19,258 66,574 9,987 (4,964) 90,855
Long-term debt 380,326 359,995 17,952 (395,062) 363,211
Other liabilities --- 10,765 286 --- 11,051
Stockholders' equity 77,049 15,333 10,094 (77,248) 25,228
------ --------- -------- --------- ---------
Total liabilities
and stockholders' equity $476,633 $ 452,667 $ 38,319 $(477,274) $ 490,345
========== ========= ======== ========== =========
</TABLE>
14
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Dictaphone Dictaphone Dictaphone Consolidating
Corporation U.S. Non-U.S. Adjustment Consolidated
----------- ---------- ---------- ------------- ------------
Operating activities:
<S> <C> <C> <C> <C> <C>
Net loss $(8,769) $(23,405) $ (2,794) $ 7,143 $ (27,825)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 4,263 47,542 3,311 --- 55,116
Provision for deferred income taxes (725) (15,327) (508) (458) (17,018)
Change in assets and liabilities:
Accounts receivable (7,718) 1,110 (923) 9,197 1,666
Inventories --- (410) 894 332 816
Other current assets (215) 1,083 (2,531) (60) (1,723)
Accounts payable and
accrued liabilities (6,354) 1,803 1,459 (8,815) (11,907)
Advance billings --- (503) (507) --- (1,010)
Other assets and other 7,610 (7,628) (647) (7,339) (8,004)
------- --------- --------- --------- -----------
Cash used in operating activities (11,908) 4,265 (2,246) --- (9,889)
-------- --------- --------- --------- -----------
Investing activities:
Payment for acquisition (8,000) --- --- --- (8,000)
Net investment in fixed assets --- (3,652) (874) --- (4,526)
-------- --------- --------- --------- -----------
Cash used in investing activities (8,000) (3,652) (874) --- (12,526)
-------- --------- --------- --------- -----------
Financing activities:
Repayment under term loan facility (5,250) --- --- --- (5,250)
Borrowing from promissory notes (12,866) 12,750 116 --- ---
Borrowing from subsidiary 20,744 (20,744) --- --- ---
Borrowing from revolving credit facility 30,500 --- --- --- 30,500
Repayment under revolving credit facility (12,500) --- --- --- (12,500)
Other (720) --- 1,209 --- 489
-------- --------- --------- -------- ----------
Cash provided by (used in) financing
activities 19,908 (7,994) 1,325 --- 13,239
-------- --------- --------- -------- ----------
Effect of exchange rate changes on cash --- --- (16) --- (16)
-------- --------- --------- -------- ----------
Decrease in cash --- (7,381) (1,811) --- (9,192)
Cash, beginning of period --- 11,591 2,688 --- 14,279
-------- --------- --------- -------- -----------
Cash, end of period $ --- $ 4,210 $ 877 $ --- $ 5,087
======== ========= ========= ======== ==========
</TABLE>
15
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
NINE MONTHS ENDED SEPTEMBER 30, 1997
Dictaphone Dictaphone Dictaphone Consolidating
Corporation U.S. Non-U.S. Adjustment Consolidated
----------- ---------- ---------- ------------- ------------
Operating activities:
<S> <C> <C> <C> <C> <C>
Net loss $(14,123) $(29,896) $ (1,540) $ 12,622 $ (32,937)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,612 37,723 2,568 --- 42,903
Provision for deferred income taxes (303) (17,518) (113) 130 (17,804)
Non-cash provision for inventory
obsolescence --- 9,535 956 --- 10,491
Change in assets and liabilities:
Accounts receivable 5,570 (11,265) (1,219) (8,655) (15,569)
Inventories --- (4,232) 4,541 (322) (13)
Other current assets 517 (1,563) (795) --- (1,841)
Accounts payable and
accrued liabilities (6,152) (4,991) (3,723) 8,802 (6,064)
Advance billings --- 69 (512) --- (443)
Other assets and other 12,697 (3,443) 594 (12,697) (2,849)
---------- --------- --------- --------- -----------
Cash used in operating activities 818 (25,581) 757 (120) (24,126)
---------- --------- --------- --------- -----------
Investing activities:
Net investment in fixed assets (3,649) (286) --- (3,935)
---------- --------- --------- --------- -----------
Cash used in investing activities --- (3,649) (286) --- (3,935)
---------- --------- --------- --------- -----------
Financing activities:
Repayment under term loan facility (8,250) --- --- --- (8,250)
Borrowing from promissory notes (26,250) 26,250 --- --- ---
Borrowing from subsidiary 71 (71) --- --- ---
Borrowing from revolving credit facility 71,300 --- --- --- 71,300
Repayment under revolving credit facility (36,800) --- --- --- (36,800)
Other (889) --- (507) 120 (1,276)
---------- --------- --------- -------- ----------
Cash provided by (used in) financing
activities (818) 26,179 (507) 120 24,974
---------- --------- --------- -------- ----------
Effect of exchange rate changes on cash --- --- (123) --- (123)
---------- --------- --------- -------- ----------
Decrease in cash --- (3,051) (159) --- (3,210)
Cash, beginning of period --- 6,569 1,358 --- 7,927
---------- --------- --------- -------- -----------
Cash, end of period $ --- $ 3,518 $ 1,199 $ --- $ 4,717
========== ========= ========= ======== ==========
</TABLE>
16
<PAGE>
8. SUBSEQUENT EVENTS
The Company is currently negotiating a fourth amendment to the Credit
Agreement. The proposed amendment would permit the Company to issue a new
Tranche C Loan in the amount of $62.8 million, the proceeds of which will
extinguish the outstanding balance of the Tranche A Loan and prepay certain
required principal payments on the outstanding amounts under the Tranche B
Loan. The planned Tranche C Loan would require amortization equal to 1% of
the total loan amount annually through 2001, 30% in 2002 and 66% in 2003.
In addition, certain of the financial covenants in the Credit Agreement
would be revised. As a result, in the fourth quarter the Company expects to
record a pre-tax extraordinary non-cash charge of $2.1 million associated
with the write-off of the unamortized debt issuance costs resulting from
the early extinguishment of the outstanding balances under the Tranche A
Loan and the Tranche B Loan. There can be no assurance that the fourth
amendment or the Tranche C facility will be executed or, if executed, that
it will not contain provisions which differ from those described above.
The Company also anticipates receiving an additional $35 million from
the purchase of additional shares of common stock by certain of its
shareholders. The proposed fourth amendment will permit the Company to
issue $35 million of new equity, the proceeds of which will be used to
repay all amounts outstanding on the new facility ("New Facility") and pay
down the Revolving Credit Facility.
9. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") which requires a statement of
comprehensive income to be included in the financial statements for fiscal
years beginning after December 15, 1997. The Company will include such
statement beginning with the first quarter of 1998.
In addition, in June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise
and Related Information" ("SFAS 131"). SFAS 131 requires disclosure of
certain information about operating segments and about products and
services, the geographic areas in which a company operates, and their major
customers. The Company is presently in the process of evaluating the effect
which this new standard will have on disclosures in the Company's financial
statements and the required information will be reflected in the Company's
financial statements for the year ended December 31, 1998.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
OVERVIEW
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(IN MILLIONS)
(unaudited)
<S> <C> <C> <C> <C>
Total revenue $ 87.7 $ 83.4 $ 248.8 $ 249.2
Cost of sales and rentals (1) 32.9 31.3 104.3 96.5
Selling, service and administrative expense 49.0 50.9 152.3 153.3
Research and development 3.8 3.8 11.1 11.4
-------- --------- --------- ---------
Operating income (loss) 2.0 (2.6) (18.9) (12.0)
-------- --------- --------- ---------
Interest expense and other expense, net 10.8 10.7 31.8 32.1
Income tax benefit (2.8) (4.8) (17.8) (16.3)
--------- --------- --------- ---------
Net loss $ (6.0) $ (8.5) $ (32.9) $ (27.8)
========= ========= ========= =========
EBITDA (2) $ 14.4 $ 13.0 $ 31.9 $ 39.0
========= ========= ========= =========
- ---------------------
(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. Accordingly, such expenses
are included in selling, service and administrative expenses.
(2)EBITDA is defined as income before effect of changes in accounting plus
interest, income taxes, depreciation and amortization and other non-cash
charges. 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.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(IN MILLIONS)
(unaudited)
Revenue from:
Sales:
<S> <C> <C> <C> <C>
Integrated Voice Systems $ 10.4 $ 11.4 $ 33.0 $ 36.5
Integrated Health Systems 9.4 7.2 26.1 22.5
Communication Recording Systems 17.9 16.6 43.5 43.4
Customer Service Parts 4.7 4.7 13.7 13.8
International and Dealer Operations 9.6 9.2 30.7 31.1
Rentals 0.4 0.4 1.4 1.6
-------- -------- -------- --------
Product sales and rentals 52.4 49.5 148.4 148.9
-------- -------- -------- --------
Contract Manufacturing 10.7 10.8 30.3 31.7
Support service:
Customer Service 21.3 19.9 60.3 59.4
Application & Training Specialists 0.8 0.3 1.8 0.5
International and Dealer Operations 2.5 2.9 8.0 8.7
-------- -------- ------- --------
Total support service 24.6 23.1 70.1 68.6
-------- -------- ------- --------
Total revenue $ 87.7 $ 83.4 $ 248.8 $ 249.2
======== ======== ======== ========
</TABLE>
RESULTS OF OPERATIONS - THIRD QUARTER 1997 VS. THIRD QUARTER 1996
Total revenue for the third quarter of 1997 increased 5.1% to $87.7 million
from $83.4 million during the third quarter of 1996. This increase in revenue is
attributable to higher product sales revenue from Integrated Health Systems
("I.H.S."), Communications Recording Systems ("C.R.S."), and higher revenue from
Customer Service (including sale of parts) and Application and Training
Specialists ("A.T.S."), offset in part by lower revenue from Integrated Voice
Systems ("I.V.S.") and Contract Manufacturing.
I.V.S. revenue declined 8.8% to $10.4 million from $11.4 million due to
lower portable and Straight Talk(TM) billings. I.V.S. orders in the third
quarter of 1997 declined 12.1% to $11.0 million from $12.5 million in the third
quarter of 1996. I.H.S. revenue increased 30.6% to $9.4 million from $7.2
million on the strength of Enterprise Express(TM) billings. I.H.S. orders
increased 21.6% to $11.1 million during the third quarter of 1997 from $9.2
million in the third quarter of 1996. C.R.S. revenue increased 7.8% to $17.9
million from $16.6 million due to significant growth in Guardian(TM) billings.
C.R.S. orders increased 21.8% to $16.8 million in the third quarter of 1997 from
$13.8 million in the third quarter of 1996. Customer Service revenue (including
sale of parts) increased 5.7% to $26.0 million from $24.6 million due to higher
proprietary product service contract revenue, installation revenue, and third
party maintenance revenue. A.T.S. revenue for the third quarter 1997 increased
by $0.5 million to $0.8 million due to increased customer training provided in
support of I.V.S. and I.H.S. products. Sales and service revenue from
International and Dealer Operations was comparable to the prior year period, as
increased system and Communications Recording System revenue was offset by lower
desktop, portable and service revenue as well as $0.4 million of unfavorable
currency exchange. Total orders from International and Dealer Operations
increased 20.0% to $10.7 million in the third quarter of 1997 from $8.9 million
in the third quarter of 1996. The increase in accounts receivable from December
31, 1996 was associated with the increased percentage of system related sales
from I.H.S. and C.R.S. generated during the latter part of the third quarter.
19
<PAGE>
Cost of sales and rentals increased 5.0% to $32.9 million (37.5% of total
revenue) during the three months ended September 30, 1997 from $31.3 million
(37.5% of total revenue) for the three months ended September 30, 1996.
Excluding additional depreciation and amortization expense associated with
purchase accounting adjustments related to the Acquisition, cost of sales as a
percentage of revenue increased by 1.3 percentage points to 37.0% due to lower
price realization for C.R.S. Guardian(TM) digital loggers, lower price
realization from International and Dealer Operations and higher inventory
adjustments.
Selling, service and administrative expenses (including amortization of
intangibles) for the third quarter of 1997 decreased 3.8% to $49.0 million
(55.8% of total revenue) from $50.9 million (61.0% of total revenue) for the
comparable period in 1996. Excluding additional depreciation and amortization
expense associated with purchase accounting adjustments related to the
Acquisition of $8.8 million and $11.4 million, respectively, from the three
months ended September 30, 1997 and 1996, selling, service and administrative
expenses (including amortization of intangibles) would have been $40.2 million
(45.8% of total revenue) for the three months ended September 30, 1997 versus
$39.5 million (47.3% of total revenue) for the comparable period of 1996. I.V.S.
and Customer Service expense reductions associated with lower field compensation
and employee-related expenses related to reduced staffing, and lower
international selling and service expenses were offset by increased expenses
associated with trade shows, advertising and marketing, higher employee benefit
and legal expenses as well as increased I.H.S. and C.R.S. selling expenses
Research and development expenses for the three months ended September 30,
1997 totalled $3.8 million and represented a decrease of 0.1% from the
comparable period of 1996.
The Company recorded an operating profit of $2.0 million during the third
quarter of 1997 compared to an operating loss of $2.6 million for the third
quarter of 1996. Excluding purchase accounting adjustments associated with the
Acquisition of $9.2 million and $12.9 million from the third quarter of 1997 and
1996, respectively, operating profit would have increased by $0.9 million as a
result of higher revenue.
The Company has recorded a net deferred tax asset of $62.6 million included
in other assets reflecting the benefit of net operating loss carryforwards and
various book tax temporary differences. The net operating loss carryforward as
of September 30, 1997 is approximately $66.6 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 September 30, 1997. This conclusion is
based upon (i) the impact of purchase accounting adjustments which contribute to
the current taxable loss and will be substantially amortized by 1998, thereby
returning the Company to a taxable position, (ii) the long carryforward period
available for net operating loss utilization, and (iii) the Company's expected
future profitability. The amount of the deferred tax asset considered realizable
could be reduced if estimates of future taxable income during the net operating
loss carryfoward period are reduced.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1997 VS. NINE MONTHS
ENDED SEPTEMBER 30, 1996
Total revenue for the first nine months of 1997 decreased 0.1% to $248.8
million from $249.2 million for the first nine months of 1996. This decline is
attributable to lower revenue from I.V.S., Contract Manufacturing and
International and Dealer Operations partially offset by increased I.H.S. and
C.R.S. sales revenue, as well as increased A.T.S. and Customer Service revenue.
I.V.S. revenue declined 9.6% to $33.0 million from $36.5 million due to lower
billings for desktops, small digital systems and Straight Talk(TM). I.H.S.
revenue increased 16.0% to $26.1 million from $22.5 million due to higher
systems billings associated with Enterprise Express(TM). C.R.S. revenue
increased only 0.2% to $43.5 million from $43.4 million as weak first
20
<PAGE>
half 1997 performance was offset by increased third quarter 1997 order rate and
installations of Guardian(TM) digital loggers. C.R.S. orders for the first nine
months of 1997 increased 4.4% to $44.7 million from $42.9 million for the first
nine months of 1996. Customer Service revenue (including sale of parts)
increased by 1.1% to $74.0 million from $73.2 million due to higher
installation, integration and third party maintenance revenue, partially offset
by lower proprietary product service contract revenue. A.T.S. revenue for the
first nine months of 1997 increased to $1.8 million from $0.5 million for the
first nine months of 1996. This increase is attributable to increased customer
training in support of I.V.S. and I.H.S. products. Revenue from International
and Dealer Operations declined 2.8% to $38.7 million from $39.8 million due to
lower desktop, portable and service revenue as well as $0.9 million of
unfavorable currency exchange. Contract Manufacturing revenue for the first nine
months of 1997 was 4.1% lower than the corresponding period in 1996.
Order backlog at September 30, 1997 totalled $30.8 million representing an
increase of $6.2 million, or 25.3%, over order backlog at December 31, 1996.
Order backlog at September 30, 1996 totalled $27.3 million.
Cost of sales and rentals increased 8.1% to $104.3 million (41.9% of total
revenue) during the nine months ended September 30, 1997 from $96.5 million
(38.7% of total revenue) for the nine months ended September 30, 1996. Excluding
additional depreciation and amortization expense related to purchase accounting
adjustments associated with the Acquisition of $2.2 million and $7.3 million for
the nine months ended September 30, 1997 and 1996, respectively, cost of sales
and rentals would have increased as a percent of revenue to 41.0% for the nine
months ended September 30, 1997 from 35.8% for the nine months ended September
30, 1996. Cost of sales and rentals as a percent of revenue increased due to a
one time non-cash charge of $10.5 million associated with the provision for
excess field service parts and stock related to Digital Express(TM) and Records
Express(TM) products as well as lower price realization for C.R.S. Guardian(TM)
digital loggers and I.H.S. digital systems.
Selling, service and administrative expenses (including amortization of
intangibles) for the first nine months of 1997 declined by 0.6% to $152.3
million (61.2% of total revenue) from $153.3 million (61.5% of total revenue)
for the first nine months of 1996. Excluding additional depreciation and
amortization expense associated with purchase accounting adjustments related to
the Acquisition of $27.7 million and $35.6 million, respectively, from the nine
months ended September 30, 1997 and 1996, selling, service and administrative
expenses (including amortization of intangibles) would have represented 50.1% of
total revenue for the nine months ended September 30, 1997 versus 47.2% of total
revenue for the comparable period in 1996. This increase in selling, service and
administrative expenses is attributable to a $2.3 million provision for
severance as well as higher I.H.S. and C.R.S. selling expenses, increased A.T.S.
training costs, higher trade show and marketing expenses, and increased legal
and management compensation expenses. Partially offsetting these expense
increases were lower I.V.S. and Customer Service field compensation and
employee-related expenses associated with reduced staffing and lower
international operating expenses.
Research and development expenses for the nine months ended September 30,
1997 totalled $11.1 million and represented a 2.4% decrease from $11.4 million
for the comparable period in 1996. Expressed as a percent of product sales and
rentals revenue, research and development expense was 7.5% for the first nine
months ended September 30, 1997 versus 7.7% for the first nine months of 1996.
The Company recorded an operating loss of $18.9 million during the first
nine months of 1997 compared to an operating loss of $12.0 million for the first
nine months of 1996. Excluding purchase accounting adjustments associated with
the Acquisition of $29.9 million and $42.9 million for the first nine months of
1997 and 1996, respectively, operating profit would have declined by $20.0
million due to lower revenue,
21
<PAGE>
higher costs associated with the charge for inventory obsolescence, the
provision for severance and increased operating expenses.
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. At September 30, 1997, the Company had outstanding
Term Loans of $134.0 million and a $38.0 million loan outstanding under the
$40.0 million Revolving Credit Facility. Availability under the Revolving Credit
Facility at September 30, 1997 was $2.0 million. Scheduled annual principal
payments on the Term Loans will be $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 Revolving Credit Facility over the next five years; however, effective
January 1, 1999, 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.
As a result of the need for additional liquidity during the remainder of
1997, the Company entered into an agreement on August 1, 1997 with a lender to
provide a facility (the "New Facility") with a $10 million line of credit, under
which the Company drew $1.5 million on that date. Loans incurred under the
facility mature, and the facility terminates, on January 30, 1998 and such loans
bear interest at the election of the Company at either (i) 2.5% over the base
rate set forth in the Bank Credit Agreement or (ii) 3.5% over a rate related to
the Eurodollar rate quoted by the lender under the facility. Under the terms of
the New Facility, various entities related to Stonington Capital Appreciation
1994 Fund, (L.P.), the Company's principal stockholder ("Stonington"), have
agreed to assume loans under the facility if the Company defaults on its
obligations under such facility. The New Facility provides that if Stonington
assumes the loans pursuant to such provisions, it will have the option to
convert all of the principal and interest due under the assumed loans into
shares of Common Stock of the Company at a conversion rate of $10.00 per share,
which is equal to the price paid by management investors upon the closing of the
acquisition of the Company. The Company had outstanding borrowings under the New
Facility on September 30, 1997 of $5.5 million.
The Company is currently negotiating a fourth amendment to the Credit
Agreement. The proposed amendment would permit the Company to issue a new
Tranche C Loan in the amount of $62.8 million, the proceeds of which will
extinguish the outstanding balance of the Tranche A Loan and prepay certain
required principal payments on the outstanding amounts under the Tranche B Loan.
The planned Tranche C Loan would require amortization equal to 1% of the total
loan amount annually through 2001, 30% in 2002 and 66% in 2003. In addition,
certain of the financial covenants in the Credit Agreement would be revised. As
a result, in the fourth quarter the Company expects to record a pre-tax
extraordinary non-cash charge of $2.1 million associated with the write-off of
the unamortized debt issuance costs resulting from the early extinguishment of
the outstanding balances under the Tranche A Loan and the Tranche B Loan. There
can be no assurance that the fourth amendment or the Tranche C facility will be
executed or, if executed, that it will not contain provisions which differ from
those described above.
The Company also anticipates receiving an additional $35 million from the
purchase of additional shares of common stock by certain of its stockholders.
The proposed fourth amendment would permit the Company to issue $35 million of
new equity, the proceeds of which would be used to repay all amounts outstanding
on the New Facility and pay down the Revolving Credit Facility.
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 effectively converts that portion of the
Term Loans to a fixed rate component of 5.8%; thus, reducing the impact of
changes in interest rates,
22
<PAGE>
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
Corporation (U.S.) to incur indebtedness, make prepayments of certain
indebtedness, pay dividends on Common Stock, 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 September 30,
1997. 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 provide 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 September 30, 1997, the
fair value of the Notes was favorable $40 million based on dealer quotes.
Capital expenditures for the first nine months of 1997 totaled $3.9
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'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 quarter. Such factors include, but are not limited to, 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 successfully introduce 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,
significant damage to or prolonged delay in operations at the Company's sole
manufacturing facility, and interest rate and foreign exchange fluctuations. The
Company is currently planning to introduce a number of new products in its
target markets in 1997 and 1998 which are expected to enhance future revenues
and liquidity of the Company. However, there can be no assurance that the
Company will be able to implement its plans to introduce such products in a
timely fashion, or that such products will meet the expectations of the Company
for either revenues or profitability. The Company believes that cash flows from
operating activities, the successful introduction of its new products, the
consummation of the fourth amendment to the Credit Facility and the anticipated
refinancing including the issuance of a Tranche C loan and the planned equity
infusion, as well as its ability to borrow under the Revolving Credit Facility,
will be adequate to meet the Company's debt service obligations, including the
repayment of the New Facility, working capital needs and planned capital
expenditures for the foreseeable future.
The Company may, from time to time, provide estimates as to future
performance. Such estimates would be "forward-looking" statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Because such statements include risks and
uncertainties, actual results may differ materially from those estimates
provided. The Company undertakes no duty to update such forward looking
statements. Factors that could cause actual results to differ from these forward
looking statements include, but are not limited to, those listed in the prior
paragraph.
23
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not currently applicable to the Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 to the Condensed Consolidated Statements of Operations
(Unaudited) of Dictaphone Corporation which is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 - Financial Data Schedule
UNDERTAKING:
The undersigned, Dictaphone Corporation, hereby undertakes, pursuant to
Regulation S-K, Item 601(b), paragraph (4) (iii), to furnish to the Securities
and Exchange Commission upon request all constituent instruments defining the
rights of holders of long-term debt of Dictaphone Corporation and its
consolidated subsidiaries not filed herewith for the reason that the total
amount of securities authorized under any of such instruments does not exceed 10
percent of the total consolidated assets of Dictaphone Corporation and its
consolidated subsidiaries.
(b) REPORTS ON FORM 8-K
On July 8, 1997, the Company filed a Current Report on Form 8-K,
reporting, under Item 5 thereof, the amendment of certain covenants
contained in the Company's senior Bank Credit Agreement dated as of
August 7, 1995, as amended. There were no other reports on Form 8-K
filed by the Company during the three months ended September 30, 1997.
24
<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: November 14, 1997 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET OF DICTAPHONE CORPORATION AT SEPTEMBER 30,
1997, AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,717
<SECURITIES> 0
<RECEIVABLES> 69,467
<ALLOWANCES> 1,035
<INVENTORY> 44,223
<CURRENT-ASSETS> 128,918
<PP&E> 64,588
<DEPRECIATION> 29,545
<TOTAL-ASSETS> 490,345
<CURRENT-LIABILITIES> 90,855
<BONDS> 363,211
20,136
0
<COMMON> 95
<OTHER-SE> 4,997
<TOTAL-LIABILITY-AND-EQUITY> 490,345
<SALES> 148,375
<TOTAL-REVENUES> 248,824
<CGS> 104,280
<TOTAL-COSTS> 267,759
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,174
<INCOME-PRETAX> (50,702)
<INCOME-TAX> 17,765
<INCOME-CONTINUING> (32,937)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,937)
<EPS-PRIMARY> (3.70)
<EPS-DILUTED> (3.70)
</TABLE>
