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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3191 BROADBRIDGE AVENUE, STRATFORD, CT 06497
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 381-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. [X] YES [ ] NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K [X].
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF MARCH 24, 1997 WAS $0.00.
AS OF MARCH 24, 1997, THERE WERE 9,462,000 SHARES OF THE REGISTRANT'S COMMON
STOCK, $.01 PAR VALUE (THE "COMMON STOCK") OUTSTANDING. THERE IS NO ESTABLISHED
TRADING MARKET FOR THE COMMON STOCK.
DOCUMENTS INCORPORATED BY REFERENCE. NONE
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<PAGE>
TABLE OF CONTENTS
PAGE
REFERENCED
ITEM NUMBER FORM 10-K
PART I
ITEM 1. BUSINESS....................................................... 1
ITEM 2. PROPERTIES..................................................... 7
ITEM 3. LEGAL PROCEEDINGS.............................................. 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................ 8
ITEM 6. SELECTED FINANCIAL DATA........................................ 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................... 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................... 66
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 66
ITEM 11. EXECUTIVE COMPENSATION........................................ 69
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................... 75
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............... 77
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K............................................ 79
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN WHICH EXPRESS "BELIEF,"
"ANTICIPATION," "EXPECTATION," OR "INTENTION" OR ANY OTHER PROJECTION, INCLUDING
STATEMENTS CONCERNING THE LAUNCH OF NEW PRODUCTS, FUTURE COMPANY PERFORMANCE,
AND CAPITAL EXPENDITURES, INSOFAR AS THEY MAY APPLY PROSPECTIVELY AND ARE NOT
HISTORICAL FACTS, ARE "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 EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE
NOT LIMITED TO, THE RISK FACTORS IDENTIFIED IN DICTAPHONE'S REGISTRATION
STATEMENT ON FORM S-1 AND IN OTHER DOCUMENTS FILED BY DICTAPHONE WITH THE
SECURITIES AND EXCHANGE COMMISSION.
PART I
ITEM 1. BUSINESS
GENERAL
On April 25, 1995, Dictaphone Acquisition Corporation ("Successor
Company", also referred to herein as the "Company" or "Dictaphone") 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, and certain foreign affiliates as set
forth in the Acquisition Agreement (collectively, the "Predecessor Company"). On
August 11, 1995, the Acquisition was consummated and the Company acquired the
Predecessor Company. Subsequent to the Acquisition, the Company changed its name
to "Dictaphone Corporation", and the Predecessor Company changed its name to
"Dictaphone Corporation (U.S.)".
The Company is the successor to a business begun by Alexander Graham Bell
in 1876. Today, the Company is a leader (in certain vertical markets) in the
business of integrated voice and data management ("IVDM"TM), consisting
primarily of design, manufacture, marketing, service and support of dictation
and voice management products and communications recording systems.
The Company's dictation and voice management products ("Integrated Voice
Systems" or "IVS"), sales of which represented 31.5% of the Company's 1996 total
revenue, consist of portable and desktop dictation products, voice management
and voice processing systems used primarily by professionals such as physicians,
attorneys and business executives, and by enterprises such as hospitals,
governmental agencies, financial institutions, insurance agencies and law firms.
Voice processing systems are generally larger, more sophisticated versions of
dictation products designed to accommodate multiple users. The Company's
communications recording systems, sales of which represented 23.0% of the
Company's 1996 total revenue, consist primarily of multi-channel archiving
recorders and emergency message repeaters used primarily by police departments,
fire departments, air traffic controllers and other public safety agencies, as
well as by financial services firms and other businesses. These products perform
continuous, reliable recording of multiple telephone or other communications
lines, such as radio channels, to protect customers who face potentially severe
financial or safety risks posed by lost or misinterpreted telephone
conversations or voice broadcasts. The Company's communications recording
systems products also include quality monitoring, productivity and training
products used primarily by call centers. Dictaphone's service business, revenue
from which represented 33.3% of the Company's 1996 total revenue, provides its
customers with service support, expedited repairs and remote diagnostics. Many
Dictaphone customers, including over 70% of customers purchasing large systems,
purchase Company service contracts at the time of product purchase.
IVS PRODUCTS
The dictation products market consists of (i) the professional and
commercial market and (ii) the consumer market. The voice management market also
consists primarily of the professional and commercial market. Customers in the
professional and commercial market include professionals such as physicians,
attorneys and
<PAGE>
business executives, and enterprises that require swift and efficient document
creation such as hospitals, governmental entities, insurance agencies, financial
institutions and law firms. Customers in this market typically purchase products
through direct sales or dealer representatives of established companies that can
provide reliable, long-term service through large service networks. Dictation
products marketed to customers in the professional and commercial segment are
generally more expensive than those sold in the consumer segment because they
have a more durable construction for longer product life and special features
geared to office and transcription use (such as cue tones, which enable users to
prioritize and index recorded voice data, and conference record capability and
telephone adapters, which enable users to record meetings and telephone
conversations). The consumer segment consists of customers who typically
purchase lower priced desktop and portable machines through retail
establishments.
The Company believes that dictation products in its markets are purchased
primarily by existing industry customers. According to the Company's market
surveys, approximately 70% of the purchasing activity in the marketplace is from
existing customers who are expanding and upgrading their equipment, 15% is from
users changing brands, and 15% is from non-users making their first purchase.
Dictation products consist of desktop and portable products and dictation
systems (also referred to as voice processing systems). Desktop and portable
dictation products, the traditional products of this industry, typically use
analog magnetic tape recording methods to store and replay voice. The industry
has begun to apply digital technology to desktop and portable products, but
analog technology currently retains a cost advantage for most of these products.
All portable products are designed to be compatible with Dictaphone desktops in
terms of features and appearance. In the United States, there is a base of
approximately 200,000 Dictaphone portables eligible for future upgrade.
Voice processing systems are generally larger, more sophisticated versions
of dictation products designed to accommodate multiple users. Voice processing
systems equipment usually consists of one or more centralized dictation units,
which include the equipment which records and replays voice data, and a series
of telephones or similar devices, which connect with the dictation units to
record voice data and access previously recorded data. This equipment permits
users to transmit voice data to transcriptionists without requiring such users
to physically transport audio tapes carrying this data. Analog versions of these
systems, which have been available for some time, have been superseded by
digital versions, which typically utilize a computer disk to capture recorded
voice and a computer controller to keep track of the data related to the voice's
creation and transcription. Digital dictation systems currently offer many
advantages over their analog predecessors including higher reliability, random
and simultaneous accessibility to work, remote access and playback over
telephone lines, and the ability to handle multiple software applications, such
as dictation, voice mail and voice response. Digital dictation systems also
permit greater feature customization and may interface with other customer
systems, such as local area network systems.
In 1996, the Company acquired the rights to a dictation, transcription and
information management software system which utilizes a Microsoft(R) WindowsTM
NT operating system platform. This system, called the Enterprise ExpressTM
System, is designed to be the Company's next generation voice processing system.
Enterprise ExpressTM is configured to support centralized as well as multi-site
networks and provide for enterprise-wide dictation, transcription and
information management solutions. The Enterprise ExpressTM system is currently
installed at several customer beta sites, and is anticipated to be fully
launched in the second half of 1997.
The Company's Digital Express(R) 7000 voice processing system, which was
introduced in 1988, currently has a worldwide installed base of over 1,600
systems. The system can be configured to provide remote access to thousands of
users who have touchtone telephones, and features a broad array of design
reliability and other features. Although the Company believes the system has
proven to be capable of serving a broad variety of its customers, such as its
legal and insurance clients, the Digital Express(R) 7000's design and software
features are focused toward the information management needs of the healthcare
market.
In 1993, Dictaphone introduced digital voice processing systems, called
the Digital Express(R) 4000 and Digital Express(R) 2500, to address the needs of
smaller customers who require fewer functions than those offered
<PAGE>
in the Digital Express(R) 7000. The Company's Straight TalkTM product is its
smallest digital desktop system. Introduced in mid-1990, Straight TalkTM is
intended to be an upgrade for clustered analog desktop users.
In 1991, the Company acquired rights to market transcription system
software designed expressly for medical records departments. This system, called
the Record ExpressTM system, utilizes third party software packages linked
together through customized programming. The system has been sold to a
significant number of hospital medical records departments.
In 1996, Dictaphone introduced SynergyTM, a multi-application voice
processing and management system based on OS/2TM and industry standard hardware.
SynergyTM provides multiple computer telephony features, including
auto-attendant, voice mail, fax mail, unified messaging and E-mail integration
among others. SynergyTM systems may be integrated with the majority of telephone
switches and can also be linked to both mainframe and client-server data
sources. SynergyTM is an OEM (original equipment manufacturer) product which is
largely sourced from a third party.
Also in late 1996, Dictaphone introduced For the RecordTM, a digital
recording product designed to provide for access, management and archiving of
court and other similar hearing proceedings. For the RecordTM provides a
centralized source where information can be managed for transcription, review
and retrieval and utilizes a Microsoft(R) WindowsTM NT operating platform. For
the RecordTM is an OEM product which is sourced from a third party.
COMMUNICATIONS RECORDING SYSTEMS
The safety and liability communications recording systems market consists
primarily of multi-channel continuous archiving recorders and emergency message
repeaters. Communications recording systems are designed to perform continuous,
reliable recording of multiple telephone or communications lines to protect
customers who face potentially severe financial or safety risks posed by lost or
misinterpreted telephone conversations or voice broadcasts. Multi-channel
archiving recorders, also called "telephone loggers" or "loggers", are
sophisticated systems that capture large volumes of voice data transmitted over
multiple telephone or other communication lines, such as radio channels, and
allow the user to retrieve and play back specific conversations. Emergency
message repeaters, sometimes referred to as "Call Checks", are much smaller
machines that attach to telephone lines or other communications devices to
capture a smaller volume of voice data.
Customers of safety and liability communications recording systems include
public safety agencies, such as police departments, fire departments and air
traffic control departments, financial services firms, such as traders and
brokers, and other businesses. Dictaphone believes that many of these customers
rely heavily on these systems as an integral part of their operations,
particularly in the case of governmental safety agencies and financial
institutions.
In the early 1990s, the communications recording systems market began to
experience technological change. Analog reel-to-reel recorders began to be
displaced by analog VHS-based products and, more frequently, digital products
including those based on magnetic disk, optical disk or digital audio tape. For
example, in the case of Dictaphone, revenue from sales of communications
recording products based on digital technology increased as a percentage of
product sales revenue from all communications recording products from only 13%
in 1992 to approximately 91% in 1996. These technological changes both improved
product flexibility and, in the case of digital recording platforms, increased
data capacity and network integration.
The Company's multi-channel continuous archive recorders consist of the
ProLogTM, GuardianTM and SentinelTM models. ProLogTM, which was introduced in
1993, is the most powerful and technologically advanced of these products.
The Company's midsized GuardianTM model, introduced in 1994, has been
designed to provide many of the services provided by the ProLogTM to customers
requiring fewer features or to those who prefer a single unit that does not
include a stand-alone personal computer ("PC") workstation.
<PAGE>
The Company's SentinelTM digital logger product is geared toward smaller
capacity and price sensitive customers. The Company began shipments of the
SentinelTM in the third quarter of 1995. The SentinelTM model was intended to
replace the Model 9800, Dictaphone's first digital logger, which was partially
sourced from an outside supplier.
Dictaphone's emergency message products include the Series 5700, 5900 and
6600. The vast majority of these units is installed in public safety
organizations, where they are used extensively for replaying emergency telephone
calls.
In the fourth quarter of 1996, Dictaphone introduced its InsightTM call
center product. InsightTM is a call center productivity, training and management
system which is used to monitor live and recorded data. The monitored record is
both voice and screen data which is synchronously played back to enable accurate
training and evaluation of call center agents and the generation of a variety of
management reports. InsightTM is an OEM product which is sourced from a third
party.
Dictaphone believes it has a number of significant opportunities in
marketing its products, including, for example, the continuing transition from
analog to digital technology, expansion of the Company's efforts in Europe, Asia
and Latin America and leveraging the Company's distribution strengths into
adjacent market opportunities.
SERVICE
The Company has an extensive service organization. The Company has
approximately 585 service representatives operating out of over 175 offices in
North America. The United States service organization is supported by
approximately 210 employees in service support, diagnostic center and repair
services, and distribution. In addition, Dictaphone has 8 service locations in
the United Kingdom, Switzerland, Germany, Belgium and Ireland and sales and
service representation through dealers in approximately 60 other countries in
Europe, South America and Asia. See "-- Sales and Marketing".
Dictaphone's service business provides its customers with service support,
expedited repairs and remote diagnostics. Service revenue includes sales of
"Assured Performance Plans", which are long term warranties sold in one year
increments and frequently purchased by the Company's systems customers, and
revenue from repair of systems software and hardware not under warranty as well
as sales of parts. Dictaphone also receives revenue from service contracts which
provide for higher levels of technical support, such as its "SOS Alert" and
"Response Network" services, for dispatching maintenance in advance of a product
shut down and for services providing 24- hour system protection. Many Dictaphone
customers, including over 70% of customers purchasing large systems, purchase
Dictaphone service contracts at the time of product purchase. In 1996,
Dictaphone instituted a mail-in service program for its desktop and portable
products. Under this program, desktop and portable products are sent by
overnight mail to a central service facility in Melbourne, Florida for rapid
turnaround or replacement. As a result of this program, desktops and portables
are no longer required to be serviced in U.S. field offices.
The Company's strategy to achieve growth in service includes a plan to
expand its third party contract service business. As Dictaphone's service
network furthers its expertise in digital and other advanced technologies,
Dictaphone believes there will be increasing opportunities to obtain service
contracts from companies in the telecommunications, cable and other related
industries that use these complex technologies. Dictaphone has negotiated a
number of such arrangements and has recently been actively marketing its
services to companies in such industries.
NEW PRODUCTS
The Company is continually evaluating its product line both with respect
to feature content and development. The Company intends to continue to develop
and enhance its product line and introduce new products, some of which may be
sourced through third parties.
<PAGE>
CUSTOMERS
Although no single customer, other than Pitney Bowes and the New York City
Police Department, represents more than 1% of the Company's sales, customers for
each of Dictaphone's product categories are concentrated in certain industries.
Dictaphone receives approximately 83% of its United States dictation products
revenue from medical, legal, insurance and financial firms, educational entities
and government agencies. This industry-oriented user concentration enables
Dictaphone to focus on customizing solutions for specific user needs and
applications.
Communications recording systems customers are predominately public safety
agencies, financial services entities and call centers. Approximately 54% of
U.S. Communications Recording Systems revenue is derived from financial services
firms and governmental agencies.
Although over 84% of Dictaphone's revenues are generated in the United
States, the Company has a significant customer base outside the United States.
Dictaphone's international customers are in many of the same industries that the
Company serves domestically, such as medical, legal and financial firms and
governmental agencies.
SALES AND MARKETING
The wide geographic coverage of the Company's sales and service offices in
the United States permits Dictaphone to sell its products to customers of all
sizes and in virtually all United States locations. Consequently, less than 1%
of all United States sales are through dealers. The placement of the service and
sales offices throughout the United States also provides a system for the rapid
distribution and service of its products. See "-- Service". Distribution of
Dictaphone products is handled mostly through the Company's distribution
facility in Melbourne, Florida and branch and district locations.
WARRANTIES. Every product sold by Dictaphone, new or previously owned, has
a minimum limited warranty for parts and labor that is 90 days in duration. Upon
purchase of a new or previously owned Dictaphone product, a customer may
purchase an "Assured Performance Plan." See " -- Service". If a Dictaphone
customer opts not to purchase the Assured Performance Plan, Dictaphone will
repair its products at an hourly service rate, in addition to parts.
ADVERTISING. The focus of Dictaphone's advertising and marketing
communications over the past few years reflects a shift away from broad based
major publication advertising to an approach targeting dictation intensive
markets where product use and applications are the greatest. Dictaphone
currently uses nationwide corporate direct mail programs, field generated
programs, print advertising, product trade shows, user group communications and
other publicity to market, advertise and promote it products.
LEASED SALES. Dictaphone provides its customers with flexible lease
programs through Pitney Bowes Credit Corporation ("PBCC"), First United Leasing
("First United") and other finance companies. These companies provide customers
of the Company with lease financing and Dictaphone with a source of used
equipment, available through terminations or defaults, that may be repurchased
and remarketed by the Company.
RESEARCH AND DEVELOPMENT
During the last few years, the Company's research and development
organization has evolved from one with a hardware engineering orientation to one
in which software engineering dominates. The Company employs software engineers,
digital signal processing engineers and test engineers to develop software for
its products as well as to perform SMT printed circuit board designs and
mechanical designs and to work closely with its Melbourne, Florida factory and
service operation to implement these designs. The research and development
organization also creates application-specific integrated circuit designs.
<PAGE>
The Company's research and development expenditures (including $4.2
million and $6.9 million of capitalized software costs in 1995 and 1996,
respectively) grew as a percentage of product sales revenue from 6.0% in 1995 to
7.9% in 1996. As of December 31, 1996, the Company's research and development
staff consisted of 182 personnel (including temporary employees).
INTELLECTUAL PROPERTY
The Company has in excess of 100 patents protecting features and methods
that are important to both dictation and communications recording product lines.
For example, Dictaphone has a number of patents associated with the Digital
Express(R) 7000 and many of its closely related enhancements such as Digital
ConnexionsTM, DXIS, MegaCenter and Optic Mics. The Company believes that there
is no single patent or group of related patents the loss of which would have a
material adverse effect on its business. The Company has a number of trademarks,
including the well known "Dictaphone(R)" trademark, in use throughout the world.
MANUFACTURING OPERATIONS
Dictaphone's vertically integrated manufacturing process and non-union
manufacturing workforce enable it to respond quickly and cost-effectively to
changing markets and customer requirements. The Company's flexible manufacturing
enables it to offer its customers a variety of product models.
The Company's primary manufacturing facility is located in Melbourne,
Florida. Manufacturing currently employs approximately 560 personnel. The
manufacturing team consists of four production departments: fabrication, wire
and cable, printed circuit assembly and final assembly.
Management assures manufacturing and raw materials quality through formal
operator certification training classes, roving quality auditors and a formal
"Supplier Certification System", which is used to continually monitor the
supplier base. The manufacturing facility is currently ISO 9002 certified.
The Company currently purchases from approximately 350 suppliers, although
80% of the annual dollar volume is procured from 55 suppliers. Most agreements
with major suppliers are expressed in letters of intent or blanket purchase
orders covering one year or less. The Company is not materially dependent on any
single supplier.
Approximately two-thirds of all items processed at the Melbourne, Florida
facility are Dictaphone products, with the remainder comprised of contract
manufacturing. The Company's contract manufacturing program provides electronics
design and manufacturing capabilities for customers unaffiliated with the
Company. In 1996, revenue from contract manufacturing was $40.6 million.
COMPETITION
The markets in which the Company competes are highly competitive. The
Company competes with large and established national and multinational
companies, as well as smaller startup companies, in all of its operations.
Furthermore, as products sold in the Company's markets evolve toward software
and digital technology, new competitors with expertise in these areas are
entering the industry. Some of these competitors have, and new competitors may
have, greater resources than the Company.
In the dictation market, the Company faces two primary systems product
competitors, the Lanier division of Harris Corporation ("Lanier"), and Sudbury
Systems, Inc. ("Sudbury"). Two other Dictaphone competitors, Philips Electronics
N.V. and Sony Corporation, focus on desktop and portable products.
Dictaphone is a leading participant in the communications recording product
market in North America. Some of Dictaphone's North American competitors include
Racal Recorders Limited, Seltronics, Inc., TEAC
<PAGE>
Corporation of America, Nice Systems Ltd. (loggers and quality monitoring),
Magnasync Moviola Corporation and Teknekron Infoswitch (quality monitoring).
Dictaphone expects that, with the increasing prevalence of digital recording
technology in this market, a large number of product oriented companies will
attempt to enter this marketplace in both North America and Europe. The Company
believes that while these companies may have difficulty in entering the
communications recording systems market in the United States due to the lack of
customer base and the absence of a direct sales and service network, their entry
will increase competitive pressure.
EMPLOYEES
As of December 31, 1996, the Company had 2,664 employees worldwide, of
which 2,315 were based in the United States. As of December 31, 1996, less than
2% of the Company's workers were unionized. Two union contracts, one in New
York, New York covering 11 employees and one in Toronto, Ontario, Canada
covering 11 employees, expire on September 1, 1998 and January 15, 1998,
respectively. The Company believes its relations with employees are
satisfactory.
ITEM 2. PROPERTIES
The Company operates a manufacturing and service/distribution center
facility in Melbourne, Florida, in addition to its numerous sales and service
offices. The Company's executive offices are located in Stratford, Connecticut.
In general, the Company believes that its properties are in good condition and
are adequate to meet its current and anticipated needs for the foreseeable
future.
The following is additional information concerning the major facilities
owned by the Company:
FACILITY PURPOSE SQUARE FOOTAGE
======== ======== ==============
Stratford, Connecticut Headquarters 138,000
Melbourne, Florida Manufacturing 120,160
Melbourne, Florida Customer Service 118,000
Toronto, Ontario, Canada Canadian Corporate Office 14,146
Killwangen, Switzerland Switzerland Sales Office 90,000
In addition, the Company leases sales, service and distribution offices in
certain countries in which it has operations, including 157 offices in the
United States, 18 offices in Canada, 4 offices in the United Kingdom and
additional offices in Belgium, Germany and Ireland.
ITEM 3. LEGAL PROCEEDINGS
On February 14, 1995, Pitney Bowes filed a complaint against 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 the
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 that the Company has meritorious defenses
to the claims against it. Consequently, the Company has not provided for any
loss exposure in connection with this
<PAGE>
complaint. Additionally, regardless of the outcome of this litigation, Pitney
Bowes has agreed to defend this action and to indemnify Dictaphone 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 Dictaphone. The complaint alleged that Dictaphone 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 Dictaphone and others. On July 5, 1995, the complaint was
served upon Dictaphone. The complaint sought 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.
Dictaphone vigorously contested this litigation, which was recently settled by
Dictaphone for an immaterial amount.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is currently no established trading market for the Company's common
stock, $.01 par value per share (the "Common Stock"). As of March 15, 1997,
there were 14 holders of record of the Common Stock.
Under the terms of the Company's Credit Agreement, dated August 7, 1995,
as amended by the First Amendment to Credit Agreement, dated as of June 28, 1996
(collectively, the "Credit Agreement"), with a syndicate of financial
institutions for whom Bankers Trust Company is the Administrative Agent and
NationsBank, N.A. (Carolinas) is the Documentation Agent, the Company and
Dictaphone U.S. are restricted from paying dividends on their capital stock. In
addition, under the terms of an Indenture (the "Note Indenture") between the
Company,
<PAGE>
Dictaphone U.S. and Shawmut Bank Connecticut, National Association, relating to
the Company's 11-3/4% Senior Subordinated Notes Due 2005 (the "Notes"), the
Company and certain of its subsidiaries are restricted from paying dividends on
their capital stock. In addition, as a holding company, the Company's ability to
pay cash dividends is also dependent on the earnings and cash flows of its
subsidiaries and the ability of its subsidiaries to make funds available to the
Company for such purpose.
The Company presently intends to retain earnings to fund working capital
and for general corporate purposes, and, therefore, does not intend to pay any
cash dividends on shares of Common Stock in the foreseeable future. The payment
of future cash dividends, if any, would be made only from assets legally
available therefore, and would also depend on the Company's financial condition,
results of operations, current and anticipated capital requirements,
restrictions under then-existing indebtedness and other factors deemed relevant
by the Company's Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is the selected consolidated financial data of Dictaphone
Corporation (Successor Company) at December 31, 1996 and December 31, 1995, and
for the year and twenty week period then ended. Also set forth below is the
selected combined financial data of the Predecessor Company for the thirty two
week period ended August 11, 1995 and for each of the three years in the period
ended December 31, 1994.
The selected financial data should be read in conjunction with "Item 7. --
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes included elsewhere in this
Report.
The capital structure and accounting bases 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. Accordingly, amounts at
December 31, 1996 and 1995, and for the year and twenty week periods then ended
should not be compared to periods prior thereto.
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
------------------------------------- --------------------------
32 WEEKS 20 WEEKS YEAR
YEAR ENDED DECEMBER 31, ENDED ENDED ENDED
-------------------------- AUGUST 11, DECEMBER 31, DECEMBER 31,
1992 1993 1994 1995 1995 1996
-------- -------- -------- ---------- ------------ ------------
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
<S> <C> <C> <C> <C> <C> <C>
Total revenue.......... $331.9 $343.2 $346.8 $202.1 $150.6 $332.5
Cost of sales and
rentals(a) ........... 112.5 119.3 118.5 74.3 69.6(e) 126.7(e)
Selling, service and
administrative ....... 160.0 156.2 155.5 93.7 82.9(f) 203.6(f)
Research and development 9.9 10.6 12.3 7.0 4.6 14.2
Operating profit (loss) 49.5 57.1 60.5 27.1 (6.5) (12.0)
Net interest (income)
expense and other..... (2.8) (1.2) (1.0) (1.4) 16.1(g) 41.6(g)
Income (loss) before
effect of changes in
accounting............ 31.7 35.0 36.6 17.1 (13.9) (34.7)
Net income (loss)...... 21.5(b) 35.0 33.8(c) 17.1 (13.9) (34.7)
Stock dividend on PIK
Preferred Stock....... --- --- --- --- .8 2.3
Net loss applicable to
Common Stock.......... --- --- --- --- (14.7) (37.0)
Net loss per share..... --- --- --- --- (1.55) (3.90)
OTHER DATA:
EBITDA(d).............. $ 58.0 $ 65.3 $ 68.6 $ 32.0 $ 32.3 $ 54.2
Depreciation and
amortization ........ 8.5 8.2 8.1 4.9 39.1 65.8
Capital expenditures... 5.1 5.0 5.9 5.5 .8 6.3
EBITDA margin.......... 17.5% 19.0% 19.8% 15.8% 21.5% 16.3%
BALANCE SHEET DATA
(AT END OF PERIOD):
Working capital........ $ 44.5 $ 59.2 $ 64.2 $ 43.3 $ 33.0
Total assets........... 218.7 241.5 268.5 550.7 504.8
Long term debt......... --- --- --- 350.0 352.6
Total liabilities...... 68.9 66.7 70.4 456.2 445.4
Stockholders' equity... 149.8 174.8 198.1 94.5 59.4
</TABLE>
- --------------------
(a) Cost of sales and rentals does 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.
(b) Effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, which resulted in a one-time
non-cash, after-tax charge of $10.3 million (net of approximately $6.7
million of taxes).
(c) Effective January 1, 1994, the Company adopted SFAS No. 112, which resulted
in a one-time non-cash, after-tax charge of $2.8 million (net of
approximately $1.9 million of income taxes). See Note 6 to the Predecessor
Company's combined financial statements appearing elsewhere in this Report.
(d) 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.
(e) Cost of sales and rentals for the twenty weeks ended December 31, 1995 and
year ended December 31, 1996 includes $14.7 million and $8.8 million,
respectively, of charges related to the amortization of inventory write-up
and depreciation associated with purchase accounting adjustments.
(f) Selling, service and administrative for the twenty weeks ended December 31,
1995 and year ended December 31, 1996 includes $21.8 million and $46.2
million, respectively, of non-cash purchase accounting charges.
(g) Includes $.9 million and $5.3 million of non-cash interest expense from
amortization of deferred financing fees for the twenty weeks ended December
31, 1995 and year ended December 31, 1996, respectively.
<PAGE>
ITEM 7. 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 for the purpose of the Acquisition. On August 11, 1995, the Company
acquired the Predecessor Company for $450.0 million, subject to certain
post-closing adjustments as set forth in the Acquisition Agreement. On March 6,
1996, the Company and Pitney Bowes reached agreement as to final purchase
adjustments. Total purchase adjustments amounted to $12.2 million for an
aggregate purchase price of $462.2 million.
The following discussion should be read in conjunction with the financial
statements and accompanying notes included in "Item 8. -- Financial Statements
and Supplementary Data."
The capital structure and accounting bases 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.
To facilitate the discussion below of the twelve month period ended
December 31, 1996 against the results of operations for the same period of 1995,
and for the twelve month period ended December 31, 1995 against the results of
operations for the same period of 1994, the historical operations of the
Successor Company and Predecessor Company have been combined, since the
Acquisition occurred thirty-two weeks into the twelve month period ended
December 31, 1995.
TWELVE MONTHS ENDED
DECEMBER 31,
--------------------------------
1994 1995 1996
---- ---- ----
(IN MILLIONS)
Net revenue.................................. $ 346.8 $ 352.7 $ 332.5
Cost of sales and rentals (*)................ 118.5 143.9 126.7
Selling, service and administrative expense.. 155.5 176.6 203.6
Research and development..................... 12.3 11.6 14.2
-------- -------- --------
Operating profit (loss)................. 60.5 20.6 (12.0)
-------- -------- --------
Net interest (income) expense and other...... (1.0) 14.7 41.6
Income tax provision (benefit).............. 24.9 2.7 (18.9)
-------- -------- --------
Income (loss) before effect of change
in accounting ............................. $ 36.6 $ 3.2 $ (34.7)
======== ======== ========
- --------------
* Cost of sales and rentals does 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.
<PAGE>
TWELVE MONTHS ENDED
DECEMBER 31,
-----------------------------
1994 1995 1996
---- ---- ----
(IN MILLIONS)
Revenue from:
Sales:
U.S. Integrated Voice Systems.............. $ 96.6 $ 94.0 $ 81.8
U.S. Communication Recording Systems....... 56.9 66.2 62.1
U.S. Customer Service Parts................ 17.8 18.2 17.1
Contract Manufacturing
(including sales to Pitney Bowes Inc.).. 40.9 44.5 40.6
International Operations................... 37.5 38.1 36.0
------- ------- -------
Total sales............................. 249.7 261.0 237.6
------- ------- -------
Rentals.................................... 1.9 2.0 2.1
-------- -------- --------
Total sales and rentals................. 251.6 263.0 239.7
------- ------- -------
Service:
U.S. Customer Service...................... 83.0 76.1 81.3
International Operations................... 12.2 13.6 11.5
------- ------- -------
Total support service................... 95.2 89.7 92.8
------- ------- -------
Total revenue................................. $346.8 $352.7 $332.5
====== ====== ======
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Total revenue decreased 5.7% to $332.5 million in 1996 from $352.7 million
in 1995. This decrease in revenue was attributable to declines in sales revenue
from U.S. Integrated Voice Systems ("U.S.I.V.S."), U.S. Communications Recording
Systems ("U.S.C.R.S."), Contract Manufacturing, and lower revenue from
International Operations offset in part by higher U.S. Customer Service revenue.
U.S.I.V.S. revenue declined 13.0% to $81.8 million due to lower demand for
desktops and portable products and lower installations of voice processing
systems. U.S.I.V.S. order backlog increased by $3.1 million during 1996 to $13.8
million. Sales revenue from U.S.C.R.S. declined 6.2% to $62.1 million due to
lower Prolog installations. In addition, the fourth quarter of 1995 included a
significant one-time installation. U.S.C.R.S. order backlog declined 19.1% to
$8.2 million in 1996. Sales revenue from Contract Manufacturing (including sales
to Pitney Bowes) declined 8.9% to $40.6 million principally due to lower sales
to Pitney Bowes. Total revenue from International Operations declined 8.0%
versus 1995. Lower sales and service revenue in the United Kingdom offset
improvement in Communications Recording System sales revenue in Canada,
Switzerland, and Germany. Revenue from U.S. Customer Service (including sales of
parts) increased 4.3% to $98.4 million due to increased proprietary product
service contract revenue which increased 4.3% as well as higher third party
maintenance revenue.
Cost of sales and rentals declined 11.9% to $126.7 million (38.1% of total
revenue) versus $143.9 million (40.8% of total revenue) for 1995. Excluding
additional depreciation and amortization expense related to purchase accounting
adjustments associated with the Acquisition of $8.8 million and $14.7 million
from 1996 and 1995, respectively, cost of sales and rentals would have declined
as a percent of revenue to 35.5% in 1996 from 36.6% in 1995. This decline is
attributable to lower inventory adjustments, an increased content of high margin
U.S. Customer Service revenue, and reduced content of low margin Contract
Manufacturing revenue, partially offset by lower U.S.C.R.S. price realization.
Selling, service and administrative expenses increased 15.3% to $203.6
million (61.2% of total revenue) from $176.6 million (50.1% of total revenue)
for 1995. Excluding additional depreciation and amortization expense associated
with purchase accounting adjustments related to the Acquisition of $46.2 million
and $21.8 million for 1996
<PAGE>
and 1995, respectively, selling, service and administrative expenses would have
increased by 1.7% from 1995. This increase is attributable to higher sales
development, marketing and advertising expenses, higher international expenses
for sales office expansion, and a one time $1.1 million charge associated with
the planned reorganization of United States field personnel and related
severance, partially offset by reduced U.S.I.V.S. compensation-related expenses
and lower employee benefit costs.
Research and development expenses increased 22.0% to $14.2 million (4.3%
of total revenue) from $11.6 million (3.3% of total revenue) in 1995, reflecting
the impact of increased staffing and compensation.
The Company recorded an operating loss of $12.0 million for 1996 compared
to an operating profit of $20.6 million for 1995. Excluding the impact of the
purchase accounting adjustments from both 1996 and 1995 discussed above,
operating profit would have declined by 24.9%. This reduction reflects the
impact of lower revenue and higher expenses partially offset by improved
margins.
1995 COMPARED TO 1994
Total revenue increased 1.7% to $352.7 million in 1995 from $346.8 million
in 1994. The increase in revenue was attributable to an increase in sales
revenue from U.S.C.R.S., Contract Manufacturing and International Operations,
offset in part by a decline in sales revenue from U.S.I.V.S. and lower U.S.
Customer Service revenue.
U.S. Integrated Voice Systems revenue declined 2.7% to $94.0 million due
to lower demand for desktop and portable products and lower installations of
voice processing systems despite significant increase in the order rate for
large systems during the second half of the year. Sales revenue from U.S.C.R.S.
increased 16.4% to $66.2 million, attributable to the continued transition by
existing customers from analog to digital products and the introduction, late in
1995 of a new digital recording product. Sales revenue from Contract
Manufacturing (including sales to Pitney Bowes) increased 8.9% to $44.5 million
due to the addition of several new accounts. Total revenue from International
Operations increased 3.7% versus 1994. Exclusive of $2.5 million of favorable
exchange rate changes, revenue declined 1.3%. Lower sales revenue in the United
Kingdom and Switzerland were partially offset by improvements in sales revenue
in Canada and Germany coupled with increased service revenue in the United
Kingdom. Revenue from U.S. Customer Service (including sales of parts) declined
6.4% to $94.3 million, as a result of the loss of one major third party
maintenance contract in the third quarter of 1994 which accounted for $9.5
million in revenue during 1994. Excluding the loss from that contract, revenue
from U.S. Customer Service (including sales of parts) grew 3.3%.
Cost of sales and rentals increased 21.3% to $143.9 million (40.8% of
total revenue) versus $118.5 million (34.2% of total revenue) for 1994.
Excluding additional depreciation and amortization expense related to purchase
accounting adjustments associated with the Acquisition of $14.7 million, cost of
sales and rentals for 1995 represented 36.6% of total revenue. Cost of sales and
rentals as a percentage of total revenue increased due to unfavorable inventory
and manufacturing underabsorption adjustments in 1995 versus favorable inventory
adjustments in 1994 relating to revised inventory reserve levels, and a higher
mix of low margin contract manufacturing revenue in 1995.
Selling, service and administrative expenses increased 13.6% to $176.6
million (50.1% of total revenue) from $155.5 million (44.8% of total revenue)
for the comparable period in 1994. Excluding additional depreciation and
amortization expense associated with purchase accounting adjustments related to
the Acquisition in the amount of $21.8 million, selling, service and
administrative expenses decreased slightly (43.9% of total revenue) versus 1994.
This decrease is attributable to lower compensation-related expenses for U.S.
Integrated Voice systems and U.S. Customer Service partially offset by higher
employee benefit and Communications Recording Systems selling and advertising
costs.
Research and development expenses decreased 5.5% to $11.6 million (3.3% of
total revenue) versus $12.3 million (3.5% of total revenue) in 1994. Increased
manpower costs were more than offset by an increase in software capitalization
in the amount of $4.2 million.
Operating profit declined 66.0% to $20.6 million (5.8% of total revenue)
in 1995 from $60.5 million (17.4% of total revenue) in 1994. Excluding the
impact of purchase accounting adjustments associated with the Acquisition of
$36.5 million, operating profit declined 5.6% versus 1994. This reduction
reflects the impact of an unfavorable mix
<PAGE>
shift from high margin third party maintenance revenue to increased low margin
contract manufacturing revenue and unfavorable inventory adjustments, partially
offset by increased revenue.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements consists primarily of scheduled
payments of principal and interest on its indebtedness, working capital needs
and capital expenditures. In addition, Dictaphone made its final required cash
payment ($8.0 million) to Pitney Bowes in the first quarter of 1996 which
related to certain post-closing adjustments to the purchase price for the
Company.
At December 31, 1996, the Company had outstanding term loans of $142.3
million (the "Term Loans") and loans of $9.0 million outstanding under the $40.0
million revolving credit facility (the "Revolving Credit Facility").
Availability under the Revolving Credit Facility at December 31, 1996 was $31.0
million. Scheduled annual principal payments 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 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. The fair value of the interest rate swaps as of
December 31, 1996 was favorable $0.2 million based on dealer quotes.
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 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.
On July 17, 1996, the Company and the lenders executed an amendment to the
Credit Agreement 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 aggregate principal amount of the Notes outstanding
as of December 31, 1996. The Notes are subordinated to the Credit Agreement
financings and other senior indebtedness, as defined in the Note Indenture. The
Notes contain covenants similar to the Credit Agreement and 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. The fair
value of the Notes at December 31, 1996 was favorable $26.0 million, based upon
dealer quotes.
Capital expenditures for 1996 totaled $6.3 million. The Company does not
expect the limitation on capital expenditures in the Credit Agreement to
restrict capital expenditures in a material manner.
The Company believes that cash flows from operating activities and its
ability to borrow under the Revolving Credit Facility will be adequate to meet
the Company's debt service obligations, working capital needs and planned
capital expenditures for the foreseeable future.
The Company's 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, the rescheduling and cancellation of orders by customers, availability
and cost of materials, the Company's ability to enhance its existing
<PAGE>
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.
As of December 31, 1996, the Company has tax net operating loss
carryforwards ("NOL's") of approximately $39.1 million, which begin to expire in
the year 2010. SFAS 109 requires that the tax benefit of such NOL's be recorded
as an asset to the extent that management assesses the utilization of such NOL's
to be "more likely than not". Management has determined, based on the Company's
history of prior operating earnings and its expectations for the future, that
taxable income of the Company will more likely than not be sufficient to fully
utilize the net deferred tax assets recorded as of December 31, 1996, including
$39.1 million of NOL's, prior to the earliest expiration in the year 2010.
The NOL's available for future utilization were generated principally by
purchase accounting acquisition adjustments in accordance with Accounting
Principles Board Opinion No. 16, "Accounting for Business Combinations". In
assessing the likelihood of utilization of existing NOL's, management considered
the historical results of the Company, and the current operating environment.
A reconciliation of the Company's loss before taxes for financial
statement purposes to taxable loss for the 20 weeks ended December 31, 1995 and
full year ended December 31, 1996 is as follows (in thousands).
YEAR ENDED 20 WEEKS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
Loss before taxes for financial
statement purposes ........................ $(53,591) $(22,580)
Differences between loss for financial
statement purposes and taxable loss:
State income taxes - current portion......... 1,701 669
Permanent differences:
Goodwill.................................. 1,158 288
All other permanent items................. 2,043 378
Temporary differences:
Intangible amortization................... 20,959 8,952
All other temporary differences (net)..... 618 (372)
-------- --------
Total differences...................... $ 26,478 $ 9,915
-------- --------
Taxable loss................................. $(27,113) $(12,665)
======== ========
Realization of the future tax benefits is dependent on the Company's
ability to generate taxable income within the carryforward period. For 1996, the
loss before income taxes of $53.6 million includes $60.3 million of additional
depreciation and amortization expense related to purchase accounting adjustments
associated with the Acquisition. On an annual basis commencing in 1997 through
the year 2001, these purchase accounting adjustments will decline by the
following approximate amounts: $17.4 million, $12.6 million, $15.0 million, $3.4
million, and $1.2 million. Excluding these purchase accounting adjustments,
operating income in 1996 would have been $43.0 million. Using this $43.0 million
as a base, if operating income were to grow at an average annual compound rate
of 5%, the Company would generate sufficient taxable income to fully utilize all
of the NOL's by 2003. This growth rate is consistent with that achieved
historically by the Company prior to the Acquisition.
Management anticipates that increases in taxable income during the
carryforward period will be realized as the result of increased revenue
associated with planned new product introductions scheduled to commence in 1997,
and the realization of efficiencies from certain restructuring and productivity
improvement initiatives.
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"). In accordance with SFAS 121, the Company
evaluates the carrying value of its long lived assets and identifiable
intangibles, including goodwill, when events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. The
effect of the adoption of SFAS 121 was not material.
<PAGE>
In 1996, the Company adopted the disclosure only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 encourages, but does not require companies
to record at fair value compensation cost for stock-based employee compensation
plans. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
-------------------------------------------------------------
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
------ ------ ------ -----
1996
----
<S> <C> <C> <C> <C>
Net revenue............. $ 80,459 $ 85,252 $ 83,447 $ 83,310
Cost of sales and
rentals (a) 33,482 31,712 31,316 30,224
Net loss................ (11,430) (7,890) (8,505) (6,835)
Net loss applicable to
Common Stock......... (11,955) (8,497) (9,098) (7,437)
Net loss per share of
Common Stock......... $ (1.26) $ (0.90) $ (0.96) $ (0.78)
PREDECESSOR COMPANY SUCCESSOR COMPANY
------------------------------------- --------------------------
QUARTER ENDED SEVEN WEEKS QUARTER
------------------- SIX WEEKS ENDED ENDED
MARCH 31, JUNE 30, ENDED SEPTEMBER 30 DECEMBER 31,
1995 1995 AUGUST 11, 1995 1995 1995
------- -------- --------------- ------------ ------------
1995
----
Net revenue............. $ 88,427 $ 82,716 $ 30,960 $ 52,221 $ 98,371
Cost of sales and
rentals(a) .......... 32,470 30,871 10,927 23,755 45,847
Net income (loss)....... 9,275 7,995 (211) (4,517) (9,357)
Net loss applicable to
Common Stock......... --- --- --- (4,807) (9,882)
Net loss per share of
Common Stock......... $ --- $ --- $ --- $ (0.51) $ (1.04)
</TABLE>
- ------------
(a) Cost of sales and rentals does 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.
The capital structure and accounting bases 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. Accordingly, amounts
subsequent to August 11, 1995 are not comparable to periods prior thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Dictaphone Corporation
We have audited the accompanying consolidated balance sheets of Dictaphone Cor-
poration and Subsidiaries (Successor Company) as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year ended December 31, 1996, and the 20 week period ended
December 31, 1995. Our audits also included the financial statement schedule as
of and for the year ended December 31, 1996 and as of and for the 20 week period
ended December 31, 1995 listed in the Index at Item 14. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Dictaphone Corporation and
Subsidiaries (Successor Company) at December 31, 1996 and 1995, and the results
of their operations and their cash flows for the year ended December 31, 1996
and 20 week period ended December 31, 1995 in conformity with generally accepted
accounting principles. Also, in our opinion, the financial statement schedule as
of and for the year ended December 31, 1996 and as of and for the 20 week period
ended December 31, 1995, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Deloitte & Touche LLP
Stamford, Connecticut
February 24, 1997
<PAGE>
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
ASSETS
Current assets:
Cash $ 14,279 $ 7,927
Accounts receivable, less allowance of
$1,462 and $1,339, respectively 57,256 53,701
Inventories 66,341 56,840
Other current assets 9,152 9,833
-------- --------
Total current assets 147,028 128,301
Property, plant and equipment, net 45,690 37,008
Deferred financing costs, net of accumulated
amortization of $900 and $6,235, respectively 18,799 14,255
Intangibles, net of accumulated amortization
of $16,968 and $58,177, respectively 307,964 271,022
Prepaid repurchases, leased equipment 7,279 5,163
Other assets 23,930 49,086
-------- --------
Total assets $550,690 $504,835
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,932 $7,634
Interest payable 10,922 10,342
Accrued liabilities 42,640 29,961
Advance billings 34,466 34,808
Current portion of long-term debt 7,750 12,512
-------- --------
Total current liabilities 103,710 95,257
Long-term debt 342,250 340,086
Other liabilities 10,227 10,114
-------- --------
Total liabilities 456,187 445,457
-------- --------
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock ($.01 par value;
10,000,000 shares authorized;
1,500,000 shares of 14% PIK
perpetual preferred stock issued
and outstanding, liquidation
value at December 31, 1996, $18,142) 15,815 18,142
Common stock ($.01 par value; 20,000,000
shares authorized; 9,480,000 shares
outstanding) 95 95
Notes receivable from stockholders (1,160) (1,052)
Additional paid-in capital 94,905 94,905
Treasury stock, at cost (100) (200)
Accumulated deficit (14,689) (51,676)
Accumulated translation adjustment (363) (836)
-------- --------
Total stockholders' equity 94,503 59,378
-------- --------
Total liabilities and stockholders'
Equity $550,690 $504,835
======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amount)
TWENTY WEEKS ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------ -----------------
Revenues:
Sales and rentals $114,906 $239,638
Support services 35,686 92,830
-------- -------
Total revenue 150,592 332,468
-------- -------
Costs and expenses:
Cost of sales and rentals 69,602 126,734
Selling, service and administrative 65,933 162,422
Amortization of intangibles 16,968 41,209
Research and development 4,587 14,135
-------- -------
Operating loss (6,498) (12,032)
Interest expense 15,850 42,897
Other expense (income) - net 232 (1,338)
-------- -------
Loss before income taxes (22,580) (53,591)
Income tax benefit 8,706 18,931
-------- -------
Net loss (13,874) (34,660)
Stock dividends on PIK Preferred Stock 815 2,327
-------- -------
Net loss applicable to Common Stock $(14,689) $(36,987)
======== ========
Net loss per share of Common Stock $ (1.55) $ (3.90)
======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)
<TABLE>
<CAPTION>
TWENTY WEEKS ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Operating activities:
Net loss $(13,874) $(34,660)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization (including
$11,691 and $5,775, respectively, of
nonrecurring charges) 39,972 71,135
Provision for deferred income taxes (9,035) (18,876)
Changes in assets and liabilities:
Accounts receivable (12,684) 3,320
Inventories 16,786 3,833
Other current assets 5,358 (513)
Accounts payable and accrued liabilities 20,020 (5,672)
Advance billings (1,134) 167
Other assets and other (18,837) (12,416)
-------- --------
Net cash provided by operating activities 26,572 6,318
-------- --------
Investing activities:
Payments for acquisition (454,239) (8,000)
Net investment in fixed assets (805) (6,225)
-------- --------
Net cash used in investing activities (455,044) (14,225)
-------- --------
Financing activities:
Net proceeds from sale of senior
subordinated notes 194,000 ---
Borrowings under term loan facility 150,000 ---
Repayment under term loan facility --- (7,750)
Proceeds from sale of common stock 95,000 ---
Proceeds from sale of preferred stock 15,000 ---
Borrowings under revolving credit facility 15,000 32,000
Repayment under revolving credit facility (15,000) (23,000)
International borrowing --- 1,277
Payment of deferred financing costs (13,699) (791)
Capital lease obligations --- (198)
Repayment of management loans 113 108
Payments to acquire treasury stock (100) (100)
-------- --------
Net cash provided by financing activities 440,314 1,546
-------- --------
Effect of exchange rate changes on cash (26) (9)
-------- --------
Increase (decrease) in cash 11,816 (6,352)
Cash, beginning of period 2,463 14,279
-------- --------
Cash, end of period $ 14,279 $ 7,927
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 4,060 $ 38,142
======== ========
Income taxes paid $ --- $ 1,960
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE TWENTY WEEKS ENDED DECEMBER 31, 1995
AND YEAR ENDED DECEMBER 31, 1996
(In millions, except per share amounts)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE ACCUMULATED ACCUMULATED
PREFERRED COMMON FROM TREASURY PAID-IN ACCUMULATED TRANSLATION TOTAL
STOCK STOCK STOCKHOLDERS STOCK CAPITAL DEFICIT ADJUSTMENTS EQUITY
--------- ------ ------------ -------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization
at August 12, 1995 $ 15,000 $ 95 $(1,273) $ --- $ 94,905 $ --- $ --- $ 108,727
Net loss --- --- --- --- --- (13,874) --- (13,874)
Stock Dividends 815 --- --- --- --- (815) --- ---
Repayment of
management loans --- --- 113 --- --- --- --- 113
Treasury stock --- --- --- (100) --- --- --- (100)
Translation
adjustments --- --- --- --- --- --- (363) (363)
--------- ------ ------ ------ --------- -------- ------ ---------
Balance at
December 31, 1995 15,815 95 (1,160) (100) 94,905 (14,689) (363) 94,503
Net loss --- --- --- --- --- (34,660) --- (34,660)
Stock Dividends 2,327 --- --- --- --- (2,327) --- ---
Repayment of
management loans --- --- 108 --- --- --- --- 108
Treasury stock --- --- --- (100) --- --- --- (100)
Translation
adjustments --- --- --- --- --- --- (473) (473)
--------- ------ ------ ------ --------- -------- ------ ---------
Balance at
December 31, 1996 $ 18,142 $ 95 $(1,052) $ (200) $ 94,905 $(51,676) $ (836) $ 59,378
========= ====== ======= ====== ========= ====---= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 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 (collectively, the "Predecessor Company"). 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 final purchase adjustment. Total purchase
adjustments amounted to $12.2 million for an aggregate purchase price of
$462.2 million.
The Acquisition, including approximately $22,178 of related
transaction and financing fees, was financed with the borrowing of
approximately $165,000 under a credit agreement, which consists of two
term loans and a revolving credit facility, the sale of senior
subordinated notes with an aggregate principal amount of $200,000, and
equity contributions of $110,000.
2. NATURE OF OPERATIONS
The Company is engaged principally in the design, manufacture,
marketing and service of integrated voice and data management
technologies. The Company is known for its sales of its desktop and
portable dictation products, however in recent years, it has obtained more
than two-thirds of its worldwide product revenue from sophisticated voice
processing systems and communications recording systems that incorporate
digital technology and complex software design. Dictaphone markets these
products worldwide with most of its revenue generated from the U.S.
market.
3. 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 was accounted for under
the purchase method of accounting in accordance with Accounting Principles
Board Opinion No. 16, "Accounting for Business Combinations".
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.
CONSOLIDATION. The consolidated financial statements include the
Company and all majority-owned subsidiaries as follows: Dictaphone
Corporation U.S. ("Dictaphone U.S."), Dictaphone Canada Ltd/Ltee
("Dictaphone Canada"), Dictaphone Company Ltd. ("Dictaphone U.K."),
Dictaphone Deutschland GmbH ("Dictaphone Germany"), Dictaphone Netherlands
BV ("Dictaphone Netherlands") and Dictaphone International A.G.
("Dictaphone Switzerland"). All significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS. Cash equivalents include short-term,
highly liquid investments with a maturity of three months or less from the
date of acquisition.
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY VALUATION. Inventories are valued at the lower of cost or
market. Cost is determined on the first-in, first-out (FIFO) method.
COMPUTER SOFTWARE DEVELOPMENT COSTS. The Company capitalizes certain
software costs (approximately $4,171 and $6,945 for the years ended
December 31, 1995 and 1996, respectively) in accordance with the
provisions of Statement of Financial Accounting Standard ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." Such amounts are amortized as the related products
are sold. During 1996, amortization expense related to these capitalized
amounts was $1,418.
FIXED ASSETS AND DEPRECIATION. Property, plant and equipment are
stated at cost and depreciated using the straight line method over the
useful lives of the various assets ranging from one to twelve years for
machinery and equipment and up to 35 years for buildings. Major
improvements which add to productive capacity or extend the life of an
asset are capitalized while repairs and maintenance are charged to expense
as incurred. Rental equipment and other depreciable assets are depreciated
using the straight line method over the related useful lives.
INTANGIBLES. Patents and non-compete agreement are amortized on a
straight line basis over five and three years, respectively. Service
contracts are amortized using a systematic method based on expected rate
of nonrenewals over four years. All other intangibles are being amortized
on a straight line basis over 40 years. The Company periodically evaluates
the recoverability of goodwill and other intangible assets by assessing
whether the unamortized intangible asset can be recovered over its
remaining useful life through future operating cash flows on an
undiscounted basis.
DEFERRED FINANCING COSTS. Deferred financing costs are amortized
over the expected terms of the related debt using the effective interest
method.
RENTAL ARRANGEMENTS AND ADVANCE BILLINGS. The Company rents
equipment to its customers under short-term rental agreements, generally
for periods of three to five years. Maintenance contracts (support
services) are billed in advance; the related revenue is included in
advance billings and taken into income as earned.
REVENUE. For large dictation and communication recording systems
that have technical installation requirements, the Company recognizes
revenue upon installation, which is when all of its contractual
obligations have been satisfied. Revenue for all other products is
recognized upon shipment, net of estimated returns.
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.
INCOME TAXES. Income tax benefit is based upon reported results of
operations and reflects the impact of temporary differences between the
amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. All U.S. Federal
and State taxes are provided currently on the undistributed earnings of
foreign subsidiaries giving recognition to current tax rates and
applicable foreign tax credits.
TRANSLATION OF FOREIGN CURRENCIES. Assets and liabilities of
subsidiaries are translated at the rate of exchange in effect on the
balance sheet date; income and expenses are translated at the average
rates of exchange prevailing during the period. The related translation
adjustments are reflected in the accumulated translation adjustment within
the stockholders' equity section of the consolidated balance sheet.
Foreign currency gains and losses resulting from transactions are included
in results of operations.
<PAGE>
LOSS PER SHARE. The weighted average number of shares of common
stock outstanding used in the computation of loss per share for the
twenty-week period ended December 31, 1995 and year ended December 31,
1996 was 9,490,000 and 9,485,750, respectively.
4. INVENTORIES
Inventories consist of the following:
DECEMBER 31, DECEMBER 31,
1995 1996
----------- -----------
Raw materials and work in process $ 18,437 $ 14,881
Supplies and service parts 19,249 19,946
Finished products 28,655 22,013
-------- --------
Total inventories $ 66,341 $ 56,840
======== ========
As a result of the Acquisition, inventories were recorded at their
fair value at August 12, 1995. Such fair value represented selling price
less estimated costs of completion for work in process and selling costs
and a reasonable profit allowance for the selling and completion effort
for finished goods. Raw materials were valued at replacement cost. The
fair value of inventories was $18,000 in excess of their historical cost.
$11,691 and $5,775 of such excess was charged to cost of sales and rentals
during the twenty-week period ended December 31, 1995 and year ended
December 31, 1996, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DECEMBER 31, DECEMBER 31,
1995 1996
----------- -----------
Land $ 1,777 $ 1,781
Buildings 20,479 16,958
Machinery and equipment 33,847 43,034
-------- --------
Subtotal 56,103 61,773
Accumulated depreciation (10,413) (24,765)
-------- --------
Property, plant and
equipment, net $ 45,690 $ 37,008
======== ========
Depreciation expense for the twenty-week period ended December 31,
1995 and year ended December 31, 1996 was $10,413 and $15,130,
respectively.
6. INTANGIBLES
The following summarizes intangible assets, net of accumulated
amortization of $16,968 and $58,177 for the twenty weeks ended December
31, 1995 and year ended December 31, 1996, respectively.
Amortization expense for the year ended December 31, 1996 was $41,209.
DECEMBER 31, DECEMBER 31,
1995 1996
----------- -----------
Goodwill $140,006 $139,687
Tradenames 77,104 75,158
Service contracts 34,499 18,951
Non-compete agreement 47,202 30,057
Patents 9,153 7,169
-------- --------
$307,964 $271,022
======== ========
<PAGE>
7. DEBT
The following summarizes the debt structure of the Company:
DECEMBER 31, DECEMBER 31,
1995 1996
----------- -----------
Current portion of
long-term debt $ 7,750 $ 12,512
-------- --------
Long-term debt:
Senior debt:
Term loans:
Tranche A 68,000 57,000
Tranche B 74,250 73,500
Revolving credit loans --- 9,000
International debt --- 586
Subordinated notes 200,000 200,000
-------- --------
Total long-term debt 342,250 340,086
-------- --------
Total debt $350,000 $352,598
======== ========
In connection with the financing of the Acquisition, the Company
entered into a Credit Agreement dated August 7, 1995, as amended by the
First Amendment to Credit Agreement, dated June 28, 1996 on July 17, 1996
(collectively, the "Credit Agreement") with a syndicate of financial
institutions for whom Bankers Trust Company ("Bankers Trust") is the
Administrative Agent and NationsBank, N.A. (Carolinas) ("Nations") is the
Documentation Agent.
The Credit Agreement consists of a $75,000 Tranche A Term Loan due
March 31, 2001 (the "Tranche A Loan"), a $75,000 Tranche B Term Loan due
June 30, 2002 (the "Tranche B Loan") together with the Tranche A Loan, the
"Term Loans" and a six-year revolving credit facility of up to $40,000
(the "Revolving Credit Facility"), and, together with the Term Loans, the
"Facilities." A portion of the Revolving Credit Facility will be available
to provide for the working capital requirements and general corporate
purposes of the Company and to issue commercial and standby letters of
credit.
At December 31, 1996, the Company had Term Loans of $142,250 and
loans of $9,000 outstanding under the Revolving Credit Facility. The
Tranche A and Tranche B Loans are repayable in installments which
commenced on March 31, 1996 and December 31, 1996, respectively. The
maturity schedule relating to the $142,250 of outstanding Term Loans is as
follows:
1997 $ 11,750
1998 15,750
1999 15,750
2000 19,750
Thereafter 79,250
--------
$142,250
========
The Company will be required to make certain prepayments, subject to
certain exceptions, on the Facilities with 75% of Excess Cash Flow (as
defined in the Credit Agreement) and with the proceeds from certain asset
sales, issuances of debt and equity securities and any pension plan
reversion. Such prepayments will be applied first to required principal
payments of the Term Loans and thereafter to amounts outstanding under the
Revolving Credit Facility. All mandatory prepayments shall be applied
ratably between the Tranche A Term Loan and the Tranche B Term Loan and
shall be applied to scheduled installments thereof in the inverse order of
maturity.
<PAGE>
7. DEBT (CONTINUED)
There are no scheduled reductions in the Revolving Credit Facility
over the next five years; however, the Company is required to reduce loans
outstanding under the Revolving Credit Facility to $15,000 for a period of
not less than 30 consecutive days during each consecutive 12-month period.
Availability under the Revolving Credit Facility at December 31, 1996 was
$31,000. The Company had outstanding letters of credit of $1,333 as of
December 31, 1996.
Borrowings under the Tranche A Loan and the Revolving Credit
Facility bear interest at a rate per annum equal to, at the Company's
option, the higher of (1) Bankers Trust's Prime Rate or (2) the rate which
is 1/2 of 1% in excess of the Federal Funds effective rate, (together the
"Base Rate") plus 1.75% or the reserve Eurodollar Rate (as defined in the
Credit Agreement) plus 2.75%. The Tranche B Loan bears interest at a rate
per annum equal to, at the Company's option, the Base Rate plus 2.25% or
the reserve Eurodollar Rate plus 3.25%. In addition, the Company is
required to pay Bankers Trust a quarterly commitment fee of .50% per annum
on the daily average unused portion of the Revolving Credit Facility. The
carrying amount of the Facilities approximates fair value as the interest
rate reprices quarterly and is reflective of currently available market
rates. The Company entered into an interest rate swap contract on November
7, 1995, effective February 16, 1996, with an aggregate notional principal
amount equivalent to $75,000 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. The fair value of
the interest rate swaps as of December 31, 1996 was favorable $244, based
upon dealer quotes. The amounts due to or from the counterparties will be
reflected in interest expense in the periods in which they accrue.
Dictaphone is exposed to credit-related losses in the event of
non-performance by the counterparties to these swaps, although no such
losses are expected as the counterparties are commercial banks having an
investment grade credit rating. The effective interest rate for the year
ended December 31, 1996 was 8.374%, 8.8639% and 8.226% on the Tranche A
Loan, Tranche B Loan and the Revolving Credit Facility, respectively.
Dictaphone U.S., the Company's wholly-owned U.S. Subsidiary,
guarantees the Company's obligations under the Facilities. The Company's
obligations and the guarantees of its domestic subsidiaries are secured by
substantially all existing and acquired personal property of the Company
and its domestic subsidiaries, including a pledge of 100% of the stock of
each of the Company's domestic subsidiaries and 66% of the stock of each of
the Company's first-tier foreign subsidiaries. The Company's obligations
are also secured by liens on certain real property of the Company and its
domestic subsidiaries.
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 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.
On July 17, 1996, the Company and the lenders executed an amendment
to the Credit Agreement 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>
7. DEBT (CONTINUED)
The Acquisition was also financed through the issuance of $200,000
senior subordinated notes (the "Notes"). The Notes are subordinated to the
Credit Agreement financing and other senior indebtedness as defined in the
indenture pursuant to which the Notes were issued (the "Note Indenture").
The Notes bear interest of 11-3/4% per annum, payable semiannually on each
February 1 and August 1. The Notes mature on August 1, 2005. The fair
value of the Notes at December 31, 1996 was favorable $26.0 million based
on dealer quotes. The Notes are fully and unconditionally guaranteed by
Dictaphone U.S. The Notes contain covenants similar to the Facilities 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.
8. EQUITY AND STOCK OPTIONS
COMMON STOCK
On December 31, 1996, the Company had 20 million shares of common
stock, $.01 par value ("Common Stock") authorized of which 9.48 million
shares were issued, outstanding and owned by Stonington Capital
Appreciation 1994 Fund, L.P. ("Stonington"), an affiliate of a limited
partner of Stonington, and by management of the Company.
PREFERRED STOCK AND WARRANT
The Company is authorized to issue up to 10 million shares of
preferred stock, $.01 par value, in one or more series as authorized by
the Board of Directors and to fix the terms, rights, restrictions and
qualifications of shares of each series. In connection with the
acquisition, the Company issued 1.5 million shares of 14% Pay-In-Kind
Perpetual Preferred Stock ("PIK Preferred Stock"). The PIK Preferred Stock
is nonvoting and has a stated value and liquidation preference of $10 per
share and carries a cumulative pay-in- kind dividend of 14% per year
payable quarterly in arrears from September 30, 1995 until July 31, 2006,
and thereafter the annual dividend rate will increase by 200 basis points
every twelve months (but in no event will exceed 24%). The PIK Preferred
Stock ranks senior to all classes and series of stock of the Company with
respect to dividend rights and rights on liquidation, winding up and
dissolution of the Company. It is redeemable at the option of the Company
or in certain limited circumstances at the option of the holder upon the
occurrence of certain events. The Company accrued the 14% pay-in-kind
dividend and charged accumulated deficit $815 and $2,327 for the twenty
weeks ended December 31, 1995 and year ended December 31, 1996,
respectively, as a result of the required dividends representing 81,500
and 232,700 shares of the PIK Preferred Stock, respectively. Such shares
of PIK Preferred Stock were declared and issued in respect of the period
up to December 31, 1996.
Together with the issuance of the PIK Preferred Stock, the Company
issued a warrant to purchase 350,000 shares of the Company's Common Stock
at a price of $10 per share (the "Warrant") representing the fair value of
Common Stock on the date of issuance. The Warrant may not be transferred
or exchanged, in whole or in part, separately from, but may be transferred
or exchanged only together with, an equivalent proportion of such PIK
Preferred Stock.
The Warrant expires on August 11, 2005 and is currently exercisable.
The Company has reserved 350,000 shares of its Common Stock for issuance
upon exercise of the Warrant. As set forth in the related agreement (the
"Warrant Agreement"), the Warrant is subject to certain antidilution
provisions related to the future adjustments to the Company's capital
stock or the issuance of its Common Stock or rights, options or warrants
to purchase such Common Stock at a price below the current market price as
defined in the Warrant Agreement.
<PAGE>
8. EQUITY AND STOCK OPTIONS (CONTINUED)
MANAGEMENT STOCK OPTION PLAN
At the date of Acquisition, the Company adopted a Management Stock
Option Plan (the "Plan") and issued options to purchase 713,000 shares of
Common Stock at $10.00 per share (fair market value) to officers, key
employees and non-employee directors of the Company. The Plan provides
that one-half of the options granted under the Plan will vest
automatically over a five year period and the other one-half will become
eligible for vesting as to 10% on April 15, 1996, as to 20% on each of
April 15, 1997, 1998, 1999, and 2000, and as to the remaining 10% on April
15, 2001, if the Company attains certain predetermined financial
performance goals, or in any case no later than the tenth anniversary of
the Acquisition. The options expire ten years from the date of grant or
earlier in certain circumstances. In the event of a Sale or an IPO (as
defined in the Plan) of the Company prior to August 11, 2000, all out-
standing service-based options and performance-based options will become
immediately vested and exercisable prior to the effective date of such
Sale or IPO. The Company has reserved 850,000 shares of its Common Stock
related to this Plan. A summary of options outstanding is as follows:
DECEMBER 31, DECEMBER 31,
1995 1996
----------- -----------
Outstanding, beginning of year --- 683,000
Granted 713,000 89,000
Cancelled (30,000) (122,000)
------- -------
Outstanding, end of year 683,000 650,000
======= =======
Statement of Financial Accounting Standards Number 123, "Accounting
For Stock-Based Compensation" ("SFAS 123") encourages, but does not
require, companies to record at fair value compensation cost of
stock-based employee compensation plans. Dictaphone has elected to
continue to account for stock- based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting For Stock Issued to Employees" ("APB No. 25") and related
interpretations. Under the intrinsic value based method, compensation cost
is the excess, if any, of the quoted market price of the stock at grant
date over the exercise price of the option. Typically, grants of stock
options pursuant to stock option plans have no intrinsic value at grant
date, and accordingly, no compensation cost has been recognized by
Dictaphone. Had compensation cost for the stock option been determined
based on the fair value of the option at a date of grant consistent with
the requirements of SFAS No. 123, Dictaphone's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
1995 1996
---- ----
Net loss As reported $(14,689) $(36,987)
Pro Forma $(14,770) $(37,182)
Net loss per share As reported $ (1.55) $ (3.90)
Pro Forma $ (1.56) $ (3.92)
The fair value of each stock option has been estimated at the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
1995 1996
---- ----
Risk free interest rate 5.44% 6.21%
Expected life 5 years 5 years
Expected volatility -- --
Expected dividend yield -- --
<PAGE>
9. INCOME TAXES
The provision (benefit) for income taxes for the twenty weeks ended
December 31, 1995 and year ended December 31, 1996 consists of the
following:
TWENTY WEEKS ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------ -----------------
Current:
Federal $ --- $ ---
State --- ---
Foreign 329 (55)
-------- --------
Total $ 329 $ (55)
-------- --------
Deferred:
Federal $ (7,228) $(14,686)
State (1,216) (3,139)
Foreign (591) (1,051)
-------- --------
Total $ (9,035) $(18,876)
-------- --------
Total $ (8,706) $(18,931)
======== ========
The difference between the Company's effective income tax rate and
the United States statutory rate for the twenty-week period ended December
31, 1995 and year ended December 31, 1996 is reconciled below:
TWENTY WEEKS ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------ -----------------
United States statutory rate 35.00% 35.00%
State income taxes, net of
Federal income tax benefit 3.50% 3.81%
Effect of foreign operations 1.09% (1.39%)
Miscellaneous (1.03%) (2.09%)
----- -----
Total 38.56% 35.33%
===== =====
See Footnote 13 for disaggregated information as to domestic and
foreign income before taxes.
<PAGE>
9. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities arise from the impact of
temporary differences between the amount of assets and liabilities
recognized for financial reporting purposes and such amounts recognized
for tax purposes and resulted from the following:
DECEMBER 31, DECEMBER 31,
1995 1996
----------- -----------
Deferred tax assets:
Net operating loss carry forwards $ 5,598 $ 15,702
Amortization - identifiable intangibles 3,981 12,951
Postretirement and pension benefits 3,084 4,107
Depreciation 2,828 5,570
Other 4,871 4,779
---------- ----------
Total deferred tax assets $ 20,362 $ 43,109
========== ==========
Deferred tax liabilities:
Amortization - identifiable intangibles $ (1,143) $ ---
Amortization - goodwill (710) (2,363)
Capitalized software costs (631) (2,084)
Other (280) (893)
---------- ----------
Total deferred tax liabilities $ (2,764) $ (5,340)
========== ==========
The Company has recorded a deferred tax asset of $43.1 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 December
31, 1996 is approximately $37.7 million, of which $13.6 million of the net
operating loss carryforward will expire in the year 2010 and $24.1
million will expire in the year 2011. In order to fully realize the
deferred tax asset the Company will need to generate future 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, and accordingly
has not established a valuation allowance for the deferred tax asset as of
December 31, 1996.This conclusion is based upon (i) the impact of purchase
accounting adjustments which contributed 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,
however, could be reduced if estimates of future taxable income during the
net operating loss carryforward period are reduced.
10. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH STONINGTON CAPITAL APPRECIATION 1994 FUND, L.P.
Stonington, together with an affiliate of a limited partner of
Stonington, own 98% of the outstanding Common Stock of the Company, has
the power to determine the composition of the Board of Directors of the
Company and otherwise control the business and affairs of the Company.
Four of the eight members of the Board of Directors of the Company are
employees of an affiliate of Stonington and serve as representatives of
Stonington.
<PAGE>
10. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
TRANSACTIONS WITH MANAGEMENT
In connection with the Acquisition, the Company sold 197,000 shares
of the Company's Common Stock to certain members of the Company's
management (the "Management Investors") for $1,970, the fair value of the
Common Stock at the date of sale (the "Management Placement"). The Company
financed $1,273 of the Management Placement with non-recourse loans
bearing interest at a rate equal to the Adjusted Eurodollar Rate in effect
for the Revolving Credit Facility under the credit Agreement plus 2.75%.
Interest is due annually starting in 1998. Unless prepaid, all
principal, accrued and unpaid interest is due and payable on August 7,
2005. The obligations under the management notes are secured by a pledge
of the proportionate number of shares of Common Stock pursuant to a
Stockholder's Agreement.
Under the terms of the Stockholders Agreement relating to the
Management Placement, for a period of five years from August 11, 1995,
unless the Company has completed an initial public offering, Management
Investors will not be permitted to sell, transfer or otherwise dispose of
their shares of Common Stock, except to (i) a "Permitted Transferee" or
(ii) to the Company pursuant to certain put and call arrangements set
forth in the Stockholders' Agreement (the "Puts and Calls"). A "Permitted
Transferee" includes certain beneficiaries, trusts and family members. The
Puts and Calls provide for the sale of shares of Common Stock to the
Company upon the termination of employment. The purchase price for shares
purchased pursuant to the Stockholders Agreement is based upon the
original per share purchase price Adjusted Book Value (as defined in the
Stockholders Agreement), cost, or Fair Market Value (as defined).
The Stockholders Agreement provides that in the event that, after
August 11, 2000, an initial public offering has not occurred, Management
Investors will be permitted to sell Common Stock to third parties after
first giving the Company and other Management Investors a right of first
refusal for the same number of shares of Common Stock at the same price.
11. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK
CONCENTRATIONS OF RISKS
A substantial portion of the Company's revenues are derived from the
sale of products manufactured at the Company's sole manufacturing facility
which is located in Melbourne, Florida. This manufacturing facility is
subject to the normal hazards of any such facility that could result in
damage to the facility. Any such damage to this facility or prolonged
delay in the operations of this facility for repairs or other reason would
have a materially adverse effect on the company's financial position and
results of operations.
COMMITMENTS
The Company leases certain factory and office facilities under lease
agreements extending from one to twenty-five years. In addition to factory
and office facilities leased, the Company leases computer and information
processing equipment under lease agreements extending from three to five
years.
<PAGE>
11. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK (CONTINUED)
COMMITMENTS (CONTINUED)
Future minimum lease payments for operating leases as of December
31, 1996 are as follows:
YEARS ENDING DECEMBER 31,
1997 $ 4,438
1998 3,144
1999 2,337
2000 1,733
2001 950
Later years 3,173
-------
Total minimum lease payments $15,775
=======
Rental expense under operating leases was $2,255 and $5,168 for the
twenty week period ended December 31, 1995 and year ended December 31,
1996, respectively.
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.
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 alleged 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 sought 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.
Dictaphone vigorously contested this litigation, which was recently
settled by Dictaphone for an immaterial amount.
<PAGE>
11. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK (CONTINUED)
CONTINGENCIES (CONTINUED)
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>
12. PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA
The following pro forma combined statement of operations of
Dictaphone Corporation for the twelve months ended December 31, 1995 has
been presented to give effect to the Acquisition, described in Note 1, as
if it had occurred on January 1, 1995. The pro forma operating results
include the historical results of Dictaphone Corporation (Predecessor
Company) shown herein adjusted for interest costs on borrowings to finance
the Acquisition and purchase accounting adjustments.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------
PREDECESSOR DICTAPHONE
COMPANY CORPORATION
32 WEEKS 20 WEEKS
ENDED ENDED DICTAPHONE
AUGUST 11, DECEMBER 31, PRO FORMA CORPORATION
1995 1995 ADJUSTMENTS PRO FORMA
----------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
Total revenue................... $202,103 $150,592 $ --- $352,695
-------- -------- --------- --------
Cost and expenses:
Cost of sales and rentals....... 74,268 69,602 4,106(a)(b) 147,976
Selling, service and
administrative................ 93,774 82,901 22,465(b) 199,140
Research and development........ 7,004 4,587 --- 11,591
-------- -------- --------- --------
Operating profit (loss)......... 27,057 (6,498) (26,571) (6,012)
Interest (income) expense
and other..................... (1,400) 16,082 27,992(c) 42,674
-------- -------- --------- --------
Income (loss) before
income taxes ................. 28,457 (22,580) (54,563) (48,686)
Provision for income tax
expense (benefit)............. 11,398 (8,706) (22,098)(d) (19,406)
-------- --------- --------- --------
Net income (loss)............... $ 17,059 $ (13,874) $ (32,465) $(29,280)
Stock dividend on PIK
Preferred Stock............... --- 815 1,285 2,100
-------- --------- --------- --------
Net loss applicable
to Common Stock............... $ 17,059 $ (14,689) $ (33,750) $(31,380)
======== ========= ========= ========
</TABLE>
- ----------------
(a) Reflects the charge to cost of sales related to the inventory write-up
as a result of the Acquisition of $6,309 for the twelve month period
ended December 31, 1995.
(b) Reflects depreciation adjustment and additional amortization from the
preliminary allocation of the excess purchase price over historical
costs of the net assets of $20,262 for the twelve month period ended
December 31, 1995.
<PAGE>
12. PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA (CONTINUED)
(c) Reflects the net adjustments to interest (income) expense as a result
of the transaction as follows:
TWELVE MONTHS
ENDED DECEMBER 31, 1995
-----------------------
Interest expense:
Revolving Credit Facility - $20,775 average
balance $ 1,849
Tranche A Term Loan - $74,125 average balance 6,597
Tranche B Term Loan - $75,000 average balance 7,050
Senior Subordinated Notes - $200,000........ 23,500
Commitment fees on unused Revolving Credit
Facility - $19,225 average unused balance.. 96
Other bank charges.......................... 300
Amortization of debt issuance costs......... 2,936
Elimination of historical interest expense.... (15,850)
---------
26,478
Elimination of historical interest income.... 1,514
---------
Total interest adjustments............... $ 27,992
=========
(d) Reflects the tax effects of the pro forma adjustments to income (loss)
before income taxes based on the estimated applicable statutory tax
rates.
13. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
INFORMATION
Dictaphone U.S. has fully and unconditionally guaranteed the Notes
(See Note 7). 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>
13. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
INFORMATION (CONTINUED)
The following are the supplemental consolidating statement of
operations and cash flow information for the twenty-week period ended
December 31, 1995 and year ended December 31, 1996, and the supplemental
consolidating balance sheet information as of December 31, 1995 and 1996.
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
TWENTY WEEKS ENDED DECEMBER 31, 1995
<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 $ --- $104,525 $15,212 $(4,831) $114,906
Support services --- 31,031 4,655 --- 35,686
-------- -------- ------- ------- --------
Total revenues --- 135,556 19,867 (4,831) 150,592
-------- -------- ------- ------- --------
Costs and expenses:
Cost of sales and rentals --- 65,692 8,312 (4,402) 69,602
Selling, service and
administrative 83 72,065 10,750 3 82,901
Research and development --- 4,587 --- --- 4,587
Interest expense - net
and other 5,472 9,455 1,155 --- 16,082
-------- -------- ------- ------- --------
Total costs and
expenses 5,555 151,799 20,217 (4,399) 173,172
-------- -------- ------- ------- --------
Equity (loss) earnings (4,035) --- --- 4,035 ---
-------- -------- ------- ------- --------
(Loss) income before
income taxes (9,590) (16,243) (350) 3,603 (22,580)
Benefit for income taxes 1,945 6,316 262 183 8,706
-------- -------- ------- ------- --------
Net (loss) income $ (7,645) $ (9,927) $ (88) $ 3,786 $(13,874)
========= ========= ======== ======= ========
</TABLE>
<PAGE>
13. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
INFORMATION (CONTINUED)
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ---------- ------------- ------------
Revenue from:
<S> <C> <C> <C> <C> <C>
Sales and rentals $ --- $215,566 $ 36,229 $(12,157) $ 239,638
Support services --- 81,311 11,519 --- 92,830
-------- -------- -------- -------- ---------
Total revenues --- 296,877 47,748 (12,157) 332,468
-------- -------- -------- -------- ---------
Costs and expenses:
Cost of sales and rentals --- 117,986 20,453 (11,705) 126,734
Selling, service and
administrative 203 171,620 31,801 7 203,631
Research and development --- 14,135 --- --- 14,135
Interest expense - net
and other 3,830 36,557 1,158 14 41,559
-------- -------- -------- -------- --------
Total costs and
expenses 4,033 340,298 53,412 (11,684) 386,059
-------- -------- -------- -------- --------
Equity (loss) earnings (7,024) --- --- 7,024 ---
-------- -------- -------- -------- --------
(Loss) income before
income taxes (11,057) (43,421) (5,664) 6,551 (53,591)
Benefit for income taxes 1,185 16,323 1,232 191 18,931
-------- -------- -------- -------- --------
Net (loss) income $ (9,872) $(27,098) $ (4,432) $ 6,742 $(34,660)
======== ======== ======== ======== ========
</TABLE>
<PAGE>
13. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
INFORMATION (CONTINUED)
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
DECEMBER 31, 1995
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ---------- ------------- ------------
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C>
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) ---
Fixed assets, net --- 42,907 2,783 --- 45,690
Intangibles, net 2,455 286,043 19,466 --- 307,964
Deferred financing costs 18,799 --- --- --- 18,799
Other assets 1,936 27,633 1,640 --- 31,209
-------- -------- ------- --------- --------
Total assets $476,927 $487,475 $49,678 $(463,390) $550,690
======== ======== ======= ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 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>
13. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
INFORMATION (CONTINUED)
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ---------- ------------- ------------
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C>
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 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 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>
<PAGE>
13. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
INFORMATION (CONTINUED)
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
TWENTY WEEKS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ---------- ----------- ------------
Operating activities:
<S> <C> <C> <C> <C> <C>
Net loss $ (7,645) $ (9,927) $ (88) $ 3,786 $ (13,874)
Adjustments to reconcile
loss to cash provided by (used in)
operating activities:
Depreciation and amortization 924 37,086 1,962 --- 39,972
Provision for deferred income taxes (1,936) (6,508) (591) --- (9,035)
Change in assets and liabilities:
Accounts receivable (10,609) (9,881) (246) 8,052 (12,684)
Inventories --- 16,179 178 429 16,786
Other current assets --- 5,631 (242) (31) 5,358
Accounts payable and
accrued liabilities 10,829 13,305 4,084 (8,198) 20,020
Advance billings --- (951) (183) --- (1,134)
Other assets and other 541 (18,617) (3,544) 2,783 (18,837)
--------- --------- -------- --------- ---------
Cash provided by (used in)
operating activities (7,896) 26,317 1,330 6,821 26,572
--------- --------- -------- --------- ---------
Investing activities:
Payment to acquire net assets of
Dictaphone Corporation (454,239) (429,763) (35,500) 465,263 (454,239)
Net investment in fixed assets --- (695) (110) --- (805)
--------- --------- -------- --------- ---------
Cash used for investing activities (454,239) (430,458) (35,610) 465,263 (455,044)
--------- --------- -------- --------- ---------
Financing activities:
Net proceeds from sale of senior
subordinated notes 194,000 --- --- --- 194,000
Borrowings under term loan facility 150,000 --- --- --- 150,000
Borrowing from promissory notes --- 347,509 17,491 (365,000) ---
Borrowings from subsidiary 6,821 --- --- (6,821) ---
Proceeds from sale of common stock 95,000 82,254 18,009 (100,263) 95,000
Proceeds from sale of preferred stock 15,000 --- --- --- 15,000
Borrowings from revolving credit
facility 15,000 --- --- --- 15,000
Repayment under revolving credit
facility --- (15,000) --- --- (15,000)
Payment of deferred financing costs (13,699) --- --- --- (13,699)
Repayment of management loans 113 --- --- --- 113
Payment to acquire treasury stock (100) --- --- --- (100)
--------- --------- -------- --------- ---------
Cash provided by (used in) financing
activities 462,135 414,763 35,500 (472,084) 440,314
--------- --------- -------- --------- ---------
Effect of exchange rate changes on cash --- --- (26) --- (26)
--------- --------- -------- --------- --------
Increase in cash --- 10,622 1,194 --- 11,816
Cash, beginning of period --- 969 1,494 --- 2,463
--------- --------- -------- --------- ---------
Cash, end of period $ --- $ 11,591 $ 2,688 $ --- $ 14,279
========= ========= ======== ========= =========
</TABLE>
<PAGE>
13. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
INFORMATION (CONTINUED)
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss $ (9,872) $(27,098) $ (4,439) $ 6,749 $(34,660)
Adjustments to reconcile
loss to cash provided by (used in)
operating activities:
Depreciation and amortization 5,388 61,501 4,246 --- 71,135
Provision for deferred income taxes (1,310) (16,323) (1,052) (191) (18,876)
Change in assets and liabilities:
Accounts receivable (2,387) 1,363 167 4,177 3,320
Inventories --- 2,346 1,021 466 3,833
Other current assets (517) 273 (204) (65) (513)
Accounts payable and
accrued liabilities (336) (2,124) 900 (4,112) (5,672)
Advance billings --- 715 (548) --- 167
Other assets and other 7,295 (11,249) (1,438) (7,024) (12,416)
-------- -------- -------- ------- --------
Cash provided by (used in)
operating activities (1,739) 9,404 (1,347) --- 6,318
-------- -------- -------- ------- --------
Investing activities:
Payment for acquisition (8,000) --- --- --- (8,000)
Net investment in fixed assets --- (5,007) (1,218) --- (6,225)
-------- -------- -------- ------- --------
Cash used for investing activities (8,000) (5,007) (1,218) --- (14,225)
-------- -------- -------- ------- --------
Financing activities:
Repayment under term loan facility (7,750) --- --- --- (7,750)
Borrowing from promissory notes (1,397) 1,250 147 --- ---
Borrowings from subsidiary 10,669 (10,669) --- --- ---
Borrowings from revolving credit
facility 32,000 --- --- --- 32,000
Repayment under revolving credit
facility (23,000) --- --- --- (23,000)
Other (783) --- 1,079 --- 296
-------- -------- -------- ------- --------
Cash provided by (used in) financing
activities 9,739 (9,419) 1,226 --- 1,546
-------- -------- -------- ------- --------
Effect of exchange rate changes
on cash --- --- 9 --- 9
-------- -------- -------- ------- --------
Decrease in cash --- (5,022) (1,330) --- (6,352)
Cash, beginning of period --- 11,591 2,688 --- 14,279
-------- -------- -------- ------- --------
Cash, end of period $ --- $ 6,569 $ 1,358 $ --- $ 7,927
======== ======== ======== ======= ========
</TABLE>
<PAGE>
14. RETIREMENT PLANS
Effective with the Acquisition on August 11, 1995, the Company
established a defined benefit pension plan for all active U.S. employees.
Responsibility for retired U.S. employees was retained by Pitney Bowes.
Certain employees in other countries are covered under contributory and
non-contributory defined benefit pension plans. The new Dictaphone Plan
("Dictaphone Plan") provides for benefits based on employees' compensation
and years of service. Company contributions are determined based on the
funding requirements of the Employee Retirement Income Security Act of
1974 and other governmental laws and regulations.
The Company sponsors a defined contribution plan (401K) for domestic
employees. The Company matches 25% of employee contributions up to 3% of
eligible compensation, subject to certain limitations. Total Company
contributions were $151 for the twenty-week period ended December 31, 1995
and $345 for the year ended December 31, 1996.
Net pension expense for defined benefit plans for the twenty-week
period ended December 31, 1995 and year ended December 31, 1996 included
the following components:
UNITED STATES
----------------------------------------
TWENTY WEEKS ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------ ----------------
Service cost -- benefits earned
during period $ 995 $ 2,157
Interest cost on projected benefit
obligations 885 2,127
Actual return on assets (1,014) (3,965)
Net (deferral) and amortization --- 1,342
------- -------
Net periodic defined benefit
pension expense $ 866 $ 1,661
======== =======
FOREIGN
----------------------------------------
TWENTY WEEKS ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------ ----------------
Service cost -- benefits earned
during period $ 48 $ 311
Interest cost on projected benefit
obligations 274 831
Actual return on assets (756) (927)
Net (deferral) and amortization 289 (333)
------- ------
Net periodic defined benefit
pension income $ (145) $ (118)
======= ======
<PAGE>
14. RETIREMENT PLANS (CONTINUED)
The following summarizes amounts included in the Company's
consolidated balance sheet and the funded status of the Company's U.S. and
foreign defined benefit plans at December 31, 1995 and 1996:
UNITED STATES
---------------------------
DECEMBER 31,
1995 1996
-------- --------
Actuarial present value of:
Vested benefits.................. $22,044 $22,099
------- -------
Accumulated benefit obligations.. $24,561 $25,461
------- -------
Projected benefit obligations....... $32,280 $31,968
------- -------
Plan assets at fair value, primarily stocks
and bonds, adjusted by:........... $27,343 $31,517
Unrecognized net loss (gain)..... --- (5,393)
Unrecognized net asset........... --- ---
Unamortized prior service costs from
plan amendments................ --- ---
------- -------
Net pension liability .............. $ 4,937 $ 5,844
======= =======
The assumptions used in determining pension
costs and funded status for defined
benefit plans is as follows:
Discount rate....................... 7.25% 7.50%
Rate of increase in future
compensation levels .............. 4.75% 4.75%
Expected long-term rate of return on
plan assets ...................... 9.50% 9.50%
FOREIGN
---------------------------
DECEMBER 31,
1995 1996
-------- --------
Actuarial present value of:
Vested benefits.................. $ 8,203 $10,938
------- -------
Accumulated benefit obligations.. $ 8,203 $10,938
------- -------
Projected benefit obligations....... $ 9,297 $12,161
------- -------
Plan assets at fair value, primarily stocks
and bonds, adjusted by:........... $11,473 $13,041
Unrecognized net loss............ 1,691 1,551
Unrecognized net asset........... (1,353) (707)
Unamortized prior service costs from
plan amendments................ --- 664
------- -------
Net pension liability (asset)....... $(2,514) $(2,388)
======= =======
The assumptions used in determining pension
costs and funded status for defined
benefit plans is as follows:
Discount rate....................... 8.25 - 8.50% 7.75 - 8.25%
Rate of increase in future compensation
levels 6.00% 5.50 - 6.00%
Expected long-term rate of return on
plan assets 9.00 - 10.00% 9.00 - 9.50%
<PAGE>
15. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company provides certain postretirement health care and life
insurance benefits for qualifying employees in the United States and
Canada. Substantially all of these employees may become eligible for
coverage. Most retirees outside the United States and Canada are covered
by government sponsored and administered programs.
This obligation was determined by application of the terms of the
postretirement health care and life insurance plan together with relevant
actuarial assumptions. These assumptions as of December 31, 1995 and
December 31, 1996, and for the twenty-week period and year then ended were
as follows:
1995 1996
---- ----
Discount rate 7.25% 7.50%
Initial health care cost trend rate 11.75% 10.75%
Ultimate health care cost trend rate 5.75% 5.75%
Year in which ultimate trend rate achieved 2001 2001
An increase in assumed health care trend rates of 1% in each year
would increase aggregate service and interest costs by $157 and would
increase the December 31, 1996 accumulated postretirement benefit
obligation by $1,065.
The Company's total net postretirement benefit costs for the
twenty-week period ended December 31, 1995 and year ended December 31,
1996 consisted of the following components:
TWENTY WEEKS
ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
Service cost-benefits earned
during the period $ 340 $ 664
Interest cost on accumulated
postretirement benefit obligations 206 630
Net deferral (2) 26
------- ------
Net periodic postretirement benefit
costs $ 544 $1,320
======= ======
Postretirement benefits are paid by the Company as incurred. The
following summarizes the status of these benefits at December 31, 1995 and
1996:
DECEMBER 31,
---------------------
1995 1996
-------- --------
Accumulated postretirement benefit obligations:
Retirees and dependents $ 9 $ 71
Fully eligible active plan participants 3,897 1,232
Other active plan participants 3,570 8,216
Unrecognized net (loss) gain 14 (929)
Unrecognized prior service credit -- ---
------- ------
Accrued postretirement benefits $ 7,490 $8,590
======= ======
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Dictaphone Corporation
We have audited the accompanying combined statement of income and cash flows of
Dictaphone Corporation and its related affiliated Dictaphone companies
(Predecessor Company) for the 32 week period ended August 11, 1995. Our audit
also included the financial statement schedule as of and for the 32 week period
ended August 11, 1995 listed in the Index at Item 14. These financial statements
and the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the combined
financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall combined financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined results of operations and cash flows of
Dictaphone Corporation and its related affiliated Dictaphone companies
(Predecessor Company) for the 32 week period ended August 11, 1995 in conformity
with generally accepted accounting principles. Also, in our opinion, such
financial statement schedule as of and for the 32 week period ended August 11,
1995, when considered in relation to the basic combined financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
As described in Note 1, Dictaphone Corporation and its related affiliated
Dictaphone companies (Predecessor Company) were sold to Dictaphone Corporation
(Successor Company).
Deloitte & Touche LLP
Stamford, Connecticut
February 22, 1996
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Dictaphone Corporation
In our opinion, the accompanying combined statements of income and of cash flows
for the year ended December 31, 1994 present fairly, in all material respects,
the results of operations and cash flows of Dictaphone Corporation and its
affiliated Dictaphone companies for the year ended December 31, 1994, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the combined financial statements of Dictaphone
Corporation and its affiliated Dictaphone companies for any period subsequent to
December 31, 1994.
As discussed in Note 1, Pitney Bowes Inc. has announced its intent to divest of
Dictaphone Corporation and its affiliated Dictaphone companies.
As described in Note 6, the Company adopted a new accounting standard for
postemployment benefits in 1994.
Price Waterhouse LLP
Stamford, CT
May 16, 1995
<PAGE>
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
COMBINED STATEMENTS OF INCOME
(Dollars in thousands)
YEAR ENDED 32 WEEKS ENDED
DECEMBER 31, 1994 AUGUST 11, 1995
------------------ --------------
Revenue from:
Sales $216,234 $128,264
Sales to Pitney Bowes Inc. 33,469 18,575
Rentals 1,888 1,253
Support services 95,231 54,011
-------- --------
Total revenue 346,822 202,103
-------- --------
Cost and expenses:
Cost of sales 87,152 56,867
Cost of sales to Pitney Bowes Inc. 30,904 17,119
Cost of rentals 505 282
Selling, service and administrative 155,535 93,774
Research and development 12,272 7,004
-------- --------
Total cost and expenses 286,368 175,046
-------- --------
Operating profit 60,454 27,057
Interest income (1,049) (1,400)
Income before income taxes and
effect of changes in accounting 61,503 28,457
Provision for income taxes 24,936 11,398
-------- --------
Income before effect of
changes in accounting 36,567 17,059
Effect of changes in accounting (2,811) ---
-------- --------
Net income $ 33,756 $ 17,059
======== ========
See accompanying notes to combined financial statements.
<PAGE>
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
COMBINED STATEMENTS OF CASH FLOW
(Dollars in thousands)
YEAR ENDED 32 WEEKS ENDED
DECEMBER 31, 1994 AUGUST 11, 1995
------------------ --------------
Cash flows from operating activities:
Net income $ 33,756 $ 17,059
Effect of changes in accounting 2,811 ---
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 8,102 4,931
Increase (decrease) in deferred income
taxes 2,135 ---
Changes in assets and liabilities:
Accounts receivable 3,418 (1,304)
Inventories (11,410) (7,190)
Other current assets and prepayments (402) (9,945)
Accounts payable and accrued
liabilities 234 2,056
Advance billings 1,669 2,719
Other assets and other 966 (4,318)
-------- -------
Net cash provided by operating
activities 41,279 4,008
-------- -------
Cash flows from investing activities:
Net investment in fixed assets (5,944) (5,538)
Cash flows from financing activities:
Principal payment on capital lease
obligations (3,500) ---
Effect of exchange rate changes on cash 298 77
-------- -------
Net cash flow available to (financed by)
Pitney Bowes Inc. $ 32,133 $(1,453)
======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 318 $ 8
======== =======
Income taxes paid $ 22,647 $13,454
======= =======
See accompanying notes to combined financial statements.
<PAGE>
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS
(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
the "Predecessor Company". Effective August 11, 1995, the Predecessor
Company was sold to the Company.
COMBINATION. The combined financial statements include the combination
of the following entities: Dictaphone U.S. (Predecessor Company) and
Dictaphone Non-U.S. (Predecessor Company) (the latter of which consists of
Dictaphone Canada Ltd/Ltee ("Dictaphone Canada"), Dictaphone Company Ltd.
("Dictaphone U.K."), Dictaphone Deutschland GmbH ("Dictaphone Germany"),
Dictaphone Netherlands BV ("Dictaphone Netherlands") and Dictaphone
International A.G. ("Dictaphone Switzerland")). All Predecessor Company
intercompany transactions have been eliminated. See Note 5 to the combined
financial statements.
CASH AND CASH EQUIVALENTS. Cash equivalents include short-term, highly
liquid investments with a maturity of three months or less from date of
acquisition. The Company places its temporary cash and short-term
investments with financial institutions and limits the amount of credit
exposure with any one financial institution. Dividends of $11.5 million and
$12.3 million were paid to Pitney Bowes during 1994 and the thirty-two week
period ended August 11, 1995, respectively, out of the net cash flow
available to Pitney Bowes in the combined statement of cash flows.
ACCOUNTS RECEIVABLE. It is the Company's policy to review its allowance
for doubtful accounts at least quarterly. As a result of such a review
during 1994, the Company revised its allowance for doubtful accounts
reserve to reflect an improvement in over 90 day account collections. The
effect of this change in estimate was to reduce selling, service and
administrative expenses by approximately $1.2 million and increase 1994 net
income by $.7 million. Concentrations of credit risk with respect to
accounts receivable are limited due to the large number of customers and
relatively small account balances within the majority of the Company's
customer base, and their dispersion across different geographic areas.
INVENTORY VALUATION. Inventories are valued at the lower of cost or
market. Cost is primarily determined on the last-in, first-out (LIFO)
method. It is the Company's policy to review inventory for obsolescence at
least quarterly. During 1994 the Company continued a program of
consolidating field service parts inventories and disposing of identified
obsolete parts. The effect of this program and ongoing reevaluation of
inventory reserve levels was to reduce 1994 cost of sales by approximately
$2.0 million and increase 1994 net income by $1.2 million.
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPUTER SOFTWARE DEVELOPMENT COSTS. The Company capitalizes certain
software costs in accordance with the provisions of Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed". No amortization of such
capitalized costs, approximately $2.6 million as of August 11, 1995, has
been recorded as the related products have not yet been made available for
sale. Software development costs in fiscal 1994 and earlier which qualified
for capitalization were not significant.
FIXED ASSETS AND DEPRECIATION. Property, plant and equipment are stated
at cost and depreciated using the straight-line method over the useful
lives of the various assets, ranging from 3-12 years for machinery and
equipment and 35 years for buildings. Major improvements which add to
productive capacity of extended life of an asset are capitalized while
repairs and maintenance are charged to expense as incurred. Rental
equipment is depreciated on the straight-line method. Properties leased
under capital leases are amortized on a straight-line basis over the
primary lease terms. At December 31, 1994, property formerly included in
capital leases was reclassified to property, plant and equipment due to the
1994 pre-payment in full of the underlying lease obligation. Other
depreciable assets are depreciated using the straight-line method.
RENTAL ARRANGEMENTS AND ADVANCE BILLINGS. The Company rents equipment
to its customers under short-term rental agreements, generally for periods
of three to five years. Charges for maintenance contracts (support
services) are billed in advance; the related revenue is included in advance
billings and taken into income as earned.
GOODWILL. Goodwill represents the excess of cost over the value of net
assets acquired in business combinations and is amortized using the
straight-line method, principally over 40 years.
REVENUE. For dictation systems and communications recording equipment
that have technical installation requirements, the Company recognizes
revenue upon installation which is when all of its contractual obligations
have been satisfied. Revenue for all other products is recognized upon
shipment.
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, cost of
rentals or support services is currently practicable, although management
intends to refine its information system to accumulate such information.
Accordingly, cost of sales and cost of rentals exclude operating expenses
of field sales and service offices.
INCOME TAXES. The Company's U.S. taxable income is included in the
consolidated federal and certain state income tax returns of Pitney Bowes.
The Company computes its provision for taxes on a separate company basis.
The deferred tax provision is determined under the liability method.
Deferred tax assets and liabilities are recognized based on differences
between the book and tax bases of assets and liabilities using presently
enacted tax rates. The provision for income taxes is the sum of the amount
of income tax paid or payable to Pitney Bowes for the year as determined by
applying the provisions of enacted tax laws to the taxable income for that
year and the net change during the year in the Company's deferred tax
assets and liabilities.
Deferred taxes on income result principally from expenses not currently
recognized for tax purposes and the excess of tax over book depreciation.
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
It has not been necessary to provide for income taxes on $41.5 million
of cumulative undistributed earnings of subsidiaries outside the U.S. These
earnings will be either indefinitely reinvested or remitted substantially
free of additional tax. Determination of the liability that would result in
the event all of these earnings were remitted to the U.S. is not
practicable. It is estimated however, that withholding taxes on such
remittance would approximate $3.4 million.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of subsidiaries
operating outside the U.S. are translated at rates in effect at the end of
the period, and revenues and expenses are translated at average rates
during the period. The functional currency for each foreign subsidiary is
its local currency. Net deferred translation gains and losses are
accumulated in stockholders' equity.
The Company enters into foreign exchange contracts for purposes other
than trading primarily to minimize its risk of loss from fluctuations in
exchange rates on the settlement of firm and budgeted intercompany
receivables and payables arising in connection with transfers of finished
goods inventories between affiliates as well as certain intercompany loans.
Gains and losses on foreign exchange contracts entered into as hedges are
deferred and recognized as part of the cost of the underlying transaction.
Gains and losses related to changes in the value of speculative contracts
are recognized in income currently. At December 31, 1994, the Company had
approximately $2.4 million of foreign exchange contracts outstanding,
maturing through 1995, to buy or sell various currencies. Risks arise from
the possible non-performance by counterparties in meeting the terms of
their contracts and from movements in securities values and interest and
exchange rates. However, the Company does not anticipate non-performance by
the counterparties as they are composed of major international financial
institutions. Maximum risk of loss on these contracts is limited to the
amount of the difference between the spot rate at the date of the contract
delivery and the contracted rate.
Foreign currency transaction gains and (losses) were not significant
for the thirty-two week period ended August 11, 1995 or the year ended
December 31, 1994.
2. RELATED PARTY TRANSACTIONS
The Company arranges financing for certain of its products primarily
through Pitney Bowes Credit Corporation ("PBCC") in the U.S., and leasing
subsidiaries in Canada and the U.K., all wholly owned subsidiaries of
Pitney Bowes. Sales to finance subsidiaries were $13.2 million for the
thirty-two weeks ended August 11, 1995 and $31.1 million for the year ended
December 31, 1994. The Company recognizes revenue on sales to PBCC
consistent with its revenue recognition policy in Note 1. Historically,
Dictaphone purchased and sourced second-hand/used equipment from PBCC. The
inventory purchased was in turn profitably remarketed by Dictaphone. In
January 1995, the Company paid $11.2 million to PBCC for equipment that
will become available to Dictaphone, principally through 1998. This amount
is reflected in other assets on the combined balance sheet and will be
reclassified to inventory as the related equipment is received by the
Company. On a quarterly basis the Company evaluates the future
recoverability of the remaining asset.
The Company manufactures selected printed circuit boards for Pitney
Bowes at its Melbourne, Florida facility. All printed circuit boards sold
to Pitney Bowes are sold at prices substantially equivalent to those which
have been or would have been realized by third parties. Although there is
no obligation on behalf of Pitney Bowes for minimum order quantities,
prices are guaranteed at specified levels not exceeding current prices
through 1998.
<PAGE>
2. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company earns interest income from its investment in and loans to
affiliates of Pitney Bowes. Interest rates charged are reflective of market
rates which would have been realized by unrelated third parties. The
interest earned from these affiliates of Pitney Bowes was $1.1 million for
the thirty-two week period ended August 11, 1995 and the year ended
December 31, 1994.
Certain of the Company's expenses are allocated to and from Pitney
Bowes. Expenses allocated to Pitney Bowes for administrative support
services relate to corporate officers' salary, rent, usage of computer
systems, invoice processing and certain product refurbishment performed at
the Company's Melbourne facility. Rent is allocated based on actual square
footage used; computer and invoice processing is allocated based on actual
computer usage; and officers' salaries are allocated based on estimated
time dedicated to other divisions. Expenses allocated from Pitney Bowes
consist primarily of insurance program costs, which are allocated based on
loss experience and exposure. Management believes that the allocations to
and from Pitney Bowes are reasonable and reflect the actual costs incurred
to provide these services. Expenses of the Company allocated to Pitney
Bowes totaled $.8 million for the thirty two-week period ended August 11,
1995 and $2.5 million for the year ended December 31, 1994. Expenses
charged to the Company from Pitney Bowes totaled $1.2 million for the
thirty-two weeks ended August 11, 1995 and $1.8 million for the year ended
December 31, 1994. Management believes that, if the Company were to operate
as an independent entity, the Company would expect to initially incur
approximately $0.5 million per year of additional operating expenses.
However, as a result of the planned transaction, Dictaphone will no longer
provide the above mentioned administrative support services to Pitney
Bowes. Accordingly, the related credits ($.8 million for the thirty-two
week period ended August 11, 1995 and approximately $2.5 million for year
1994) which were previously offset against operating expenses will not be
generated in the future.
The Company leases space to Pitney Bowes at its Melbourne, Florida
facility. The rental rates charged to Pitney Bowes are reflective of market
rates which would have been realized by unrelated third parties. The rental
income associated with this arrangement is approximately $0.1 million per
year pursuant to a lease expiring in the year 2000.
3. TAXES ON INCOME
The provision for income taxes consists of the following:
YEAR ENDED 32 WEEKS ENDED
DECEMBER 31, 1994 AUGUST 11, 1995
----------------- ---------------
Current:
Federal $16,164 $ 7,388
State 4,357 1,992
Foreign 1,199 548
------- -------
Total 21,720 9,928
======= =======
Deferred: 3,216 1,470
------- -------
Total $24,936 $11,398
======= =======
<PAGE>
3. TAXES ON INCOME (CONTINUED)
The reconciliation between the provision for income taxes and the
provision for income taxes at the U.S. federal statutory rate is as
follows:
YEAR ENDED 32 WEEKS ENDED
DECEMBER 31, 1994 AUGUST 11, 1995
----------------- ---------------
PERCENT OF PRETAX INCOME
U.S. federal statutory rate 35.0% 35.00%
State and local income taxes 4.7% 4.55%
Other .8% 0.50%
------ -------
Effective income tax rate 40.5% 40.05%
====== =======
4. NET STOCKHOLDERS' EQUITY
The changes in net stockholders' equity were as follows:
<TABLE>
<CAPTION>
CAPITAL IN CUMULATIVE
PREFERENCE COMMON EXCESS OF RETAINED TRANSLATION
STOCK STOCK PAR VALUE EARNINGS ADJUSTMENTS
--------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ 600 $ 270 $113,777 $ 56,874 $3,317
Net income --- --- --- 33,756 ---
Dividends paid to Pitney Bowes Inc. --- --- --- (11,460) ---
Translation adjustments --- --- --- --- 967
------- ------ ------- -------- ------
Balance, December 31, 1994 600 270 113,777 79,170 4,284
Net income --- --- --- 17,059 ---
Dividends paid to Pitney Bowes Inc. --- --- --- (12,255) ---
Stock transfer of Dictaphone Canada --- 68 130 --- ---
Translation adjustments --- --- --- --- 1,825
------- ------ ------- -------- ------
Balance, August 11, 1995 $ 600 $ 338 $113,907 $ 83,974 $6,109
======= ====== ======== ======== ======
</TABLE>
5. RETIREMENT PLANS
The Company has several defined benefit and defined contribution
pension plans covering substantially all employees worldwide. Benefits are
primarily based on employees' compensation and years of service. Company
contributions are determined based on the funding requirements of U.S.
federal and other governmental laws and regulations.
<PAGE>
5. RETIREMENT PLANS (CONTINUED)
Total pension expense was $1.3 million for the year ended December 31,
1994 and $.5 million for the thirty-two week period ended August 11, 1995.
Net pension expense for defined benefit plans for the year ended December
31, 1994 and thirty-two week period ending August 11, 1995 included the
following components:
UNITED STATES
---------------------------
32 WEEKS ENDED
1994 AUGUST 11, 1995
--------- ---------------
Service cost -- benefits earned during period $ 2,019 $ 1,005
Interest cost on projected benefit obligations 4,071 2,423
Actual return on assets 504 (6,168)
Net (deferral) and amortization (5,385) 3,219
------- --------
Net periodic defined benefit pension expense $ 1,209 $ 479
======= ========
FOREIGN
---------------------------
32 WEEKS ENDED
1994 AUGUST 11, 1995
--------- ---------------
Service cost -- benefits earned during period $ 119 $ 80
Interest cost on projected benefit obligations 659 417
Actual return on assets 608 (553)
Net (deferral) and amortization (1,699) (154)
------ ------
Net periodic defined benefit pension (income) $ (313) $ (210)
======= ======
<PAGE>
5. RETIREMENT PLANS (CONTINUED)
The funded status at December 31, 1994 and August 11, 1995 for the
Company's defined benefit plans was:
UNITED STATES
---------------------------
32 WEEKS ENDED
1994 AUGUST 11, 1995
--------- ---------------
Actuarial present value of:
Vested benefits $40,891 $42,212
Accumulated benefit obligations $43,271 $45,623
Projected benefit obligations $49,178 $51,467
Plan assets at fair value, primarily stocks
and bonds, adjusted by: $50,089 $55,615
Unrecognized net loss (gain) (21) (2,835)
Unrecognized net asset (2,028) (1,832)
Unamortized prior service costs from
plan amendments 1,155 1,080
------- -------
49,195 52,028
------- -------
Net pension asset $ (17) $ (561)
======= =======
Assumptions for defined benefit plans*:
Discount rate 8.75% 8.75%
Rate of increase in future compensation levels 5.75% 5.75%
Expected long-term rate of return on plan assets 9.50% 9.50%
FOREIGN
---------------------------
32 WEEKS ENDED
1994 AUGUST 11, 1995
--------- ---------------
Actuarial present value of:
Vested benefits $ 7,064 $ 8,203
------- -------
Accumulated benefit obligations $ 7,064 $ 8,203
------- -------
Projected benefit obligations $ 8,125 $ 9,297
------- -------
Plan assets at fair value, primarily stocks
and bonds, adjusted by: $10,200 $11,473
Unrecognized net loss (gain) 1,364 1,691
Unrecognized net asset (1,537) (1,353)
Unamortized prior service costs from
plan amendments --- ---
------- -------
10,027 11,811
------- -------
Net pension asset $(1,902) $(2,514)
======= =======
Assumptions for defined benefit plans*:
Discount rate 8.5%-9.0% 7.75%-8.25%
Rate of increase in future compensation
levels 6.0% 5.5%-6.0%
Expected long-term rate of return
on plan assets 9.0-10.0% 9.0%-9.5%
- ----------
* Pension costs are determined using assumptions as of the beginning of
the year while the funded status of the plans is determined using
assumptions as of the end of the year.
<PAGE>
6. NONPENSION POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company provides certain postretirement health and life insurance
benefits for employees. Full-time employees electing retirement who have
attained age 60 and have at least ten years service are entitled to
postretirement healthcare as provided to active employees on the date of
retirement. Life insurance coverage upon retirement for employees having
attained age 60 with at least 10 years of service is provided at 25% of
the Company provided amount in effect on the date of retirement, to a
maximum of $10,000 and a minimum of $2,500. In the first quarter of 1993,
the Company announced certain changes to its health care plans, including
plan cost maximums, which should significantly reduce the ongoing
incremental impact of FAS 106 on future earnings.
The Company's total net nonpension postretirement benefit costs for the
year ended December 31, 1994 and thirty-two week period ended August 11,
1995 consisted of the following components:
DECEMBER 31, AUGUST 11
1994 1995
------------ -----------
Service cost-benefits earned during the
period $ 600 $ 334
Interest cost on accumulated postretirement
benefit obligations 1,045 529
Net deferral (905) (729)
------ ------
Net periodic postretirement benefit costs $ 740 $ 134
====== ======
The Company's nonpension postretirement benefit plans are not funded.
The status of the plans was as follows:
DECEMBER 31, AUGUST 11
1994 1995
------------ -----------
Accumulated postretirement benefit obligations:
Retirees and dependents $ 8,425 $ 7,924
Fully eligible active plan participants 2,533 929
Other active plan participants 2,214 2,285
Unrecognized net (loss) gain 1,655 3,684
Unrecognized prior service credit 3,407 2,881
------- -------
Net periodic postretirement benefit costs $18,234 $17,703
======= =======
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligations was 11.75% in 1994. This was
assumed to gradually decline to 5.75% by the year 2000 and remaining at
that level thereafter. A one-percentage-point increase in the assumed
health care cost trend rate would increase the year-end accumulated
postretirement benefit obligation by $1.5 million as of December 31, 1994
and the net periodic postretirement health care cost by $0.2 million in
1994 and $0.1 million for the thirty-two week period ended August 11, 1995.
The assumed weighted average discount rate used in determining the
accumulated postretirement benefit obligations was 8.75% for the year ended
December 31, 1994 and for the thirty-two week period ended August 11, 1995.
<PAGE>
6. NONPENSION POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
The Company adopted Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits" ("SFAS 112") as of
January 1, 1994. SFAS 112 required that postemployment benefits be
recognized on the accrual basis of accounting. Postemployment benefits
include primarily company provided medical benefits to disabled employees
and company provided life insurance
The effect of adopting SFAS 112 was a one-time non-cash, after-tax
charge of $2.8 million (net of approximately $1.9 million of income taxes).
Application of this new standard had no significant effect on the Company's
expense for 1994 and the thirty-two week period ended August 11, 1995.
7. COMMITMENTS AND CONTINGENCIES
On February 14, 1995, Pitney Bowes Inc. filed a complaint against
Sudbury Systems, Inc. in the United States District court for the District
of Connecticut alleging intentional and wrongful interference with Pitney
Bowes Inc.'s plans to sell Dictaphone. The complaint seeks damages and a
declaratory judgment relating to the validity of Sudbury Systems Inc.'s
claim and the alleged infringement by Dictaphone. On February 14, 1995,
Sudbury Systems, Inc. filed a complaint against Dictaphone in the United
States District Court for the District of Massachusetts alleging patent
infringement and seeking preliminary and permanent injunctive relief and
treble damages. The complaint filed by Sudbury did not quantify the amount
of damages sought. The litigation is still in preliminary stages and the
Company cannot currently make a reasonable estimate of the amount of
damages that will be sought by Sudbury. Management believes it has
meritorious defenses to the complaint against Dictaphone. 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 Inc. has agreed to defend this action and to indemnify
Dictaphone for any liabilities arising from such litigation. Moreover,
Pitney Bowes Inc. believes it will prevail in its actions against Sudbury
Systems, Inc.
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 alleged 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
sought 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. Discovery only recently
commenced and the Company is not in a position to fully assess the expected
outcome of this litigation, but management of 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, the Company does not
believe this complaint is likely to have a material adverse effect on the
Company's financial condition and results of operations.
The Company is subject to federal, state and local laws and regulations
concerning the environment, and is currently participating in
administrative proceedings as a participant in a group of potentially
responsible parties in connection with two third party disposal sites.
These proceedings are at a preliminary stage, for which it is impossible to
reasonably estimate the potential cost of remediation, the timing and
extent of remedial actions which may be required by governmental
authorities, and the amount of 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 cleanup of the
site and the Company believes that it has no continuing material liability
for any later phases of the cleanup. Consequently, the Company 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 Dictaphone in connection with retained environmental
liabilities and for breaches of the environmental representations and
warranties, subject to certain limitations.
<PAGE>
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 combined
financial position or results of operations.
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Dictaphone does not believe that the Sudbury and Failsafe litigations
and the environmental matters described above in the aggregate, create a
material loss exposure to the Company's financial position and results of
operations.
8. LEASES
The Company leases certain factory and office facilities under lease
agreements extending from three to twenty-five years. In addition to
factory and office facilities leased, the Company leases computer and
information processing equipment under lease agreements extending from
three to five years.
Future minimum lease payments for operating leases as of December 31,
1994 are as follows:
OPERATING
LEASES
---------
Years ending December 31:
1995 $ 5,018
1996 2,696
1997 1,639
1998 763
1999 534
Later years 3,729
-------
Total minimum lease payments $14,379
=======
Rental expense under operating leases was $6.3 million for the year
ended December 31, 1994 and $3.6 million for the thirty-two week period
ended August 11, 1995.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
CASH, CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE. The
carrying amounts approximate fair value because of the short maturity of
these instruments.
FOREIGN CURRENCY EXCHANGE CONTRACTS. The fair value of foreign currency
exchange contracts is obtained from dealer quotes. These values represent
the estimated amount the Company would receive or pay to terminate
agreements taking into consideration current interest rates, the credit
worthiness of the counterparties and current foreign currency exchange
rates. The fair value of such contracts was not significant at December 31,
1994.
<PAGE>
10. SUPPLEMENTAL COMBINING FINANCIAL STATEMENTS AND SEGMENT INFORMATION
The following are the supplemental combining statements of income and
combining statements of cash flows for the year ended December 31, 1994 and
thirty-two week period ended August 11, 1995.
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
SUPPLEMENTAL COMBINING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
DICTAPHONE DICTAPHONE COMBINING
U.S. NON-U.S. ADJUSTMENTS COMBINED
---------- ---------- ----------- --------
Revenue from:
Sales and rentals $224,324 $37,956 $(10,689) $251,591
Support services 82,956 12,275 --- 95,231
-------- ------- -------- --------
Total revenue 307,280 50,231 (10,689) 346,822
-------- ------- -------- --------
Cost and expenses:
Cost of sales and rentals 109,677 19,681 (10,797) 118,561
Selling, service and
administrative 130,684 24,851 --- 155,535
Research and development 12,272 --- --- 12,272
Interest (income) expense, net 289 (1,338) --- (1,049)
-------- ------- -------- --------
Total costs and expenses 252,922 43,194 (10,797) 285,319
-------- ------- -------- --------
Income before income taxes
and effect of a change
in accounting 54,358 7,037 108 61,503
Provision for income taxes 22,344 2,533 59 24,936
-------- ------- -------- --------
Income before effect of a change
in accounting 32,014 4,504 49 36,567
Effect of a change in accounting (2,811) --- --- (2,811)
-------- ------- -------- --------
Net income $ 29,203 $ 4,504 $ 49 $ 33,756
======== ======= ======== ========
<PAGE>
10. SUPPLEMENTAL COMBINING FINANCIAL STATEMENTS AND SEGMENT INFORMATION
(CONTINUED)
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE COMBINING
U.S. NON-U.S. ADJUSTMENTS COMBINED
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 29,203 $ 4,504 $ 49 $ 33,756
Effect of a change in accounting 2,811 --- --- 2,811
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6,868 1,234 --- 8,102
Increase (decrease) in deferred income
taxes 2,216 (81) --- 2,135
Change in assets and liabilities:
Accounts receivable 3,997 (177) (402) 3,418
Inventories (8,799) (2,503) (108) (11,410)
Other current assets (913) 603 (92) (402)
Accounts payable and accrued
liabilities (471) 153 552 234
Advance billings 1,656 13 --- 1,669
Other assets and other 1,067 (102) 1 966
---------- ------- ----- --------
Net cash provided by operating activities $ 37,635 $ 3,644 $ --- $ 41,279
---------- ------- ----- --------
Cash flows from investing activities:
Net investment in fixed assets (4,499) (1,445) --- (5,944)
---------- ------- ----- --------
Cash flows from financing activities:
Principal payment on capital lease
obligations (3,500) --- --- (3,500)
---------- ------- ----- --------
Effect of exchange rate changes on cash --- 298 --- 298
---------- ------- ----- --------
Net cash flow available to Pitney Bowes
Inc. $ 29,636 $ 2,497 --- $ 32,133
========== ======= ===== ========
</TABLE>
<PAGE>
10. SUPPLEMENTAL COMBINING FINANCIAL STATEMENTS AND SEGMENT INFORMATION
(CONTINUED)
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
SUPPLEMENTAL COMBINING STATEMENT OF INCOME
32 WEEKS ENDED
AUGUST 11, 1995
DICTAPHONE DICTAPHONE COMBINING
U.S. NON-U.S. ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
Revenue from:
Sales and rentals $130,013 $ 23,275 $ (5,196) $148,092
Support services 45,074 8,937 --- 54,011
-------- -------- -------- --------
Total revenue 175,087 32,212 (5,196) 202,103
-------- -------- -------- --------
Costs and expenses:
Cost of sales and rentals 67,150 12,282 (5,164) 74,268
Selling, service and
administrative 77,046 16,728 --- 93,774
Research and development 7,004 --- --- 7,004
Interest (income) expense-net (24) (1,376) --- (1,400)
-------- -------- -------- --------
Total costs and expenses 151,176 27,634 (5,164) 173,646
-------- -------- -------- --------
Income before income taxes 23,911 4,578 (32) 28,457
Provision (benefit) for income
taxes 9,921 1,514 (37) 11,398
-------- -------- -------- --------
Net income $ 13,990 $ 3,064 $ 5 $ 17,059
======== ======== ======== ========
<PAGE>
10. SUPPLEMENTAL COMBINING FINANCIAL STATEMENTS AND SEGMENT INFORMATION
(CONTINUED)
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOW
32 WEEKS ENDED
AUGUST 11, 1995
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE COMBINING
U.S. NON-U.S. ADJUSTMENTS COMBINED
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $13,990 $ 3,064 $ 5 $ 17,059
Adjustments to reconcile
income to cash provided by
operating activities:
Depreciation and amortization 4,069 862 --- 4,931
Decrease in deferred income taxes --- --- --- ---
Change in assets and liabilities:
Accounts receivable (1,750) 303 143 (1,304)
Inventories (8,767) 1,545 32 (7,190)
Other current assets (9,431) (457) (57) (9,945)
Accounts payable and
accrued liabilities 1,531 648 (123) 2,056
Advance billings 2,577 142 --- 2,719
Other assets and other (4,016) (302) --- (4,318)
------- ------- ------ --------
Cash provided by operating activities (1,797) 5,805 --- 4,008
------- ------- ------ --------
Cash flows from investing activities:
Net investment in fixed assets (4,740) (798) --- (5,538)
------- ------- ------ --------
Effect of exchange rate changes on cash --- 77 --- 77
------- ------- ------ --------
Cash flow available to (financed by)
Pitney Bowes Inc. $(6,537) $ 5,084 $ --- $ (1,453)
======= ======= ====== ========
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
THE FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Dictaphone Corporation
Our audit of the combined financial statements of Dictaphone Corporation and its
affiliated Dictaphone companies referred to in our report dated May 16, 1995
appearing on page 47 of this Annual Report on Form 10-K also included an audit
of the Financial Statement Schedule of Dictaphone Corporation and its affiliated
Dictaphone companies for the year ended December 31, 1994 listed in Item 14(A)
of this Form 10-K. In our opinion, the Financial Statement Schedule of
Dictaphone Corporation and its affiliated Dictaphone companies presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related combined financial statements.
Price Waterhouse LLP
Stamford, CT
May 16, 1995
<PAGE>
SCHEDULE II
DICTAPHONE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ---------- ----------
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts $1,462 $1,599 $1,722 $1,339
20 WEEKS ENDED DECEMBER 31, 1995
Allowance for doubtful accounts 1,095 785 418 1,462
32 WEEKS ENDED AUGUST 11, 1995
Allowance for doubtful accounts 1,049 618 572 1,095
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts 2,436 (60) 1,327 1,049
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
persons who are members of the Board of Directors or were executive officers of
the Company as of March 15, 1997.
NAME AGE POSITION
John H. Duerden..................... 56 Chairman, Chief Executive Officer
and President
Albert J. Fitzgibbons, III.......... 51 Director
Emil F. Jachmann.................... 50 Director
Stephen M. McLean................... 39 Director
Alexis P. Michas.................... 39 Director
Scott M. Shaw....................... 34 Director
Peter P. Tong....................... 55 Director
Kim H. Carpenter.................... 39 Vice President, Human Resources
Ronald A. Elwell.................... 36 Vice President, Marketing and
Product Development
Daniel P. Hart...................... 38 Vice President, General Counsel
& Secretary
Thomas C. Hodge..................... 51 Vice President, Operations
Manufacturing
Robert G. Schwager.................. 43 Vice President, Sales Operations,
North America
Joseph D. Skrzypczak................ 41 Vice President, Chief Financial
Officer and Director
Robert E. Trimper................... 58 Vice President, International
Operations
The business experience of each of the directors and executive officers
during the past five years is as follows:
JOHN H. DUERDEN has served as Chairman, Chief Executive Officer and
President of the Company since August 1995. Mr. Duerden served as Joint
President and Chief Operations Officer of the Reebok Brands division of Reebok
International Limited, with responsibility for global sales, finance, operations
and production from October 1994 to February 1995. He was a Director of Reebok
International Limited from June 1991 until April 1995. Mr. Duerden was
previously President of Worldwide Operations for Reebok, from January 1994 to
September 1994 and, before that, President of the Reebok International
Operations group of the Reebok Brands division from October 1992 until January
1994. Prior to that, Mr. Duerden was President and Chief Executive Officer of
the Reebok Brands division from February 1990 to September 1992 and President of
Reebok International Operations from October 1988 to February 1990. Prior to
joining Reebok, Mr. Duerden was employed by Xerox Corporation for 20 years in a
variety of corporate and international management positions. In February 1997,
Mr. Duerden became a limited partner of Stonington Partners, L.P. ("SPLP"). Mr.
Duerden is a director of Sunglass Hut International, Inc.
<PAGE>
ALBERT J. FITZGIBBONS, III has served as a Director of the Company since
August 1995. Mr. Fitzgibbons is a Partner and a Director of Stonington Partners,
Inc. ("Stonington Partners"), a position that he has held since 1993 and a
Partner and a Director of Stonington Partners, Inc. II ("Stonington II"), a
position he has held since 1994. Mr. Fitzgibbons has also been a Director of
Merrill Lynch Capital Partners, Inc. ("MLCP"), a private investment firm
associated with Merrill Lynch & Co., since 1988. He was a Partner of MLCP from
1993 to 1994 and Executive Vice President of MLCP from 1988 to 1993. Mr.
Fitzgibbons was also a Managing Director of the Investment Banking Division of
Merrill Lynch & Co. from 1978 to July 1994. Mr. Fitzgibbons is also a Director
of Borg-Warner Automotive, Inc., Borg-Warner Security Corporation,
Rykoff-Sexton, Inc., United Artists Theater Circuit, Inc. and a privately held
company.
EMIL F. JACHMANN has served as a Director of the Company since August 1995.
Mr. Jachmann is President and Chief Executive Officer of Zen Research Inc.,
which develops and markets high performance optical disc drive technology,
primarily advanced detection optics and chip sets. He has held these positions
since January 1995. Mr. Jachmann was President of EFJ Associates from June 1994
to January 1995. From June 1991 until June 1994, he was President of the
Shipping and Weighing Systems Division of Pitney Bowes. Mr. Jachmann was also
President of Dictaphone Canada Ltd. from June 1990 to June 1991.
STEPHEN M. MCLEAN has served as a Director of the Company since May 1996.
Mr. McLean is a Partner and a Director of Stonington Partners, a position that
he has held since 1993. Mr. McLean is also a Partner and a Director of
Stonington II, a position he has held since 1994. Mr. McLean has also been a
member of the Board of Directors of MLCP since 1987. He was a Partner of MLCP
from 1993 to July 1994 and a Senior Vice President of MLCP from 1987 to 1993.
Mr.McLean was also a Managing Director of the Investment Banking Division of
Merrill Lynch, Pierce, Fenner & Smith Incorporated from 1987 to 1994. Mr. McLean
is a Director of CMI Industries, Inc., Packard BioScience Company, Pathmark
Stores, Inc. and Supermarkets General Holdings Corporation and several privately
held companies.
ALEXIS P. MICHAS has served as Director of the Company since August 1995.
Mr. Michas is a Partner and a Director of Stonington Partners, a position that
he has held since 1993. Mr. Michas is also a Partner and a Director of
Stonington II, a position he has held since 1994. Mr. Michas has also been a
Director of MLCP since 1989. He was a Partner of MLCP from 1993 to 1994 and
Senior Vice President of MLCP from 1989 to 1993. Mr. Michas was also a Managing
Director of the Investment Banking Division of Merrill Lynch & Co. from 1991 to
July 1994 and a Director in the Investment Banking Division of Merrill Lynch &
Co. from 1990 to 1991. Mr. Michas is also a Director of Blue Bird Corporation,
Borg-Warner Automotive, Inc., Borg-Warner Security Corporation, Goss Graphics
Systems, Inc., Pathmark Stores, Inc., Packard BioScience Company, Supermarkets
General Holdings Corp. and several privately held companies.
SCOTT M. SHAW has served as a Director of the Company since August 1995.
Mr. Shaw is a Principal of Stonington Partners, a position that he has held
since 1993. Mr. Shaw was an Associate of MLCP from 1991 to July 1994 and an
Analyst of MLCP from 1986 to 1989. Mr. Shaw was also a Vice President of the
Investment Banking Division of Merrill Lynch & Co. from January to July 1994, an
Associate of the Investment Banking Division of Merrill Lynch & Co. from 1991 to
1994, and an Analyst of the Investment Banking Division of Merrill Lynch & Co.
from 1986 to 1989. Mr. Shaw is also a Director of United Artists Theater
Circuit, Inc.
PETER P. TONG has served as a Director of the Company since February 1997.
Mr. Tong is a Private Investor. From January 1996 to May 1996, Mr. Tong served
as the Co-President of Marquette Electronics, Inc., a manufacturer of medical
equipment. From 1991 to 1996, he served as President, Chairman and Chief
Executive Officer of E for M Corporation. Mr. Tong is also a Director of
Marquette Electronics, Inc. and is also on the Boards of Directors of several
privately held companies.
KIM H. CARPENTER has served as the Vice President, Human Resources for
Dictaphone Corporation since October 1991. Ms. Carpenter joined Pitney Bowes in
March 1984, where she held positions of increasing responsibility in the Human
Resources function within Pitney Bowes Mailing Systems in employee relations,
Pitney Bowes Corporate in Human Resources Planning and Development, and the
Copier Systems Division with full human resources support accountability, first
as the Director of Human Resources in July 1989 and then as Vice President of
Human Resources in January 1991.
<PAGE>
RONALD A. ELWELL has served as Vice President, Marketing and Product
Development for the Company since April 1996 and served as Vice President,
Product Development and Engineering for Dictaphone from January 1996 to April
1996. Mr. Elwell joined Dictaphone Corporation in December 1983. Since that time
he has held various positions of responsibility with Dictaphone. Mr. Elwell
served as District Manager in Harrisburg, Pennsylvania from 1988 to 1992 and
served as General Manager of Dictaphone Canada from 1992 to November 1995. From
November 1995 to January 1996, he was a Vice President in the Company's
Marketing department.
DANIEL P. HART has served as Vice President, General Counsel and Secretary
of the Company since November 1995. From 1993 to 1994, Mr. Hart served as
General Counsel of Brooke Group Ltd. and certain of its affiliates and from 1988
to 1993 served as Associate General Counsel of such companies. Mr. Hart was a
consultant and private investor from 1994 to 1995.
THOMAS C. HODGE has served as Vice President, Operations Manufacturing for
the Company's facility in Melbourne, Florida since June 1989. Prior to June
1989, he held various positions throughout the manufacturing facility. Mr. Hodge
joined Dictaphone Corporation in October 1978, as the Production Control
Manager.
ROBERT G. SCHWAGER has served as Vice President, Sales Operations, North
America since October 1995 and served as Vice President, Sales for
Communications Recording Systems from February 1994 to October 1995. Mr.
Schwager joined Dictaphone Corporation in 1978 as a Sales Representative in the
Milwaukee District Office. He progressed through various sales management
positions to that of Regional Sales Vice President in 1988. In 1989, Mr.
Schwager joined the Company's headquarters staff as the Vice President,
Marketing. Mr. Schwager was also responsible for the Company's international
operations from September 1992 to March 1996.
JOSEPH D. SKRZYPCZAK has been a Director of the Company since August 1995.
Mr. Skrzypczak has served as Vice President and Chief Financial Officer for
Dictaphone Corporation since May 1994. While serving in such capacity at Pitney
Bowes, his responsibilities covered Pitney Bowes Office Systems, which included
the Company, Copier Systems, and Facsimile Systems, in which capacity he was
directly responsible for all financial and administrative activities of the
Company. In May 1989, Mr. Skrzypczak was appointed Vice President, Finance,
Facsimile Systems, from which time his role expanded to include finance
responsibilities for Copier Systems and Dictaphone. Mr. Skrzypczak joined Pitney
Bowes in 1981 and held various management positions. Prior to joining Pitney
Bowes, Mr. Skrzypczak worked for Price Waterhouse. He is a certified public
accountant.
ROBERT E. TRIMPER has been the Company's Vice President, International
Operations since March 1996. From 1991 to 1996, Mr. Trimper served as President
of Middle East and Africa operations for Xerox Corporation. Mr. Trimper served
in various other management capacities within Xerox Corporation prior to 1991.
Messrs. Fitzgibbons, Michas and Shaw serve as members of the Audit
Committee and the Compensation Committee (the "Compensation Committee"). Each of
Messrs. Fitzgibbons, Michas, McLean and Shaw is an employee of Stonington
Partners and serves on the Board of Directors of the Company as a representative
of Stonington Capital Appreciation 1994 Fund, L.P. ("Stonington").
The Company's directors are elected to serve until their successors have
been elected and qualified. Other than Mr. Jachmann who received a $25,000 fee,
in 1996 no member of the Board received any retainder or meeting fees. All
members of the Board of Directors are reimbursed for out-of-pocket expenses
incurred in connection with meeting attendance. Each officer of the Company
serves at the pleasure of the Board of Directors, subject the terms of any
existing employment agreement.
There are no family relationships among any of the directors or executive
officers of the Company.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to each person who
served as the Company's President and Chief Executive Officer during 1996 and
the four other most highly compensated executive officers of the Company, whose
aggregate cash and cash equivalent compensation exceeded $100,000 (the "named
executives") during 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------- ----------------------------
AWARDS PAYOUTS
----------- --------------
SECURITIES LONG-TERM
NAME A OTHER ANNUAL UNDERLYING INCENTIVE PLAN ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS ($) COMPENSATION($) OPTIONS (#) PAYOUTS ($) COMPENSATION ($)
- ------------------ ---- --------- --------- --------------- ----------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
John H. Duerden, 1996 $660,000 $660,00 $108,407(3) -- -- $142,024(4)
Chairman, President 1995 373,154 327,250(2) 100,390(3) 210,000 -- 33
and Chief Executive
Officer(1)
Robert G. Schwager, 1996 184,377 106,933 --(3) -- -- 100(4)
VP Sales Operations North 1995 168,486 106,811(2) 1,940(3) 45,000(5) -- 100
America 1994 154,700 82,500 -- 1,000(6) -- 100
Robert Trimper, (7) 1996 188,666 141,918(8) --(3) 30,000 -- 334(4)
VP International Operations
Joseph D. Skrzypczak, 1996 167,607 140,791 11,828(3) -- -- 15,365(4)
VP, Chief Financia1 1995 149,317 118,864(2) 20,873(3) 45,000(5) -- 26,080
Officer 1994 135,553 82,600 -- 1,200(6) -- 1,699
Karen M. Garrison,(9) 1996 157,154 100,116 15,292(3) -- -- 19,305(4)
VP Customer Service 1995 124,592 87,570(2) 22,645(3) 45,000(5) -- 99,734
1994 103,769 56,100 -- 1,000(6) -- 878
</TABLE>
(1) Mr. Duerden became Chairman, Chief Executive Officer and President of the
Company on August 11, 1995.
(2) Includes bonus amounts paid by Pitney Bowes in the following amounts: Mr.
Duerden -- $0; Mr. Schwager -- $85,300; Mr. Skrzypczak -- $49,500; and Ms.
Garrison -- $58,400.
(3) The amounts reported in this column for 1996 for each of Messrs. Duerden
and Skrzypczak and Ms. Garrison and the amounts reported in this column for
1995 for each of Messrs Schwager and Skrzypczak and Ms. Garrison reflects
tax gross ups made by the Company. The amounts reported in this column for
Mr. Duerden in 1995 includes $80,084 in relocation expenses and $20,306 of
tax gross ups. The aggregate value of the perquisites and other personal
benefits received by each of Messrs. Duerden, Schwager, Trimper, Skrzypczak
and Ms. Garrison in 1996 and each of Messrs. Schwager and Skrzypczak and
Ms. Garrison in 1995 have not been reflected because the amount was below
the Securities and Exchange Commission's (the "Commission") threshold for
disclosure (i.e., the lesser of $50,000 or 10% of the total of annual
salary and bonus for such officer).
(4) The compensation reflected in this column for 1996 is comprised of Company
contributions to the Company's Savings with Extra Earning Potential Plan,
supplemental contributions under supplemental
<PAGE>
benefits arrangements and Company paid life insurance premiums.
Specifically, these amounts for fiscal 1996 were $0, $121,226 and $20,798
for Mr. Duerden; $0, $0 and $100 for Mr. Schwager; $0, $0 and $334 for Mr.
Trimper; $1,209, $14,056 and $100 for Mr. Skrzypczak; and $925, $18,280 and
$100 for Ms. Garrison.
(5) The number of options granted in 1995 varies from the numbers presented in
the Company's Annual Report on Form 10-K for 1995 as a result of the
forfeiture after March 31, 1996 of certain of the options which had been
granted to the name executives under the Pitney Bowes Stock Option Plan.
(6) These options were granted in fiscal 1994 to the named executives pursuant
to the Pitney Bowes Stock Option Plan. Options vest automatically over a
three-year period in one-third increments and are subject to forfeiture. No
options were granted by the Company in 1994 with respect to its Common
Stock.
(7) Mr. Trimper became an executive officer of the Company in March 1996.
(8) Includes a special one-time sign on bonus in the amount of $50,000.
(9) Ms. Garrison resigned from the Company on January 31, 1997.
STOCK OPTION GRANTS
The following table sets forth information regarding grants of options to
purchase Common Stock during the fiscal year ended December 31, 1996 to each of
the named executives. No stock appreciation rights were granted during 1996.
OPTION GRANTS IN 1996
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE ($/ EXPIRATION --------------------------
NAME GRANTED(#) 1996(1) HARE)(2) DATE (5%) (10%)
- ---- ---------- ------------ --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
John H. Duerden.... -- -- -- -- -- --
Robert G. Schwager. -- -- -- -- -- --
Robert Trimper..... 30,000 34% $10.00 03/01/05 $488,688 $778,123
Joseph D. Skrzypczak -- -- -- -- -- --
Karen Garrison..... -- -- -- -- -- --
</TABLE>
(1) The Company granted options to purchase a total of 89,000 shares of Common
Stock in 1996.
(2) Each of the Company's stock options were granted at the fair market value
on the date of grant. The fair market value of the Common Stock on December
31, 1996 was $10.00 (as determined by the Company's Board of Directors).
(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on the
Common Stock over the term of the options. These assumptions are based on
rules promulgated by the Commission and do not reflect the Company's
estimate of future stock price
<PAGE>
appreciation. Actual gains, if any, on the stock option exercises and
common stock holdings are dependent on the timing of such exercise and the
future performance of the underlying common stock. There can be no
assurance that the rates of appreciation assumed in this table can be
achieved or that the amounts reflected will be received by the option
holder.
(4) One-half of the options granted vest automatically over a five year period
and, of the other half, 10% vested on April 15, 1996 and the remaining will
become eligible for vesting as to an additional 20% on each of April 15,
1997, 1998, 1999 and 2000, if the Company attains certain predetermined
financial performance goals.
OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table sets forth information regarding the exercise of
stock options during fiscal 1996 and the number and year end value of
unexercised options held at December 31, 1996 by each of the named executives.
No stock appreciation rights were exercised by the named executives during
fiscal 1996.
AGGREGATE OPTION EXERCISES IN FISCAL 1996
AND FISCAL 1996 OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY(1)
SHARES UNDERLYING UNEXERCISED (OPTIONS)
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END AT(FISCAL YEAR-END ($)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------ ------------ -------------------------- -------------------------
<S> <C> <C> <C> <C>
John H. Duerden....... -- -- 27,300/182,700(2) $0/$0(5)
Robert G. Schwager.... -- -- 3,616/344(3) 70,175/5,031(6)
5,850/39,150(2) 0/0(5)
Robert E. Trimper..... -- -- 2,400/27,600(2) 0/0(5)
Joseph D. Skrzypczak.. 2,150 $32,759 1,600/400(3) 21,950/6,025(6)
5,850/39,150(2) 0/0(5)
Karen M. Garrison..... -- -- 3,066/334(3) 59,591/5,031(6)
5,850/39,150(2)(4) 0/0(5)
</TABLE>
(1) Options are "in-the-money" if the fair market value of the underlying
securities exceeds the exercise price of the options.
(2) Represents options granted under the Company's Management Stock Option
Plan.
(3) Represents options granted under the Pitney Bowes Stock Option Plan during
the period 1985 through 1996. The numbers have been adjusted to give effect
to the 1986 and 1992 two-for-one stock splits of Pitney Bowes stock.
(4) In connection with her resignation on January 31, 1997, all of Ms.
Garrison's options to purchase Common Stock were forfeited and cancelled.
(5) The amounts set forth represent the difference between $10.00 per share,
the fair market value of the Common Stock issuable upon exercise of options
at December 31, 1996 (as determined by the Board of Directors), and the
exercise price of the option, multiplied by the applicable number of
options.
<PAGE>
(6) The amounts set forth represent the difference between $54.75 per share,
the fair market value of Pitney Bowes common stock issuable upon exercise
of options at December 31, 1996 and the exercise price of the Pitney Bowes
option, multiplied by the applicable number of options.
PENSION PLANS
The Company currently maintains a non-contributory pension plan for all
employees (the "Pension Plan"). As of December 31, 1996, the estimated pension
benefits payable to the named executives are as set forth below. The Pension
Plan provides monthly benefits at age 65 equal to the sum of (i) for service
before January 1, 1988, 0.75% of the participant's average annual earnings from
1983 through 1987 up to $18,000 plus 1.25% of the participant's average annual
earnings from 1983 to 1987 above $18,000 multiplied by the participant's years
of credited service before January 1, 1988 and (ii) for each year of service
after January 1, 1988, 1% of the participant's annual earnings for each year up
to the Social Security Wage Base (as defined) for that year plus 1.5% of annual
earnings above the Social Security Wage Base for that year. Annual earnings
includes overtime pay, incentive pay and bonuses, but excludes reimbursements or
other expense allowances, fringe benefits or moving expenses. Employees' pension
rights vest after five years of service. Benefits are also available under the
Pension Plan upon early or deferred retirement. The projected annual benefit
under the qualified pension plan at age 65 assuming no future increases in pay,
the social security wage base and Internal Revenue Code (the "Code") Section
401(a)(17) limits and with no provision for the Supplemental Executive
Retirement Plan ("SERP") for the named executives is as follows: Mr. Duerden -
$21,302; Mr. Schwager - $70,884; Mr. Trimper - $15,492; Mr. Skrzypczak -
$51,288; and Ms. Garrison - $47,876. The projected annual benefit under the
qualified pension plan at age 65 assuming a 3% future increase in pay, the
Social Security Wage Base and Code Section 401(a)(17) limits and with no
provision for the SERP for the named executives is as follows: Mr. Duerden
- -$24,485; Mr. Schwager - $88,920; Mr. Trimper - $17,012; Mr. Skrzypczak -
$73,346; and Ms. Garrison - $58,028.
The following table sets forth the estimated annual benefits, based on
the indicated credited years of service and the indicated average compensation
used in calculating benefits, assuming a normal retirement at age 65, no future
increases in pay, the Social Security Wage Base and Code Section 401(a)(17)
limits and with no provision for the SERP implemented by the Company.
RETIREMENT PLAN TABLE
YEARS OF SERVICE
-------------------------------------------------
AVERAGE ANNUAL COMPENSATION 15 20 25 30 35
- ---------------------------- ---- ---- ---- ---- ----
$ 125,000................. $23,422 $31,230 $39,038 $46,846 $54,654
150,000................. 29,047 38,730 48,413 58,096 67,779
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company adopted the SERP for certain executive officers during the
first quarter of 1997 with benefits being determined on a retroactive basis as
of January 1, 1996. Benefits under the SERP accrue without regard to limitations
imposed by Code Sections 401(a)(17) and 415 and are offset by any benefit
accrued under the Pension Plan. Participants rights vest after five years of
service.
EMPLOYMENT AND CONSULTING AGREEMENTS
On August 9, 1995, the Company entered into an employment agreement with
John Duerden pursuant to which Mr. Duerden agreed to serve as Chairman,
President and Chief Executive Officer of the Company for an initial employment
term of two years (which term is automatically extended for additional two-year
terms unless affirmatively terminated by either the Company or Mr. Duerden).
Pursuant to an amendment to Mr. Duerden's employment agreement, dated January 1,
1997 (as amended, the "Employment Agreement"), effective as of such date his
annual base salary was increased to $995,000. In addition, Mr. Duerden is
eligible to receive an annual
<PAGE>
cash bonus ranging from $497,500 to $995,000 based upon the attainment of
certain personal and budgeted performance objectives for the Company as
determined by the Board of Directors.
Mr. Duerden's Employment Agreement also provides that if he terminates
his employment without Good Cause (as defined therein) he will not, for two
years either (i) directly or indirectly, in any capacity, engage or participate
in, or become employed by or under advisory or consulting or other services in
connection with any Prohibited Business (as hereinafter defined) or (ii) make
any financial investment, whether in the form of equity or debt, or own any
interest, directly or indirectly, in any Prohibited Business. Notwithstanding
the foregoing, Mr. Duerden is not restricted from making any investment in any
company whose stock is listed on an American securities exchange or actively
traded in the over-the-counter market and has sales in excess of $500 million;
provided that (i) such investment does not give Mr. Duerden the right or ability
to control or influence the policy decisions of any Prohibited Business, and
(ii) such investment does not create a conflict of interest between Mr.
Duerden's duties under the Employment Agreement and his interest in such
investment. For purposes of the Employment Agreement "Prohibited Business" means
any dictation product or communications recording systems business located
within, or providing service to any area located within, any state or other
jurisdiction to which the Company (or any of its subsidiaries) provides
dictation products or communications recording systems services, or located
within, or providing service to any area located within, any other area within
the United States.
Pursuant to the Employment Agreement, if Mr. Duerden is terminated by the
Company without Cause or if he resigns for Good Reason (as defined therein), Mr.
Duerden is entitled to receive a lump sum payment equal to two times his base
salary. Mr. Duerden is not entitled to receive severance in connection with a
termination for Cause or resignation for other than Good Reason. Upon a
termination of employment due to death or Disability (as defined therein), the
Company is required to pay Mr. Duerden or his estate, as the case may be, an
amount equal to the sum of the accrued annual base salary as of the date of
death or Disability and the accrued unpaid annual bonus, if any, for the fiscal
year prior to the date of death or Disability and a pro-rata portion of the
annual bonus accrued to the date of such death or Disability.
Mr. Duerden's Employment Agreement also includes a provision requiring
the Company to establish an annual deferred annuity bonus arrangement (the
"Deferred Annuity Bonus Arrangement") on his behalf. The Company finalized the
Deferred Annuity Bonus Arrangement in February 1997. The intended annual benefit
to Mr. Duerden under the terms of the Deferred Annuity Bonus Arrangement is an
amount which is estimated to be equal to two-thirds of his average base salary
over the final three years of his employment (reduced by amounts receivable by
him from certain other pensions, profit sharing accounts and Social Security).
Benefits under the Deferred Annuity Bonus Arrangement are payable to Mr. Duerden
annually and are to be utilized by him for the purchase of an annuity contract
chosen and owned by him. As the owner of the annuity contract, Mr. Duerden has
the sole power to direct the investment funds held. The actual benefits under
the annuity contract are dependent upon Mr. Duerden's investment decision. Mr.
Duerden's entitlement to benefits under the Deferred Annuity Bonus Arrangement
vest in increments of one-twelfth for each full year of employment from his date
of hire.
As part of his employment arrangement, Mr. Duerden agreed to purchase
70,000 shares of the Company's Common Stock. Mr. Duerden purchased such shares
on August 11, 1995 with funds provided by the Company pursuant to an
interest-bearing non-recourse loan in the amount of $350,000. Mr. Duerden also
received 210,000 options under the Plan (as hereinafter defined). See
"Management Stock Option Plan". The 1995 options granted to, and Common Stock
purchased by, Mr. Duerden are subject to the same conditions as apply to other
Management Investors (as hereinafter defined), as described in "Stockholders
Agreement" (as hereinafter defined). Pursuant to the January 1, 1997 amendment
to the Employment Agreement, the Company agreed to grant Mr. Duerden an
additional 325,000 stock options which are to vest in one-third increments on
the first three anniversaries of the date of grant. These new options, which
have an exercise price of $10.00 per share, are subject to the Plan.
The Company has entered into a letter employment agreement with each of
Messrs. Schwager, Skrzypczak and Trimper. The agreements have no fixed term of
employment. Upon an involuntary termination of employment by the Company for any
reason other than for Cause (as defined therein) or for Substantial
Underperformance (as defined therein), Mr. Schwager is entitled to receive
salary continuation for a minimum of one year after such termination of
employment. After the conclusion of the first year of salary continuation, if
Mr. Schwager has not secured other employment, the Company has agreed to extend,
for a maximum of 12 additional months, such salary
<PAGE>
continuation on a month-by-month basis as long as Mr. Schwager, using reasonable
efforts, has not secured other employment. In lieu of the foregoing, in the
event of a termination for any reason other than for Cause, Mr. Skrzypczak is
entitled to receive severance in an amount equal to two years' base salary,
payable in a lump sum, and Mr. Trimper is entitled to receive severance in an
amount equal to up to two years' base salary, payable in accordance with the
Company's existing payroll practices except in the event that it is determined
that severance will not continue beyond twelve months in which event severance
will be paid in a lump sum. In addition, if Mr. Trimper's employment is
terminated without cause, he is also entitled to receive any earned and unpaid
annual bonus amounts.
Each of Messrs. Schwager, Trimper and Skrzypczak are also entitled to
receive outplacement services and are entitled to participate in medical, dental
and life insurance plans, under the same terms and conditions as when they were
employed by the Company, until the earlier of the commencement of employment
with a subsequent employer or the twelve month anniversary of the date of
termination of employment. Each of Messrs. Schwager, Trimper and Skrzypczak are
also entitled to an additional six-month period of medical insurance coverage as
required under Section 4980B of the Code.
The Company has entered into a supplemental compensation agreement with
Mr. Skrzypczak. The agreement provides benefits under a supplemental executive
retirement arrangement without regard to any limitations under Code Sections
401(a)(17) and 415 and will be reduced by amounts receivable by Mr. Skrzypczak
from certain other pensions. Mr. Skrzypczak is 100% vested in his benefits under
this arrangement.
In November 1995, the Company entered into a consulting agreement with
Mr. Jachmann, a director of the Company. Pursuant to the terms of the agreement,
Mr. Jachmann agreed to act as a consultant to the Company for an original term
of one year, August 11, 1995 through August 11, 1996. Although a new consulting
agreement has not been executed, the Company has continued to utilize Mr.
Jachmann's services on a month-by-month basis. In consideration for his
consulting services, Mr. Jachmann receives $3,000 per day. During 1996, Mr.
Jachmann was paid $64,250 for consulting services. Mr. Jachmann also received
$25,000 for services as a Director.
MANAGEMENT STOCK OPTION PLAN
On August 11, 1995, the Company adopted the Management Stock Option Plan,
which was amended on April 27, 1996 (collectively, the "Plan"), pursuant to
which officers, key employees and non-employee directors of the Company (the
"Participants") may be granted options to purchase shares of Common Stock. The
Committee has the discretion to select those to whom options are granted (from
among those eligible) and to determine the exercise price, the duration and
other terms and conditions of the options. The Compensation Committee has the
authority to interpret and construe the Plan and any interpretation or
construction of the provisions of the Plan or of any options granted under the
Plan by the Committee are final and conclusive.
The Plan provides that one-half of the options granted in any one option
grant will vest automatically over a five-year period (20% of the options
vesting each year) (the "Service Options") and the remaining options will vest
as to specified percentages over a five-year period based on predetermined
financial performance goals (the "Performance Options"). As to all outstanding
Performance Options, 10% were eligible for vesting on April 15, 1996, and the
remaining options become eligible for vesting as to an additional 20% on each of
April 15, 1997, 1998, 1999 and 2000, with the remaining 10% becoming eligible
for vesting on April 15, 2001, or, in any case, no later than August 11, 2005,
provided that the applicable Participant continues to be employed or continues
as a member of the Board. Based on the Company's 1995 performance, the Company's
Board of Directors determined that 60% of the Performance Options eligible for
vesting on April 15, 1996 would vest. Performance options which are not vested
on each of the April 15 vesting dates remain eligible for future vesting by the
Board if the Company reaches certain enterprise values. In the event of a Sale
or an IPO (as defined therein) of the Company prior to August 11, 2000, all
outstanding Service and Performance Options will become immediately vested and
exercisable prior to the effective date of such Sale or IPO and appropriate
provisions will be required to be made by the Company to permit the holders of
options to realize the value of his or her options in connection with such Sale
or
<PAGE>
IPO to the same extent as if he or she had exercised such options in full
immediately prior to the effective date of such Sale or IPO and participated
therein.
The terms and conditions of an option grant are set forth in a related
option agreement (the "Option Agreement"). Options granted under the Plan will
terminate upon the earliest to occur of (a) the tenth anniversary of the date of
the Option Agreement; (b) the date on which the Company acquires any shares of
Common Stock or options held by the Participant in connection with the exercise
of a Put or Call Right (as defined in the Stockholders Agreement); (c) the
six-month anniversary of the date of death of the Participant; (d) unless
otherwise provided in an agreement between the Participant and the Company, the
thirty-day anniversary of the date of the Participant's Retirement or Disability
(as defined therein); and (e) immediately upon a Participant's termination of
employment or directorship other than due to death, Retirement or Disability;
provided that the term of the option may be extended in the event of a
termination of an option under (c), (d) or (e) above if the Participant
exercises a Put Right prior to the time the option would otherwise terminate
under (c), (d) or (e) above and a Restriction (as defined in the Stockholders
Agreement) prevents the Company from purchasing the options pursuant to the Put
Right. Payment of the option exercise price may be made in cash or Common Stock
which has been held by the Participant for more than six months. The Board or
Compensation Committee may also, in its sole discretion, cancel the vested
portion of an option or options held by a Participant whose employment or
directorship has terminated in exchange for a cash payment equal to the excess
of the Fair Value Price (as defined in the Plan) of the option over the option
exercise price, multiplied by the number of shares of Common Stock subject to
such cancelled options, or may cancel any outstanding options in exchange for a
cash payment to a Participant equal to the excess of the fair market value of
the consideration received for Stonington Shares by the Stonington Investor
(each as defined in the Stockholders Agreement) in any sale of all of the then
issued and outstanding Stonington Shares over the exercise price of the option
multiplied by the number of shares of Common Stock subject to such cancelled
options.
The maximum number of shares of Common Stock that are available for
options under the Plan is currently 850,000 shares; the Company intends,
however, to amend the Plan to accommodate the additional options granted to Mr.
Duerden pursuant to the terms of his amended Employment Agreement. See "--
Employment and Consulting Agreements". If options granted under the Plan expire
or terminate without having been exercised in full or cancelled in exchange for
a cash or other payment, the shares covered by such option will again be
available for grant under the Plan. In the event of the declaration of a stock
dividend, or a reorganization, merger, consolidation, acquisition, disposition,
separation, recapitalization, stock split, split-up, spin-off, combination or
exchange of any shares of Common Stock or like event, the number or character of
the shares subject to the option or the exercise price of any option may be
appropriately adjusted as deemed appropriate by the Compensation Committee.
The Plan terminates upon, and no options may be granted after, August 11,
2005, unless the Plan has sooner terminated due to grant and full exercise or
cancellation of options covering all the shares available for grant under the
Plan. The Board may at any time amend, suspend or discontinue the Plan;
provided, however, that the Board may not alter, amend, discontinue or revoke or
otherwise impair any outstanding options granted under the Plan and which remain
unexercised in a manner adverse to the holders of the options, except if the
written consent of such holder is obtained.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 15, 1997, by (i) each person known to
the Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each named executive, and (iv)
all executive officers and directors of the Company, as a group.
<PAGE>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENTAGE
OF BENEFICIAL OWNER OWNERSHIP (1) OF CLASS
- ------------------- ----------------- ----------
Stonington Capital Appreciation 1994 Fund, L.P.(2) 9,303,000 98.3%
767 Fifth Avenue
New York, New York 10153
John H. Duerden(3)............................ 97,300 1.0
Robert G. Schwager(3)......................... 20,850 *
Joseph D. Skrzypczak(3)....................... 20,850 *
Robert E. Trimper(3).......................... 14,550 *
Albert J. Fitzgibbons(4)...................... 9,303,000 98.3
Emil F. Jachmann(3)........................... 10,000 *
Alexis P. Michas(4)........................... 9,303,000 98.3
Stephen M. McLean(4).......................... 9,303,000 98.3
Peter P. Tong................................. -- --
Scott M. Shaw................................. -- --
Karen M. Garrison............................. -- --
Directors and executive officers as a
group ((15) persons)(4)(5) 9,524,310 100.0%
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
(1) Beneficial ownership is determined in accordance with the rules and
regulations of the Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options and warrants held by that person
that are currently exercisable or exercisable within 60 days of March 15,
1997 are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage of any other
person. Except as indicated in the footnotes to this table, the
stockholders named in the table have sole voting and investment power with
respect to the shares set forth opposite such stockholder's name.
(2) Stonington is the record holder of 9,153,000 shares, or 96.4%, of Common
Stock. Stonington also controls, but disclaims beneficial ownership of, an
additional 150,000 shares purchased by an institutional investor, pursuant
to the Stockholder Agreement. Stonington is a Delaware limited partnership
whose limited partners consist of certain institutional investors, formed
to invest in corporate acquisitions organized by Stonington Partners. SPLP,
a Delaware limited partnership, is the general partner of Stonington with a
1% economic interest in Stonington. Except for such economic interest, SPLP
disclaims beneficial ownership of the shares set forth above. Stonington
II, a Delaware corporation, is the general partner of SPLP with a 1%
economic interest in SPLP. Except for such economic interest, Stonington II
disclaims beneficial ownership of the shares set forth above. The limited
partners of SPLP are certain current and former employees of Stonington
Partners, entities controlled by certain employees of Stonington and
individuals with special relationships to portfolio companies of
Stonington.
Pursuant to a management agreement with Stonington, Stonington Partners has
full discretionary authority with respect to the investments of Stonington,
including the authority to make and dispose of such investments. Stonington
Partners disclaims beneficial ownership of the shares set forth above. The
address of each of the entities and individuals listed in this footnote is
c/o Stonington Partners, Inc., 757 Fifth Avenue, New York, New York 10153.
(3) Includes shares of Common Stock which the directors and executive officers
have the right to acquire through the exercise of options within 60 days of
March 15, 1997, as follows: Mr. Duerden - 27,300 shares; Mr. Schwager -
5,850 shares; Mr. Trimper - 4,550 shares; Mr. Skrzypczak - 5,850 shares;
and Mr. Jachmann - 10,000 shares. Mr. Duerden is a 3.1% limited partner of
SPLP.
(4) The shares indicated as owned beneficially by Messrs. Fitzgibbons, Michas
and McLean are owned or controlled by Stonington and are included because
of their ownership of stock in Stonington Partners and Stonington II.
Messrs. Fitzgibbons, Michas and McLean disclaim beneficial ownership of
such shares.
<PAGE>
(5) Includes 73,610 shares of Common Stock subject to options granted under the
Plan which are currently exercisable or vest within 60 days of March 15,
1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT INVESTMENT AND MANAGEMENT LOANS
In connection with the Acquisition, the Company sold 197,000 shares of
Common Stock to certain key members of the Company's Management, including
Messrs. Duerden, Schwager and Skrzypczak and Ms. Garrison for $1,970,000 (the
"Management Placement"). The Company financed $1,273,000 of the Management
Placement with non-recourse loans bearing interest at a rate equal to the
Adjusted Eurodollar Rate (as defined) plus 2.75% in effect for the Revolving
Credit Facility under the Credit Agreement. Interest is due annually starting
in 1998. Unless prepaid, all principal, accrued and unpaid interest is due and
payable on August 7, 2005. The obligations under the management notes are
secured by a pledge of the proportionate number of shares of Common Stock
pursuant to the Stockholders Agreement. The name of each executive officer of
the Company who participated in the Management Placement whose indebtedness
to the Company exceeds $60,000 is listed below: Mr. Duerden -- $350,000;
Mr. Schwager -- $140,000; Mr. Skrzypczak -- $95,600; Ms. Garrison -- $123,154;
and Ms. Carpenter -- $68,211. In connection with Ms. Garrison's resignation
from the Company on January 31, 1997, the Company repurchased all of her
shares of Common Stock and all amounts borrowed by Ms. Garrison in the
Management Placement were repaid.
In connection with Mr. Trimper's employment arrangement, the Company sold
Mr. Trimper 10,000 shares of Common Stock pursuant to the Management Placement.
STOCKHOLDERS AGREEMENT
The Company, Stonington, each of the institutional investors who
purchased $15 million of the Company's 14% Pay-in-Kind Perpetual Preferred Stock
("Pay-in-Kind Preferred Stock"), together with warrants to purchase 350,000
shares of Common Stock (the "Warrants") or $1.5 million of the Company's Common
Stock (the "Equity Private Placement"), and each of Messrs. Duerden, Schwager,
Trimper and Skrzypczak and Ms. Garrison (each a "Stockholder") entered into a
stockholder agreement (the "Stockholders Agreement"), which contains, among
other terms and conditions, provisions relating to voting rights, certain
restrictions with respect to the transfer of Common Stock, Pay-in-Kind Preferred
Stock and Warrants by certain parties thereunder, certain rights related to puts
and calls and certain registration rights granted by the Company with respect to
shares of Common Stock.
Pursuant to the terms of the Stockholders Agreement, Stonington controls
the votes of the Common Stock purchased in the Equity Private Placements. Under
the Stockholders Agreement, Stonington also has the right to designate at any
time and from time to time at least three Directors of the Company and has the
right to remove such designees at any time and from time to time and each of the
Stockholders have agreed to vote in favor of such designation or removal of such
Directors. The Company currently has eight Board members.
Pursuant to the terms of the Stockholders Agreement, in the event that
Stonington proposes to sell securities which, in the aggregate, represent 30% or
more of the Common Stock on a fully diluted basis to a third party which is not,
and following such sale will not be, an affiliate of Stonington, the
Institutional Investors (as defined in the Stockholders Agreement) and the
Management Investors (as defined in the Stockholders Agreement) will have the
right to elect to participate in such sale with respect to a certain number of
shares of Common Stock. In the event that Stonington proposes to sell securities
which, in the aggregate, represent 30% or more of the Common Stock on a fully
diluted basis to a third party which is not, and following such sale will not
be, an affiliate of Stonington, Stonington has the right to require each
Management Investor, Institutional Investor and such other stockholders who have
agreed to be bound to the Stockholders Agreement to participate in such sale
with respect to a certain number of shares of Common Stock.
<PAGE>
Management Investors are not permitted to sell or transfer Common Stock,
other than to Permitted Transferees (as defined in the Stockholders Agreement)
(i.e., family members and, upon the death of a Management Investor, to his or
her estate or executors), prior to the occurrence of the earlier of August 11,
2000 and an IPO (as defined in the Stockholders Agreement). Following an IPO, a
Management Investor may transfer shares in accordance with Rule 144 of the
Securities Act of 1933, as amended (the "Securities Act"), or pledge shares to a
financial institution, subject to applicable Securities Act restrictions. On or
after August 11, 2000, if an IPO has not occurred, Management Investors are
permitted to sell Common Stock to third parties after first giving the Company
and the other Management Investors a right of first refusal for the same number
of shares of Common Stock at the same price.
Institutional Investors are permitted to sell or transfer Common Stock,
other than to an Affiliate (as defined in the Stockholders Agreement), prior to
the occurrence of an IPO. Following an IPO, the Institutional Investors will,
with certain limited exceptions, generally be permitted to sell or transfer
Common Stock subject to applicable Securities Act restrictions. The Pay-in-Kind
Preferred Stock and Warrants are subject to transfer restrictions as set forth
in the Stockholders Agreement.
Prior to an IPO, the Company will have the right to require a Management
Investor to sell his or her shares of Common Stock and Options upon a
termination of employment for any reason. Such right will be exercisable within
a period of one year after the date of termination of employment (or within a
period of six months in the event of a termination of employment due to death)
at a price per share equal to the higher of Fair Value Price (as defined in the
Stockholders Agreement) or the original per share purchase price of a share of
Common Stock and at a price per Option equal to the difference between the Fair
Value Price or the original per share purchase price of the shares of Common
Stock covered by such Option and the exercise price of the shares of Common
Stock covered by such Option, multiplied by the number of shares of Common Stock
covered by the Option. Prior to an IPO, the Management Investor will have the
right to require the Company to purchase his or her shares of Common Stock or
Options upon termination of employment due to death, Disability, Retirement or
Involuntary Termination (as defined therein). Such a right will be exercisable
within a period of 180 days after the date of termination of employment due to
death, Disability, Retirement or Involuntary Termination (a) at a price per
share of Common Stock equal to the Fair Value Price of a share of Common Stock;
provided, however, that upon a termination of employment due to death,
Disability or Retirement, the purchase price per share will be equal to the
greater of (x) the Fair Value Price and (y) the original purchase price plus
interest at the Adjusted Eurodollar Rate plus 2.75%, minus the Applicable
Pricing Discount (as defined in the Credit Agreement) as of the date of such
death, Disability or Retirement) (in either case, the "Put Price"); and (b) at a
price per Option equal to the difference between the Put Price of the shares of
Common Stock covered by such Option and the exercise price of the shares of
Common Stock covered by such Option, multiplied by the number of shares of
Common Stock covered by the Option.
Stockholders are, subject to certain limitations, entitled to register
shares of Common Stock in connection with a registration statement prepared by
the Company to register Common Stock. Stonington has the right to require the
Company to take such steps as necessary to register all or part of the Common
Stock held by Stonington under the Securities Act pursuant to the provisions of
the Stockholders Agreement. The Stockholders Agreement contains customary terms
and provisions with respect to, among other things, registration procedures and
certain rights to indemnification granted by parties thereunder in connection
with the registration of Common Stock subject to such agreement.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The financial statements are included in Part II, Item 8 of this
Report.
2. FINANCIAL STATEMENT SCHEDULES AND SUPPLEMENTARY INFORMATION REQUIRED
TO BE SUBMITTED
Schedule II "Valuation and Qualifying Accounts" is included in Part
II, Item 8 of this Report.
(B) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the fiscal
quarter ended December 31, 1996.
(C) Index to Exhibits.
The following is a list of all Exhibits filed as part of this Report:
EXHIBITS DESCRIPTION
- -------- -----------
2.1 -- Stock and Asset Purchase Agreement, dated as of April 25, 1995,
between Pitney Bowes Inc. and Dictaphone Acquisition Inc. filed as
Exhibit 2.1 to the Company's Registration Statement on Form S-1, File
No. 33-93464, filed on June 14, 1995).
2.2 -- Amendment to Stock and Asset Purchase Agreement, dated August 11,
1995, between Pitney Bowes Inc. and Dictaphone Acquisition Inc. (filed
as Exhibit 2.2 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1995, filed on September 21, 1995).
2.3 -- Asset Purchase Agreement, dated August 11, 1995, between Dictaphone
Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc. (filed as
Exhibit 2.3 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1995, filed on September 21, 1995).
2.4 -- Stock Purchase Agreement, dated August 11, 1995, between Pitney Bowes
Deutschland GmbH and Dictaphone Acquisition Inc. (filed as Exhibit 2.4
to the Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
filed on September 21, 1995).
2.5 -- Stock Purchase Agreement, dated August 11, 1995, between Walnut Street
Corp. and Dictaphone Acquisition Inc. (filed as Exhibit 2.5 to the
Company's Form 10-Q for the fiscal quarter ended June 30, 1995, filed
on September 21, 1995).
2.6 -- Stock Purchase Agreement, dated August 11, 1995, between Pitney Bowes
Holdings Ltd. and Dictaphone U.K. Acquisition Limited (filed as
Exhibit 2.6 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1995, filed on September 21, 1995).
2.7 -- General Conveyance Agreement, dated August 11, 1995, between
Dictaphone Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc.
(filed as Exhibit 2.7 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995). 2.8 --
Assumption of Liabilities Agreement, dated August 11, 1995, between
Dictaphone Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc.
(filed as Exhibit 2.8 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995).
2.8 -- Assumption of Liabilities Agreement, dated August 11, 1995, between
Dictaphone Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc.
(filed as Exhibit 2.8 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995).
<PAGE>
2.9 -- Merger Agreement between Dictaphone U.S. Acquisition Inc. and
Dictaphone Corporation, dated August 11, 1995 (filed as Exhibit 2.9 to
the Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
filed on September 21, 1995).
3.1 -- Restated Certificate of Incorporation of the Company, adopted by the
Company on August 11, 1995 (filed as Exhibit 3.2 to the Company's Form
10-Q for the fiscal quarter ended June 30, 1995, filed on September
21, 1995).
3.2 -- By-Laws of the Company, adopted April 20, 1995 (filed as Exhibit 3.3
to the Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
filed on September 21, 1995).
3.3 -- Restated Certificate of Incorporation of Dictaphone Corporation (U.S),
adopted by Dictaphone Corporation (U.S.) on August 11, 1995 (filed as
Exhibit 3.5 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1995, filed on September 21, 1995).
3.4 -- By-Laws of Dictaphone Corporation (U.S.) (filed as Exhibit 3.6 to the
Company's Form 10-Q for the fiscal quarter ended June 30, 1995, filed
on September 21, 1995).
4.1 -- Indenture, dated as of August 11, 1995, among the Company, Dictaphone
Corporation (U.S.) and Shawmut Bank Connecticut, National Association,
Trustee, relating to the 11-3/4% Senior Subordinated Notes Due 2005 of
the Company (filed as Exhibit 4.1 to the Company's Form 10-Q for the
fiscal quarter ended June 30, 1995, filed on September 21, 1995).
4.2 -- Bank Credit Agreement, dated as of August 7, 1995 among the Company,
Dictaphone Corporation (U.S.) and the Lenders party thereto (filed as
Exhibit 4.2 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1995, filed on September 21, 1995).
4.3 -- First Amendment to Credit Agreement, dated as of June 28, 1996, among
the Company, Dictaphone Corporation (U.S.) and the Lenders party
thereto (filed as Exhibit 10.13 to the Company's Current Report on
Form 8-K, filed on July 18, 1996).
10.1 -- Subscription Agreements for the Equity Private Placements, dated as of
August 7, 1995 (filed as Exhibit 10.1 to the Company's Form 10-Q for
the fiscal quarter ended June 30, 1995, filed on September 21, 1995).
10.2 -- Subscription Agreement for Management Private Placement, dated as of
August 7, 1995 (filed as Exhibit 10.2 to the Company's Form 10-Q for
the fiscal quarter ended June 30, 1995, filed on September 21, 1995).
10.3 -- Stockholders Agreement, dated as of August 11, 1995 (filed as Exhibit
10.3 to the Company's Form 10-Q for the fiscal quarter ended June 30,
1995, filed on September 21, 1995).
10.4 -- Employment contract of John H. Duerden, dated as of August 9, 1995
(filed as Exhibit 10.4 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995).+
*10.5 -- Amendment to employment contract of John H. Duerden, dated January 1,
1997.+
10.6 -- Employment contract of Joseph D. Skrzypczak, dated July 21, 1995
(filed as Exhibit 10.6 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995).+
10.7 -- Employment contract of Robert G. Schwager, dated June 19, 1995 (filed
as Exhibit 10.7 to the Company's Registration Statement on Form S-1,
File No. 33-93464, filed on June 14, 1995).+
10.8 -- Employment contract of Karen M. Garrison, dated July 21, 1995 (filed
as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, File No. 33-93464, filed on March
29, 1996.+
<PAGE>
10.9 -- Management Stock Option Plan of the Company (filed as Exhibit 10.9 to
the Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
filed on September 21, 1995) and Amendment No. 1 to the Management
Stock Option Plan, dated as of April 27, 1996 (filed as Exhibit 10.13
to the Company's Form 10-Q for the fiscal quarter ended March 31,
1996, filed on May 15, 1996).+
10.10 -- Supply Agreement, dated August 11, 1995, between the Company and
Pitney Bowes Inc. (filed as Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995, File
No. 33-93464, filed on March 29, 1996).
10.11 -- Leasing Agreement, dated August 10, 1995, between Dictaphone
Corporation (U.S.) and Pitney Bowes Credit Corporation (filed as
Exhibit 10.11 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, File No. 33-93464, filed on March
29, 1996).
10.12 -- Consulting Agreement, dated November 17, 1995, between the Company and
Emil F. Jachmann (filed as Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995, File
No. 33-93464, filed on March 29, 1996).+
*10.13 -- Employment contract of Robert Trimper, dated January 24, 1996.+
10.14 -- Form of Letter Agreement amending the Subscription Agreement for the
Management Private Placement, dated as of August 7, 1995, and the
Stockholders Agreement, dated as of August 11, 1995, (filed as Exhibit
10.14 to the Company's Form 10-Q for the fiscal quarter ended March
31, 1996, filed on May 15, 1996).+
21.1 -- List of subsidiaries of the Company (filed as Exhibit 21 to the
Company's Registration Statement on Form S-1, File No. 33-93464, filed
on June 14, 1995).
24 -- Powers of Attorney (included on the signature page hereof).
*27 -- Financial Data Schedule.
________________
* Filed herewith.
+ Management contract or compensatory arrangement.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Stratford, State of Connecticut, on this 27th day of March, 1997.
DICTAPHONE CORPORATION
By: /S/ JOHN H. DUERDEN
-----------------------------------------------
John H. Duerden
Chairman, Chief Executive Officer and President
KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Scott M. Shaw and Joseph D. Skrzypczak
his true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or their or his substitutes
or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 27th day of March, 1997.
SIGNATURE TITLE(S)
--------- --------
/S/ JOHN H. DUERDEN Chairman, Chief Executive Officer
- ------------------------------------ and President
John H. Duerden (Principal Executive Officer)
/S/ JOSEPH D. SKRZYPCZAK Vice President, Chief Financial
- ------------------------------------ Officer and Director
Joseph D. Skrzypczak (Principal Financial and Accounting
Officer)
/S/ ALBERT J. FITZGIBBONS, III Director
- ------------------------------------
Albert J. Fitzgibbons, III
Director
- ------------------------------------
Emil F. Jachmann
/S/ STEPHEN M. MCLEAN Director
- ------------------------------------
Stephen M. McLean
/S/ ALEXIS P. MICHAS Director
- ------------------------------------
Alexis P. Michas
/S/ SCOTT M. SHAW Director
- ------------------------------------
Scott M. Shaw
/S/ PETER P. TONG Director
- ------------------------------------
Peter P. Tong
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBITS DESCRIPTION NUMBERED PAGE
- -------- ----------- -------------
<S> <C> <C>
2.1 -- Stock and Asset Purchase Agreement, dated as of April 25, 1995,
between Pitney Bowes Inc. and Dictaphone Acquisition Inc. (filed
as Exhibit 2.1 to the Company's Registration Statement on Form
S-1, File No. 33-93464, filed on June 14, 1995).
2.2 -- Amendment to Stock and Asset Purchase Agreement, dated August 11,
1995, between Pitney Bowes Inc. and Dictaphone Acquisition Inc.
(filed as Exhibit 2.2 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995).
2.3 -- Asset Purchase Agreement, dated August 11, 1995, between
Dictaphone Canada Ltd./Ltee and Dictaphone Canada Acquisition
Inc. (filed as Exhibit 2.3 to the Company's Form 10-Q for the
fiscal quarter ended June 30, 1995, filed on September 21, 1995).
2.4 -- Stock Purchase Agreement, dated August 11, 1995, between Pitney
Bowes Deutschland GmbH and Dictaphone Acquisition Inc. (filed as
Exhibit 2.4 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1995, filed on September 21, 1995).
2.5 -- Stock Purchase Agreement, dated August 11, 1995, between Walnut
Street Corp. and Dictaphone Acquisition Inc. (filed as Exhibit
2.5 to the Company's Form 10-Q for the fiscal quarter ended June
30, 1995, filed on September 21, 1995).
2.6 -- Stock Purchase Agreement, dated August 11, 1995, between Pitney
Bowes Holdings Ltd. and Dictaphone U.K. Acquisition Limited
(filed as Exhibit 2.6 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995).
2.7 -- General Conveyance Agreement, dated August 11, 1995, between
Dictaphone Canada Ltd./Ltee and Dictaphone Canada Acquisition
Inc. (filed as Exhibit 2.7 to the Company's Form 10-Q for the
fiscal quarter ended June 30, 1995, filed on September 21, 1995).
2.8 -- Assumption of Liabilities Agreement, dated August 11, 1995,
between Dictaphone Canada Ltd./Ltee and Dictaphone Canada
Acquisition Inc. (filed as Exhibit 2.8 to the Company's Form 10-Q
for the fiscal quarter ended June 30, 1995, filed on September
21, 1995).
2.9 -- Merger Agreement between Dictaphone U.S. Acquisition Inc. and
Dictaphone Corporation, dated August 11, 1995 (filed as Exhibit
2.9 to the Company's Form 10-Q for the fiscal quarter ended June
30, 1995, filed on September 21, 1995).
3.1 -- Restated Certificate of Incorporation of the Company, adopted by
the Company on August 11, 1995 (filed as Exhibit 3.2 to the
Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
filed on September 21, 1995).
3.2 -- By-Laws of the Company, adopted April 20, 1995 (filed as Exhibit
3.3 to the Company's Form 10-Q for the fiscal quarter ended June
30, 1995, filed on September 21, 1995).
3.3 -- Restated Certificate of Incorporation of Dictaphone Corporation
(U.S), adopted by Dictaphone Corporation (U.S.) on August 11,
1995 (filed as Exhibit 3.5 to the Company's Form 10-Q for the
fiscal quarter ended June 30, 1995, filed on September 21, 1995).
3.4 -- By-Laws of Dictaphone Corporation (U.S.) (filed as Exhibit 3.6 to
the Company's Form 10-Q for the fiscal quarter ended June 30,
1995, filed on September 21, 1995).
4.1 -- Indenture, dated as of August 11, 1995, among the Company,
Dictaphone Corporation (U.S.) and Shawmut Bank Connecticut,
National Association, Trustee, relating to the 11-3/4% Senior
Subordinated Notes Due 2005 of the Company (filed as Exhibit 4.1
to the Company's Form 10-Q for the fiscal quarter ended June 30,
1995, filed on September 21, 1995).
<PAGE>
4.2 -- Bank Credit Agreement, dated as of August 7, 1995 among the
Company, Dictaphone Corporation (U.S.) and the Lenders party
thereto (filed as Exhibit 4.2 to the Company's Form 10-Q for the
fiscal quarter ended June 30, 1995, filed on September 21, 1995).
4.3 -- First Amendment to Credit Agreement, dated as of June 28, 1996,
among the Company, Dictaphone Corporation (U.S.) and the Lenders
party thereto (filed as Exhibit 10.13 to the Company's Current
Report on Form 8-K, filed on July 18, 1996).
10.1 -- Subscription Agreements for the Equity Private Placements, dated
as of August 7, 1995 (filed as Exhibit 10.1 to the Company's Form
10-Q for the fiscal quarter ended June 30, 1995, filed on
September 21, 1995).
10.2 -- Subscription Agreement for Management Private Placement, dated as
of August 7, 1995 (filed as Exhibit 10.2 to the Company's Form
10-Q for the fiscal quarter ended June 30, 1995, filed on
September 21, 1995).
10.3 -- Stockholders Agreement, dated as of August 11, 1995 (filed as
Exhibit 10.3 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1995, filed on September 21, 1995).
10.4 -- Employment contract of John H. Duerden, dated as of August 9,
1995 (filed as Exhibit 10.4 to the Company's Form 10-Q for the
fiscal quarter ended June 30, 1995, filed on September 21,
1995).+
*10.5 -- Amendment to employment contract of John H. Duerden, dated
January 1, 1997.+
10.6 -- Employment contract of Joseph D. Skrzypczak, dated July 21, 1995
(filed as Exhibit 10.6 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995).+
10.7 -- Employment contract of Robert G. Schwager, dated June 19, 1995
(filed as Exhibit 10.7 to the Company's Registration Statement on
Form S-1, File No. 33-93464, filed on June 14, 1995).+
10.8 -- Employment contract of Karen M. Garrison, dated July 21, 1995
(filed as Exhibit 10.8 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995, File No.
33-93464, filed on March 29, 1996).+
10.9 -- Management Stock Option Plan of the Company (filed as Exhibit
10.9 to the Company's Form 10-Q for the fiscal quarter ended June
30, 1995, filed on September 21, 1995) and Amendment No. 1 to the
Management Stock Option Plan, dated as of April 27, 1996 (filed
as Exhibit 10.13 to the Company's Form 10-Q for the fiscal
quarter ended March 31, 1996, filed on May 15, 1996).+
10.10 -- Supply Agreement, dated August 11, 1995, between the Company and
Pitney Bowes Inc. (filed as Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995,
File No. 33- 93464, filed on March 29, 1996).
10.11 -- Leasing Agreement, dated August 10, 1995, between Dictaphone
Corporation (U.S.) and Pitney Bowes Credit Corporation (filed as
Exhibit 10.11 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, File No. 33-93464, filed on
March 29, 1996).
10.12 -- Consulting Agreement, dated November 17, 1995, between the
Company and Emil F. Jachmann (filed as Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, File No. 33-93464, filed on March 29, 1996).+
*10.13 -- Employment contract of Robert Trimper, dated January 24, 1996.+
10.14 -- Form of Letter Agreement amending the Subscription Agreement for
the Management Private Placement, dated as of August 7, 1995, and
the Stockholders Agreement, dated as of August 11, 1995 (filed as
Exhibit 10.14 to the Company's Form 10-Q for the fiscal quarter
ended March 31, 1996, filed on May 15, 1996).
<PAGE>
21.1 -- List of subsidiaries of the Company (filed as Exhibit 21 to the
Company's Registration Statement on Form S-1, File No. 33-93464,
filed on June 14, 1995).
24 -- Powers of Attorney (included on the signature page hereto).
*27 -- Financial Data Schedule.
</TABLE>
______________
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
FIRST AMENDMENT
TO EMPLOYMENT AGREEMENT
This FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment") is
dated as of January l, 1997, and entered into by and among DICTAPHONE
CORPORATION, a Delaware corporation, whose address is 3191 Broadbridge Avenue,
Stratford, Connecticut 06497-2559 (Dictaphone) and JOHN H. DUERDEN,
("Executive"). Capitalized terms used herein without definition shall have the
same meanings herein as set forth in the Agreement (as hereunder defined).
RECITALS:
WHEREAS, Executive and Dictaphone desire to amend the Employment
Agreement between Dictaphone and Executive (the "Agreement") dated August 9,
1995 in order to amend, modify and clarify certain provisions thereof.
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO THE EMPLOYMENT AGREEMENT
1. The Annual Base Salary shall, effective January l, 1997, be
increased to $995,000.00; the term Annual Base Salary as used in the Agreement
shall refer to the Annual Base Salary as so increased.
2. Section 4.02 of the Agreement is hereby amended,
effective January l, 1997, as follows:
A. Section 4.02(a) and 4.02(b) are hereby
amended to read in their entirety as follows:
(a) While the Executive is employed by the
Company during the Contract Term, the Company shall pay or cause to be paid an
annual cash bonus ("Annual Bonus") in accordance with the terms hereof for each
Fiscal Year in a determined amount based (i) one-half on the extent of the
attainment of personal performance goals for the Executive as determined by the
Board (the "Executive Performance Objectives"), and (ii) one-half on the extent
of the attainment of budgeted performance objectives for the Company as
determined by the Board (the "Budgeted Performance Objectives"), such amounts to
be paid on or prior to April 15th of the year following the end of such Fiscal
Year.
(b) The Annual Bonus amounts shall be calculated
as follows:
(i) with respect to that portion of the
Annual Bonus related to the Executive Performance Objectives, if the Executive
reaches 95% of the Executive Performance
<PAGE>
Objectives, that portion of the Annual Bonus shall equal 50% of the Base Salary,
if the Executive reaches between 90% and 95% of the Executive Performance
Objectives that portion of the Annual Bonus shall equal 42.5% of the Base
Salary, and if the Executive fails to reach 90% of the Executive Performance
Objectives that portion of the Annual Bonus shall equal 25% of the Base Salary;
(ii) the same criteria and percentages shall
apply mutatis mutandis with respect to that portion of the Annual Bonus related
to Budgeted Performance Objectives for the Company as described in clause (i)
above.
3. Section 4.02(b) is restated in haec verba and is
renumbered as Section 4.02(c).
4. The word "recourse" in Section 4.03(a)(ii) of the
Agreement is hereby deleted and replaced with the word "non-recourse".
5. With reference to Section 5.02 of the Agreement, the
Company shall provide for term life insurance in the amount of five times the
Annual Base Salary.
SECTION 2. ADDITIONAL STOCK
As soon as possible following Board and other necessary
approvals Company shall grant to Executive new options (the "New Options") to
purchase 325,000 shares of common stock of the Company pursuant to the Company's
Management Stock Option Plan.
The New Options shall vest in one-third increments on each of
first three anniversaries of the grant thereof. The exercise price per share of
the New Options shall be ten dollars ($10).
SECTION 3. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE EMPLOYMENT AGREEMENT.
(i) On and after the date hereof, each reference
in the Employment Agreement to "this Agreement", "hereunder", "hereof", "herein"
or words of like import referring to the Employment Agreement shall mean and
be a reference to the Amended Agreement.
(ii) Except as specifically amended by this
Amendment, the Employment Agreement shall remain in full force and effect
and is hereby ratified and confirmed.
<PAGE>
B. HEADINGS. Section and subsection headings in this
Amendment are included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose or be given any
substantive effect.
C. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature pages
are physically attached to the same document. This Amendment shall become
effective upon the execution of a counterpart hereof by Executive and
Dictaphone.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
Dictaphone DICTAPHONE CORPORATION
By: /S/ DANIEL C. HART
Title: VP & GENERAL COUNSEL
Date: 2/24/97
Executive
By: /S/ JOHN H. DUERDEN
John H. Duerden
Date: 2/24/97
-3-
<PAGE>
DICTAPHONE
John H. Duerden
Chairman & Chief Executive Officer
January 24, 1996
Mr. Robert E. Trimper
104 Oakwood Court
Abbotsbury Road
London, W14 8J2
Dear Bob:
This letter will set forth our agreement concerning your employment
with Dictaphone Corporation effective 3/1/96 and supersedes any and all prior
offer letters.
1. THE JOB AND LOCATION
I am pleased to extend you an offer of employment with Dictaphone
Corporation as a Vice President, International Operations reporting directly to
me. In this capacity, you will of course, be a full-time member of the Executive
Committee. Your position will be based in London, England except for required
travel on company business. The company will not relocate you outside of London,
England unless you and I agree that the move is in the best interest of
Dictaphone.
2. COMPENSATION
Your annual base salary will be $220,000. As is current company
practice, your performance will be reviewed on an annual basis for consideration
of a merit increase based on the base structure and the performance management
grid in effect as of the date of your annual review. Your base pay will be paid
in accordance with the company's payroll procedure but, in any case, not less
frequently than monthly. We expect that should there be dual payroll
participation that your payment will be on the basis of each of the separate
country payrolls and that no special payroll run will be required in order to
meet your personal tax needs.
To assist you with your transition into Dictaphone, I have agreed to
pay a one time sign-on bonus of $50,000. This will be payable to you on your
start date with Dictaphone.
In addition to your annual based salary, you are eligible to receive
a performance base bonus with a target of 35% of your base pay equaling
approximately
<PAGE>
$77,000. As a performance based compensation employee, "PBC," your bonus is
determined on the basis of your individual performance and the performance of
Dictaphone Corporation as assessed by the Board of Directors. This can pay up to
100% of your base salary. I've enclosed a copy of the proposed PBC Group II (35%
target grid) Incentive Guide which has been forwarded to the Board of Directors
for approval for 1996. In addition, I've attached the proposed grid for a
Dictaphone "rating" guideline which has also been forwarded to the Board for
approval. You will note that the vertical rating for the Grid II bonus
delineates the payout based on the Dictaphone rating. The Dictaphone rating for
1996 will be based solely on corporate performance against the EBITDA target and
is self- explanatory. Your personal rating which is the horizontal access on the
grid will be based on 60% of the financial performance against budget for the
International group as mutually agreed upon at the beginning of the fiscal year.
The other 40% of your personal rating will be dependent upon your performance
against agreed upon objectives for the International Operation. I will expect
you and I to come to a conclusion within three weeks of your start date as to
what those targets for the remainder of the calendar year will be. As a
demonstration of my confidence in your ability to have a positive impact on the
International organization I have agreed that your bonus for 1996 (payable in
February, 1997) will be guaranteed at the 50% of base salary for that prorated
period of 1996 for which you are actively employed. In addition, I have agreed
that for 1997 fiscal year bonus payable in February, 1998 you will also be
guaranteed a bonus payout of 50% of the base salary in effect for 1997. This
guarantee assumes, of course, that you are actively employed by Dictaphone for
the period covered. For 1998 and thereafter, you will be eligible for a PBC
bonus based on the grid approved by the Board of Directors at the start of the
new year and comparable to other PBC Level II participants. It is my expectation
at this time that the on target bonus opportunity would be at 35% of the annual
base with a maximum bonus opportunity of not less than 100% for the grid II
bonus. All compensation plans, however, are reviewed on an annual basis and may
be changed at the company's discretion.
3. STOCK OPTION
As a PBC level executive a recommendation will be made to the Board
of Directors that you be offered stock options and an opportunity to participate
in the management equity options. The details of these plans will be discussed
in greater detail with you in the documents specifically designed to delineate
all of the terms and conditions of those plans. The recommendation to the Board
will be that you be offered 10,000 management equity options at $10 a share in
accordance with the Management Private Placement Memorandum. In addition, it
will be recommended that you be offered 30,000 stock options, 15,000 of which
will vest over a five year period and 15,000 of which will be performance based
on the total Dictaphone organizations performance against specific targets in
accordance with the Management Stock Option Plan. The relevant documents
covering these plans will be forwarded to Mr. Album on your behalf over the next
few business days. In case of any discrepancy in terms and/or conditions the
formal plan documents will be the final authority. If you are approved for an
equity position you will, of course, be required to make a personal investment
of $100,000 to cover the management equity options. Dictaphone will make
available to you a loan of up to $50,000 under the same terms and conditions
afforded other executives buying equity in the company as of August 11, 1995.
<PAGE>
4. BENEFITS
The company has agreed to offer you the appropriate benefits
depending upon availability and based on the plan documents or policies in
effect for each plan.
As a PBC level employee you are entitled to paid vacation time in
accordance with the current plans and practices of Dictaphone and will be
entitled to receive a minimum of four weeks paid vacation per calendar year.
5. DISABILITY BENEFITS
If, as a result of your incapacity due to physical or mental illness
you shall be unable to perform all of your duties hereunder by reason of the
illness you will be eligible for compensation under the company's long term
disability plan provided you are a participant of the plan. Any incapacity due
to physical or mental illness which is expected, based on bonafide medical
documentation, to continue for more than six consecutive months will be
considered grounds for termination and will invoke the "Executive Severance
Arrangement" as described hereunder.
6. EXPENSE REIMBURSEMENT
As a PBC level executive within the Dictaphone Team reporting to me,
you are eligible for participation in the Company Car Program which provides for
an allowance of $1,000 per month. Or, if you would prefer, the lease on a BMW
530 or comparable lease on a top-line fully loaded automobile as long as the
terms of the lease are reasonably acceptable to Dictaphone. You will also be
entitled to receive prompt reimbursement for all reasonable business and travel
expenses upon the companies receipt of accountings and in accordance with the
company policy on expense reimbursement. When you are required to be in the U.S.
for Dictaphone business, the company will pay for reasonable hotel
accommodations, meals and transportation.
7. TAX MATTERS
As we discussed, the company has agreed that dependent upon your
wishes and as is legally appropriate for Dictaphone, we will structure your
payment and benefit plans in such a way that is most tax efficient for you. You
acknowledge that you will remain responsible for the payment of all fees and
expenses of your external tax consultant and retain personal liability for
ensuring that the appropriate level of taxes have been paid to whatever taxing
authority you are deemed to be accountable to.
8. SEVERANCE TERMS
Your employment may be terminated at any time by the company with or
without cause. I have agreed to extend an "Executive Severance Arrangement"
including a severance pay period of up to two times your current annual base pay
in the event that your employment is terminated by Dictaphone for any reason
other than cause. This severance
<PAGE>
will also be offered to you should your job be eliminated or a substantial
reduction in your responsibilities and/or compensation occur.
A termination for cause will be defined as your termination
resulting from a severe breach of business ethics, a material violation of
stated company policy which would otherwise result in your immediate
termination, your continued failure or refusal to perform any of the material
duties or responsibilities (other than failure due to a disability as defined in
Dictaphone's Disability Policy) reasonably required by Dictaphone hereunder with
written notice and an opportunity to cure within 45 days of that written notice,
acts of gross misconduct or a breach of your representations and warranties made
to Dictaphone herein. In the event of a termination for cause, you shall receive
your salary up through the date of termination and other accrued benefits and
pension rights.
In addition to your severance pay you will be eligible for payment
for any earned and unpaid annual bonus amount with respect to any fiscal year
ending prior to the date of termination and, for the fiscal year in which the
termination occurred, a prorata portion equal to the bonus which would have been
payable with respect to such termination year multiplied by a fraction equal to
(a) the number of days of the termination year elapsed prior to termination over
(b) 365. Any such bonus or prorata bonus will be paid in accordance with the
standard PBC bonus payments, normally in February of the subsequent fiscal year.
Under the terms of this "Executive Severance Arrangement" you will
be offered your salary at the time of separation for a period of up to two
years, payable on regular pay days. In the event that it is agreed upon that the
severance will not continue beyond the first twelve months severance pay may be
paid in a lump sum. The first year of severance pay will be payable to you in
full regardless of your employment status with any other company. At the
conclusion of the first 12 months, if you have not secured employment elsewhere,
the company will extend your severance pay on a month by month basis for a
maximum of 12 additional months. This extension, at the company's discretion,
will be dependent upon reasonable efforts to secure employment as judged by your
documented job search activities.
In addition, you will be eligible for out placement services at a
nationally recognized out placement firm of the company's choosing at the
service levels normally afforded Executive Vice Presidents for the first 12
months of the severance period. Medical, dental and life insurances will be
extended to you at the rate that you would have paid as an active employee under
the terms and conditions of those plans for up to 12 months or until you have
secured employment elsewhere.
In any event, the PBC severance package or the "Executive Severance
Arrangement" will require you to sign, as a condition or receiving severance
hereunder, a severance agreement including a release of the company from all
liability for any acts or violations relative to any administrative procedure
and/or federal, state or local law(s) covering the employment relationship. The
release will also include a non-compete, non- solicitation of employees,
non-disclosure of confidential information and an agreement to
<PAGE>
cooperate with the company on any legal and otherwise reasonable business issues
requiring your involvement for resolution.
9. DIRECTORS AND OFFICERS LIABILITY INSURANCE
As a Vice President of the company you will be covered by the
company's Director's and Officer's Liability Insurance as in effect from time to
time. The company will not, however, indemnify and hold you harmless for any
claims arising from your prior employers with respect to your conduct or your
employment responsibilities in any case.
10. OTHER CONTINGENCIES
Your offer of employment remains contingent upon the following
conditions:
o Completion of the patent and confidentiality agreement. A
copy of this has been forwarded to you with my letter of
December 22, 1995.
o Compliance, as an express condition of employment, with the
Dictaphone's drug free workplace and substance abuse policy
statement including passing a pre-employment drug screening
test.
11. LAW APPLICABLE
This Agreement, the rights and obligations of the parties hereto,
and any claims or disputes relating thereto, shall be governed by and construed
in accordance with the laws of the State of New York (applicable to agreements
to be entered into and performed wholly within such state).
12. SUMMARY
I trust this addresses all major issues relative to your employment
offer with Dictaphone Corporation. I am confident that you will find this
position to be challenging and rewarding and afford you an opportunity to make a
significant contribution to the future of Dictaphone. I remain hopeful that you
will be able to begin this position no later than March 1, 1996. Please confirm
to me as soon as is reasonable what your expected start date will be and what
benefit structure and payroll structure is most appropriate for your personal
circumstances.
This letter contains all of the terms of your proposed employment
with Dictaphone; no change or modification of such terms shall be effective
unless set forth in writing, signed by yourself and Dictaphone. Further, by
signing below you represent and
<PAGE>
warrant that your employment with Dictaphone hereunder will not violate the
terms of any agreements to which you are bound.
Sincerely,
/s/ John H. Duerden
John H. Duerden
Chairman and Chief Executive Officer
Agreed and Accepted:
/S/ ROBERT E. TRIMPER
Robert E. Trimper
Date:
<PAGE>
================================================================================
Minimum EBITDA and
Dictaphone Qualify/PERCENTAGE OVER PY
RATING DICTAPHONE
================================================================================
1 Less than 85% of Less than $64.5 Million
Budgeted EBITDA --
- --------------------------------------------------------------------------------
2 85 - 89% of Budgeted $64.5 Million
EBITDA --
- --------------------------------------------------------------------------------
3 90 - 93% of Budgeted $68.4 Million
EBITDA 6%
- --------------------------------------------------------------------------------
4 94 - 100% of Budgeted $71.0 Million
EBITDA 10%
- --------------------------------------------------------------------------------
5 Greater than 100% of $75.9 Million
Budgeted EBITDA 18%
- --------------------------------------------------------------------------------
1996 Budgeted EBITDA $75.8 Million
1995 Forecasted EBITDA $64.5 Million
- --------------------------------------------------------------------------------
<PAGE>
PBC GROUP II INCENTIVE GUIDE
35% TARGET GRID
INDIVIDUAL RATING
------------------------------------------------------------------
DICTAPHONE 1 2 3 4 5
RATING
- --------------------------------------------------------------------------------
1 0 0 20 31 36
- --------------------------------------------------------------------------------
2 0 0 28 34 40
- --------------------------------------------------------------------------------
3 0 10 35 41 48
- --------------------------------------------------------------------------------
4 0 12 40 46 53
- --------------------------------------------------------------------------------
5 0 14 44 52 60-100
- --------------------------------------------------------------------------------
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET OF DICTAPHONE CORPORATION AT DECEMBER 31,
1996, AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,927
<SECURITIES> 0
<RECEIVABLES> 55,040
<ALLOWANCES> 1,339
<INVENTORY> 56,840
<CURRENT-ASSETS> 128,301
<PP&E> 61,773
<DEPRECIATION> 24,765
<TOTAL-ASSETS> 504,835
<CURRENT-LIABILITIES> 95,257
<BONDS> 340,086
18,142
0
<COMMON> 95
<OTHER-SE> 41,141
<TOTAL-LIABILITY-AND-EQUITY> 504,835
<SALES> 239,638
<TOTAL-REVENUES> 332,468
<CGS> 126,734
<TOTAL-COSTS> 344,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,897
<INCOME-PRETAX> (53,591)
<INCOME-TAX> 18,931
<INCOME-CONTINUING> (34,660)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,660)
<EPS-PRIMARY> (3.90)
<EPS-DILUTED> (3.90)
</TABLE>