SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 33-93464
DICTAPHONE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3838908
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3191 Broadbridge Avenue
Stratford, CT 06497
(203) 381-7000
(Address of principal executive offices,
including zip code, and telephone
number, including area code)
-------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ____
-----
Number of Shares of Common Stock, Par Value $.01, outstanding as of
August 11, 1997: 9,452,000
The Common Stock of the registrant is not publicly traded.
<PAGE>
DICTAPHONE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
<S> <C> <C>
Unaudited Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1997 2
Unaudited Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1996 3
Condensed Consolidated Balance Sheets as of June 30, 1997
(Unaudited) and December 31, 1996 4
Unaudited Condensed Consolidated Statements of Cash Flow for the
Six Months Ended June 30, 1997 and June 30, 1996 5
Notes to Unaudited Consolidated Financial Statements 6 - 16
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17 - 22
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 23
ITEM 6. Exhibits and Reports on Form 8-K 23
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amount)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1997
------------- -------------
Revenues:
Sales and rentals $ 57,336 $ 115,584
Support services 22,605 45,524
--------- ---------
Total revenue 79,941 161,108
--------- ---------
Costs and expenses:
Cost of sales and rentals 41,803 71,399
Selling, service and administrative 45,238 84,812
Amortization of intangibles 9,170 18,548
Research and development 3,599 7,333
--------- ---------
Operating loss (19,869) (20,984)
Interest expense 10,232 20,677
Other (income) expense - net (137) 236
--------- ---------
Loss before income taxes (29,964) (41,897)
Income tax benefit 10,884 14,983
--------- ---------
Net loss (19,080) (26,914)
Stock dividends on PIK Preferred Stock 678 1,313
--------- ---------
Net loss applicable to Common Stock $ (19,758) $ (28,227)
========= =========
Net loss per share of Common Stock $ (2.09) $ (2.99)
========= ==========
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amount)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1996 JUNE 30, 1996
------------- -------------
Revenues:
Sales and rentals $ 62,241 $ 120,225
Support services 23,011 45,486
--------- ---------
Total revenue 85,252 165,711
--------- ---------
Costs and expenses:
Cost of sales and rentals 31,712 65,194
Selling, service and administrative 40,868 80,466
Amortization of intangibles 10,986 21,914
Research and development 3,996 7,583
--------- ---------
Operating loss (2,310) (9,446)
Interest expense 10,454 21,459
Other (income) expense - net (77) (64)
--------- ---------
Loss before income taxes (12,687) (30,841)
Income tax benefit 4,797 11,521
--------- ---------
Net loss (7,890) (19,320)
Stock dividends on PIK Preferred Stock 607 1,132
--------- ---------
Net loss applicable to Common Stock $ (8,497) $ (20,452)
========= =========
Net loss per share of Common Stock $ (0.90) $ (2.16)
========= ==========
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
(UNAUDITED)
ASSETS
Current assets:
<S> <C> <C>
Cash $ 7,927 $ 5,821
Accounts receivable, less allowances of $1,339 and $757, respectively 53,701 53,551
Inventories 56,840 42,795
Other current assets 9,833 12,663
--------- ---------
Total current assets 128,301 114,830
Property, plant and equipment, net 37,008 35,761
Deferred financing costs, net of accumulated amortization of $6,235
and $6,946, respectively 14,255 12,978
Intangibles, net of accumulated amortization of $58,177 and $76,725, respectively 271,022 251,334
Prepaid repurchases, leased equipment 5,163 4,256
Other assets 49,086 64,836
--------- ---------
Total assets $ 504,835 $ 483,995
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,634 $ 8,270
Interest payable 10,342 10,224
Accrued liabilities 29,961 27,692
Advance billings 34,808 31,932
Current portion of long-term debt 12,512 13,914
--------- ---------
Total current liabilities 95,257 92,032
Long-term debt 340,086 349,507
Other liabilities 10,114 10,800
--------- ---------
Total liabilities $ 445,457 $ 452,339
--------- ---------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock ($.01 par value; 10,000,000 shares authorized;
1,500,000 shares of 14% PIK perpetual preferred stock
issued and outstanding, liquidation value at June 30, 1997, $19,455) 18,142 19,455
Common stock ($.01 par value; 20,000,000 shares authorized;
9,452,000 shares outstanding) 95 95
Notes receivable from stockholders (1,052) (831)
Additional paid-in capital 94,905 94,905
Treasury stock, at cost (200) (480)
Accumulated deficit (51,676) (79,903)
Accumulated translation adjustment (836) (1,585)
--------- --------
Total stockholders' equity 59,378 31,656
--------- ---------
Total liabilities and stockholders' equity $ 504,835 $ 483,995
========= =========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1996 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Operating activities:
Net loss $ (19,320) $ (26,914)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization (including $4,384
and $1,389, respectively, of nonrecurring charges) 38,110 29,764
Provision for deferred income taxes (12,758) (14,770)
Non-cash provision for inventory obsolescence (Note 3) --- 10,491
Changes in assets and liabilities:
Accounts receivable 3,649 (408)
Inventories 491 1,837
Other current assets (692) (2,878)
Accounts payable and accrued liabilities (4,601) (1,309)
Advance billings (1,701) (2,780)
Other assets and other (6,547) (2,231)
--------- ---------
Net cash used in operating activities (3,369) (9,198)
--------- ---------
Investing activities:
Payment for acquisition (8,000) ---
Net investment in fixed assets (2,259) (3,023)
--------- ---------
Net cash used in investing activities (10,259) (3,023)
--------- ---------
Financing activities:
Repayment under term loan facility (3,500) (5,500)
Borrowings under revolving credit facility 11,000 37,500
Repayment under revolving credit facility (4,000) (20,500)
Other 132 (1,299)
--------- ---------
Net cash provided by financing activities 3,632 10,201
--------- ---------
Effect of exchange rate changes on cash (36) (86)
--------- ---------
Decrease in cash (10,032) (2,106)
Cash, beginning of period 14,279 7,927
--------- ---------
Cash, end of period $ 4,247 $ 5,821
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 18,065 $ 18,975
========= =========
Income taxes paid $ 1,041 $ 349
========= =========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
DICTAPHONE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except share amounts)
1. THE ACQUISITION
On April 25, 1995, Dictaphone Corporation (the "Company") entered
into a Stock and Asset Purchase Agreement, as amended August 11, 1995
(the "Acquisition Agreement") with Pitney Bowes Inc. ("Pitney Bowes") for
the purpose of acquiring (the "Acquisition") Dictaphone Corporation, the
United States Dictaphone Subsidiary of Pitney Bowes ("Dictaphone U.S.
(Predecessor Company)") and certain foreign affiliates ("Dictaphone
Non-U.S. (Predecessor Company)") as set forth in the Acquisition
Agreement. On August 11, 1995, the Company acquired the Predecessor
Company for $450.0 million, which was subject to certain post-closing
adjustments as defined in the Acquisition Agreement. On March 6, 1996,
the Company and Pitney Bowes reached agreement as to the final purchase
adjustment. Total purchase adjustments amounted to $12.2 million for an
aggregate purchase price of $462.2 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements of the Company are
unaudited, as of and for the three and six month periods ended June 30,
1997 and June 30, 1996, but in the opinion of management contain all
adjustments which are of a normal and recurring nature necessary to
present fairly the financial position and results of operations and cash
flows for the periods presented. These financial statements should be
read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
COSTS AND EXPENSES. Operating expenses of field sales and service
offices are included in selling, service and administrative expenses
because no meaningful allocation of such expenses to cost of sales or
support services is practicable.
LOSS PER SHARE. The weighted average number of shares of common
stock outstanding used in the computation of loss per share for the three
months ended June 30, 1997 was 9,452,000.
DERIVATIVE FINANCIAL INSTRUMENTS. The Company has only limited
involvement with derivative financial instruments and does not use them
for trading purposes. The Company enters into interest rate swap
agreements to reduce its exposure to interest rate fluctuations. The net
gain or loss from exchange of interest payments is included in interest
expense in the consolidated financial statements and interest paid in the
condensed consolidated statements of cash flow.
6
<PAGE>
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
Raw materials and work in process $ 14,881 $ 16,434
Supplies and service parts 19,946 12,226
Finished products 22,013 14,135
--------- ---------
Total inventories $ 56,840 $ 42,795
========= =========
During the three months ended June 30, 1997, the Company recorded a
one time non-cash charge of $10.5 million associated with the
provision for excess field service parts and inventory related to the
Company's Digital Express(TM) and Records Express(TM) products. With
the production of Enterprise Express (TM) in June 1997, the Company
provided for excess inventory associated with those products that
the Enterprise Express (TM) product would replace, recording this charge
as an inventory provision.
4. INTANGIBLES
The following summarizes intangible assets, net of accumulated
amortization of $58,177 and $76,725 at December 31, 1996 and June 30,
1997, respectively. Amortization expense for the three and six months
ended June 30, 1997 was $9,170 and $18,548, respectively.
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
Goodwill $ 139,687 $137,483
Tradenames 75,158 74,184
Service contracts 18,951 13,251
Non-compete agreement 30,057 20,239
Patents 7,169 6,177
--------- ---------
$ 271,022 $ 251,334
========= =========
5. INCOME TAXES
The benefit for income taxes for the three and six months ended
June 30, 1997 is $10,884 and $14,983, respectively.
The Company has recorded a deferred tax asset of $58.6 million
included in other assets reflecting the benefit of net operating loss
carryforwards and various book tax temporary differences. The net
operating loss carryforward as of June 30, 1997 is approximately $58.5
million which will expire beginning in the year 2010. Realization is
dependent on generating sufficient taxable income prior to expiration of
the net operating loss carryforwards. Although realization is not
assured, management believes it is more likely than not that all of the
deferred tax asset will be realized. Accordingly, no valuation allowance
has been established as of June 30, 1997. This conclusion is based upon
(i) the impact of purchase accounting adjustments which contribute to the
current taxable loss and will be substantially amortized by 1998, thereby
returning the Company to a taxable position, (ii) the long carryforward
period available for net operating loss utilization, and (iii) the
Company's expected future profitability. The amount of the deferred tax
asset considered realizable could be reduced if estimates of future
taxable income during the net operating loss carryforward period are
reduced.
7
<PAGE>
6. COMMITMENTS AND CONTINGENCIES
On February 14, 1995, Pitney Bowes filed a complaint against
Sudbury Systems, Inc. ("Sudbury") in the United States District court for
the District of Connecticut alleging intentional and wrongful
interference with Pitney Bowes's plans to sell the Company. The complaint
seeks damages and a declaratory judgment relating to the validity of a
patent owned by Sudbury entitled "Rapid Simultaneous Multiple Access
Information Storage and Retrieval System" and the alleged infringement
thereof by the Company. Sudbury responded by answering the complaint and
filing a third-party complaint against the Company alleging patent
infringement and seeking preliminary and permanent injunctive relief and
treble damages. The third-party complaint filed by Sudbury did not
quantify the amount of damages sought. The litigation is in the discovery
stage and the Company cannot currently make a reasonable estimate of the
amount of damages that will be sought by Sudbury. Management believes the
Company has meritorious defenses to the claims against it. Consequently,
the Company has not provided for any loss exposure in connection with
this complaint. Additionally, regardless of the outcome of this
litigation, Pitney Bowes has agreed to defend this action and to
indemnify the Company for any liabilities arising from such litigation.
The Company is subject to federal, state and local laws and
regulations concerning the environment, and is currently participating in
administrative proceedings as a participant in a group of potentially
responsible parties in connection with two third party disposal sites.
These proceedings are at a preliminary stage, for which it is impossible
to reasonably estimate the potential costs of remediation, the timing and
extent of remedial actions which may be required by governmental
authorities, and the amount of the liability, if any, of the Company
alone or in relation to that of any other responsible parties. When it is
possible to make a reasonable estimate of the Company's liability with
respect to such a matter, a provision will be made as appropriate.
Additionally, the Company has settled and paid its liability at three
other third party disposal sites. At a fourth site, the Company has paid
approximately $10,000 for its share of the costs of the first phase of
the clean up of the site and management believes that it has no
continuing material liability for any later phases of the cleanup.
Consequently, management believes that its future liability, if any, for
these four sites is not material. In addition, regardless of the outcome
of such matters, Pitney Bowes has agreed to indemnify the Company in
connection with retained environmental liabilities and for breaches of
the environmental representations and warranties in the Acquisition
Agreement, subject to certain limitations.
The Company is a defendant in a number of additional lawsuits and
administrative proceedings, none of which will, in the opinion of
management, have a material adverse effect on the Company's consolidated
financial position or results of operations.
The Company does not believe that the ultimate resolution of the
litigation, administrative proceedings and environmental matters
described above in the aggregate will have a material adverse effect on
the Company's consolidated financial position or results of operations.
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION
Dictaphone U.S. (Predecessor Company) has fully and unconditionally
guaranteed the repayment of $200,000 of senior subordinated notes (the
"Notes") issued to finance the Acquisition. The Notes are subordinate to
financing of the Credit Agreement, dated August 7, 1995, as modified by
amendments to Credit Agreement, dated June 28, 1996, June 27, 1997 and
July 21, 1997 (collectively, the "Credit Agreement"), and other senior
indebtedness as defined in the indenture pursuant to which the Notes
8
<PAGE>
were issued (the "Note Indenture"). Dictaphone Non-U.S. (Predecessor
Company) is not a guarantor of the Notes. Separate financial
statements of Dictaphone U.S. (Predecessor Company) are not presented
because management has determined that they would not be meaningful to
investors in the Notes.
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
The following are the supplemental consolidating statements of
operations for the three and six month periods ended June 30, 1997 and
1996, the supplemental consolidating balance sheet information as of
December 31, 1996 and June 30, 1997, and cash flow information for the
six month periods ended June 30, 1996 and 1997.
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
THREE MONTHS ENDED JUNE 30, 1997
<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 $ --- $ 51,955 $ 8,337 $ (2,956) $ 57,336
Support services --- 19,750 2,855 --- 22,605
---------- ---------- ---------- --------- ----------
Total revenues --- 71,705 11,192 (2,956) 79,941
---------- ---------- ---------- --------- ----------
Costs and expenses:
Cost of sales and rentals --- 38,187 6,648 (3,032) 41,803
Selling, service and administrative 70 49,501 4,837 --- 54,408
Research and development --- 3,599 --- --- 3,599
Interest expense - net and other 365 9,285 445 --- 10,095
---------- ---------- ---------- --------- ----------
Total costs and expenses 435 100,572 11,930 (3,032) 109,905
---------- ---------- ---------- --------- ----------
Equity (loss) earnings (12,401) --- --- 12,401 ---
---------- ---------- ---------- --------- ----------
(Loss) income before income taxes (12,836) (28,867) (738) 12,477 (29,964)
Income tax benefit (expense) (177) 10,788 304 (31) 10,884
---------- ---------- ---------- --------- ----------
Net (loss) income $ (13,013) $ (18,079) $ (434) $ 12,446 $ (19,080)
========== ========== ========== ========= ==========
</TABLE>
9
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
SIX MONTHS ENDED JUNE 30, 1997
<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 $ --- $ 103,997 $ 17,211 $ (5,624) $ 115,584
Support services --- 39,985 5,539 --- 45,524
---------- ---------- ---------- --------- ----------
Total revenues --- 143,982 22,750 (5,624) 161,108
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales and rentals --- 65,608 11,544 (5,753) 71,399
Selling, service and administrative 289 91,854 11,217 --- 103,360
Research and development --- 7,333 --- --- 7,333
Interest expense - net and other 1,240 18,259 1,414 --- 20,913
---------- ---------- ---------- --------- ----------
Total costs and expenses 1,529 183,054 24,175 (5,753) 203,005
---------- ---------- ---------- --------- ----------
Equity (loss) earnings (13,317) --- --- 13,317 ---
---------- ---------- ---------- --------- ----------
(Loss) income before income taxes (14,846) (39,072) (1,425) 13,446 (41,897)
Income tax benefit (expense) 117 14,554 365 (53) 14,983
---------- ---------- ---------- ---------- ----------
Net (loss) income $ (14,729) $ (24,518) $ (1,060) $ 13,393 $ (26,914)
========== ========== ========== ========= ==========
</TABLE>
10
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
THREE MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue from:
Sales and rentals $ --- $ 56,635 $ 8,784 $ (3,178) $ 62,241
Support services --- 20,060 2,951 --- 23,011
---------- ---------- ---------- --------- ----------
Total revenues --- 76,695 11,735 (3,178) 85,252
---------- ---------- ---------- --------- ----------
Costs and expenses:
Cost of sales and rentals --- 29,765 4,876 (2,929) 31,712
Selling, service and administrative 69 43,959 7,841 (15) 51,854
Research and development --- 3,996 --- --- 3,996
Interest expense - net and other 404 9,428 530 15 10,377
---------- ---------- ---------- --------- ----------
Total costs and expenses 473 87,148 13,247 (2,929) 97,939
---------- ---------- ---------- --------- ----------
Equity (loss) earnings (1,310) --- --- 1,310 ---
---------- ---------- ---------- --------- ----------
(Loss) income before income taxes (1,783) (10,453) (1,512) 1,061 (12,687)
Income tax benefit 113 3,896 685 103 4,797
---------- ---------- ---------- --------- ----------
Net (loss) income $ (1,670) $ (6,557) $ (827) $ 1,164 $ (7,890)
========== ========== ========== ========= ==========
</TABLE>
11
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue from:
Sales and rentals $ --- $ 107,027 $ 19,800 $ (6,602) $ 120,225
Support services --- 39,710 5,776 --- 45,486
---------- ---------- ---------- --------- ----------
Total revenues --- 146,737 25,576 (6,602) 165,711
---------- ---------- ---------- --------- ----------
Costs and expenses:
Cost of sales and rentals --- 60,357 11,082 (6,245) 65,194
Selling, service and administrative 107 86,855 15,418 --- 102,380
Research and development --- 7,583 --- --- 7,583
Interest expense - net and other 1,257 18,909 1,215 14 21,395
---------- ---------- ---------- --------- ----------
Total costs and expenses 1,364 173,704 27,715 (6,231) 196,552
---------- ---------- ---------- --------- ----------
Equity (loss) earnings (5,725) --- --- 5,725 ---
---------- ---------- ---------- --------- ----------
(Loss) income before income taxes (7,089) (26,967) (2,139) 5,354 (30,841)
Income tax benefit 372 10,303 695 151 11,521
---------- ---------- ---------- --------- ----------
Net (loss) income $ (6,717) $ (16,664) $ (1,444) $ 5,505 $ (19,320)
========== ========== ========== ========= ==========
</TABLE>
12
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ --- $ 6,569 $ 1,358 $ --- $ 7,927
Accounts receivable 9,896 49,259 8,165 (13,619) 53,701
Inventories --- 48,220 9,919 (1,299) 56,840
Other current assets 517 5,445 3,871 --- 9,833
---------- ---------- ---------- ---------- ----------
Total current assets 10,413 109,493 23,313 (14,918) 128,301
Note receivable --- 17,491 --- (17,491) ---
Investments in subsidiaries 440,601 --- --- (440,601) ---
Fixed assets, net --- 33,833 3,175 --- 37,008
Intangibles, net 2,131 250,872 18,019 --- 271,022
Deferred financing costs, net 14,255 --- --- --- 14,255
Other assets 3,246 48,571 1,919 513 54,249
---------- ---------- ---------- ---------- ----------
Total assets $ 470,646 $ 460,260 $ 46,426 $ (472,497) $ 504,835
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable, interest payable
and accrued liabilities $ 10,660 $ 40,250 $ 10,793 $ (13,766) $ 47,937
Advance billings --- 31,246 3,562 --- 34,808
Current portion of long-term debt 11,750 --- 762 --- 12,512
---------- ---------- ---------- ---------- ----------
Total current liabilities 22,410 71,496 15,117 (13,766) 95,257
Long-term debt 357,005 333,745 18,077 (368,741) 340,086
Other liabilities --- 9,790 324 --- 10,114
Stockholders' equity 91,231 45,229 12,908 (89,990) 59,378
---------- ---------- ---------- ---------- ----------
Total liabilities
and stockholders' equity $ 470,646 $ 460,260 $ 46,426 $ (472,497) $ 504,835
========== ========== ========== ========== ==========
</TABLE>
13
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
JUNE 30, 1997
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ --- $ 5,307 $ 514 $ --- $ 5,821
Accounts receivable 10,511 45,898 8,754 (11,612) 53,551
Inventories --- 39,114 4,851 (1,170) 42,795
Other current assets 27 7,000 5,636 --- 12,663
---------- ---------- ---------- ---------- ----------
Total current assets 10,538 97,319 19,755 (12,782) 114,830
Note receivable --- 18,179 --- (18,179) ---
Investments in subsidiaries 438,517 --- --- (438,517) ---
Fixed assets, net --- 33,013 2,748 --- 35,761
Intangibles, net 2,104 232,893 16,337 --- 251,334
Deferred financing costs, net 12,978 --- --- --- 12,978
Other assets 3,488 63,241 1,903 460 69,092
---------- ---------- ---------- ---------- ----------
Total assets $ 467,625 $ 444,645 $ 40,743 $ (469,018) $ 483,995
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable, interest payable
and accrued liabilities $ 10,239 $ 39,827 $ 7,732 $ (11,612) $ 46,186
Advance billings --- 28,360 3,572 --- 31,932
Current portion of long-term debt 13,750 --- 164 --- 13,914
---------- ---------- ---------- ---------- ----------
Total current liabilities 23,989 68,187 11,468 (11,612) 92,032
Long-term debt 367,193 345,245 17,998 (380,929) 349,507
Other liabilities --- 10,502 298 --- 10,800
Stockholders' equity 76,443 20,711 10,979 (76,477) 31,656
---------- ---------- ---------- ----------- ----------
Total liabilities
and stockholders' equity $ 467,625 $ 444,645 $ 40,743 $ (469,018) $ 483,995
========== ========== ========== ========== ==========
</TABLE>
14
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss $ (6,717) $ (16,664) $ (1,444) $ 5,505 $ (19,320)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,853 32,924 2,333 --- 38,110
Provision for deferred income taxes (415) (11,460) (410) (473) (12,758)
Change in assets and liabilities:
Accounts receivable (2,876) 4,977 (1,018) 2,566 3,649
Inventories --- (891) 1,011 371 491
Other current assets --- 1,316 (1,961) (47) (692)
Accounts payable and
accrued liabilities 530 (2,365) (379) (2,387) (4,601)
Advance billings --- (1,864) 163 --- (1,701)
Other assets and other 8,335 (8,850) (497) (5,535) (6,547)
---------- ---------- ---------- ---------- ----------
Cash used in operating activities 1,710 (2,877) (2,202) --- (3,369)
---------- ---------- ---------- ---------- ----------
Investing activities:
Payment for acquisition (8,000) --- --- --- (8,000)
Net investment in fixed assets --- (2,068) (191) --- (2,259)
---------- ---------- ---------- ---------- ----------
Cash used in investing activities (8,000) (2,068) (191) --- (10,259)
---------- ---------- ---------- ---------- ----------
Financing activities:
Repayment under term loan facility (3,500) --- --- --- (3,500)
Borrowing from promissory notes (6,345) 6,345 --- --- ---
Borrowing from subsidiary 9,124 (9,124) --- --- ---
Borrowing from revolving credit facility 11,000 --- --- --- 11,000
Repayment under revolving credit facility (4,000) --- --- --- (4,000)
Other 11 --- 121 --- 132
---------- ---------- ---------- ---------- ----------
Cash provided by (used in) financing
activities 6,290 (2,779) 121 --- 3,632
---------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on cash --- --- (36) --- (36)
---------- ---------- ---------- ---------- ----------
Decrease in cash --- (7,724) (2,308) --- (10,032)
Cash, beginning of period --- 11,591 2,688 --- 14,279
---------- ---------- ---------- ---------- ----------
Cash, end of period $ --- $ 3,867 $ 380 $ --- $ 4,247
========== ========== ========== ========== ==========
</TABLE>
15
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss $ (14,729) $ (24,518) $ (1,060) $ 13,393 $ (26,914)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,858 26,152 1,754 --- 29,764
Provision for deferred income taxes (242) (14,555) (26) 53 (14,770)
Non-cash provision for inventory obsolescence --- 8,875 1,616 --- 10,491
Change in assets and liabilities:
Accounts receivable (615) 3,361 (1,147) (2,007) (408)
Inventories --- (1,144) 3,110 (129) 1,837
Other current assets 490 (1,555) (1,813) --- (2,878)
Accounts payable and
accrued liabilities (421) (423) (2,619) 2,154 (1,309)
Advance billings --- (2,886) 106 --- (2,780)
Other assets and other 13,583 (2,486) 256 (13,584) (2,231)
---------- ---------- ---------- ---------- ----------
Cash used in operating activities (76) (9,179) 177 (120) (9,198)
---------- ---------- ---------- ---------- ----------
Investing activities:
Net investment in fixed assets (2,895) (128) --- (3,023)
---------- ---------- ---------- ---------- ----------
Cash used in investing activities --- (2,895) (128) --- (3,023)
---------- ---------- ---------- ---------- ----------
Financing activities:
Repayment under term loan facility (5,500) --- --- --- (5,500)
Borrowing from promissory notes (11,500) 11,500 --- --- ---
Borrowing from subsidiary 688 (688) --- --- ---
Borrowing from revolving credit facility 37,500 --- --- --- 37,500
Repayment under revolving credit facility (20,500) --- --- --- (20,500)
Other (612) --- (807) 120 (1,299)
---------- ---------- ---------- ---------- ----------
Cash provided by (used in) financing
activities 76 10,812 (807) 120 10,201
---------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on cash --- --- (86) --- (86)
---------- ---------- ---------- ---------- ----------
Decrease in cash --- (1,262) (844) --- (2,106)
Cash, beginning of period --- 6,569 1,358 --- 7,927
---------- ---------- ---------- ---------- ----------
Cash, end of period $ --- $ 5,307 $ 514 $ --- $ 5,821
========== ========== ========== ========== ==========
</TABLE>
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
OVERVIEW
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1996 1997 1996 1997
-------- -------- ------ ------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Total revenue $ 85.3 $ 79.9 $ 165.7 $ 161.1
Cost of sales and rentals (1) 31.7 41.8 65.2 71.4
Selling, service and administrative expense 51.9 54.4 102.3 103.4
Research and development 4.0 3.6 7.6 7.3
-------- -------- ------- -------
Operating loss (2.3) (19.9) (9.4) (21.0)
-------- -------- ------- -------
Interest expense and other expense, net 10.4 10.1 21.4 20.9
Income tax benefit (4.8) (10.9) (11.5) (15.0)
-------- -------- ------- -------
Net loss $ (7.9) $ (19.1) $ (19.3) $ (26.9)
======== ======== ======= =======
EBITDA (2) $ 13.8 $ 4.3 $ 26.0 $ 17.4
======== ======== ======= =======
</TABLE>
- ---------------------
(1) Cost of sales and rentals do not include operating expenses of field
sales and service offices because no meaningful allocation of such
expenses to this line item is practicable. Accordingly, such expenses
are included in selling, service and administrative expenses.
(2) EBITDA is defined as income before effect of changes in accounting
plus interest, income taxes, depreciation and amortization and other
non-cash charges. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to incur and service debt.
However, EBITDA should not be considered in isolation or as a
substitute for net income or cash flow data prepared in accordance
with generally accepted accounting principles or as a measure of a
company's profitability or liquidity.
17
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
1996 1997 1996 1997
-------- -------- ------ ------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue from:
Sales:
U.S. Integrated Voice Systems $ 13.0 $ 11.0 $ 25.1 $ 22.6
U.S. Integrated Health Systems 9.1 7.3 15.2 16.7
U.S. Application & Training Specialists 0.2 0.5 0.2 1.0
-------- -------- ------- -------
Total U.S. Voice Systems 22.3 18.8 40.5 40.3
U.S. Communication Recording Systems 14.3 13.7 26.8 25.6
U.S. Customer Service Parts 4.5 4.0 8.9 8.0
Contract Manufacturing
(including sales to Pitney Bowes) 10.8 10.5 20.9 19.6
U.S. Dealer Operations 1.1 1.6 2.3 3.9
International Operations 8.6 8.3 19.6 17.2
-------- -------- ------- -------
Total sales 61.6 56.9 119.0 114.6
-------- -------- ------- -------
Rentals 0.7 0.5 1.2 1.0
-------- -------- ------- -------
Total sales and rentals 62.3 57.4 120.2 115.6
-------- -------- ------- -------
Service:
U.S. Customer Service 20.0 19.7 39.7 40.0
International Operations 3.0 2.8 5.8 5.5
-------- -------- ------- -------
Total support service 23.0 22.5 45.5 45.5
-------- -------- ------- -------
Total revenue $ 85.3 $ 79.9 $ 165.7 $ 161.1
======== ======== ======= =======
</TABLE>
RESULTS OF OPERATIONS - SECOND QUARTER 1997 VS. SECOND QUARTER 1996
Total revenue for the second quarter of 1997 declined 6.2% to $79.9 million
from $85.3 million during the second quarter of 1996. This decline in revenue is
attributable to lower sales revenue from U.S. Voice Systems ("U.S.V.S."), U.S.
Communications Recording Systems ("U.S.C.R.S."), and Contract Manufacturing, and
lower revenue from U.S. Customer Service and International Operations offset in
part by increased sales revenue from U.S. Dealer Operations.
U.S.V.S. revenue declined 15.7% to $18.8 million from $22.3 million due to
lower U.S. Integrated Voice Systems ("U.S.I.V.S.") and U.S. Integrated Health
Systems ("U.S.I.H.S.") revenue. U.S.I.V.S. revenue declined 15.4% to $11.0
million from $13.0 million due to lower billings of desktops, Straight Talk(TM)
and accessories. U.S.I.H.S. revenue declined 19.8% to $7.3 million from $9.1
million due to lower systems billings. U.S.C.R.S. revenue declined 4.2% to $13.7
million from $14.3 million due to lower Prolog(TM) and Sentinel(TM)
installations. U.S. Customer Service revenue (including sales of parts) declined
3.5% to $23.7 million from $24.5 million due to lower proprietary product
service contract and parts revenue partially offset by increased third party
maintenance revenue. Revenue from International Operations declined 4.3% to
$11.1 million from $11.6 million due to lower service revenue as well as $0.2
million of unfavorable currency exchange.
18
<PAGE>
Cost of sales and rentals increased 31.9% to $41.8 million (52.3% of total
revenue) during the three months ended June 30, 1997 from $31.7 million (37.2%
of total revenue) for the three months ended June 30, 1996. Cost of sales and
rentals as a percentage of revenue increased during the three months ended June
30, 1997 due primarily to a one time non-cash charge of $10.5 million associated
with the provision for excess field service parts and stock related to the
Company's Digital Express(TM) and Records Express(TM) products. With the
production of Enterprise Express(TM) in June 1997, the Company provided for
excess service parts and field stock associated with those products that the
Enterprise Express(TM) product would replace. The Company recorded this charge
as an inventory provision.
Selling, service and administrative expenses (including amortization of
intangibles) for the second quarter of 1997 increased 4.8% to $54.4 million
(68.0% of total revenue) from $51.9 million (60.8% of total revenue) for the
comparable period in 1996. Excluding additional depreciation and amortization
expense associated with purchase accounting adjustments related to the
Acquisition of $9.3 million and $12.1 million, respectively, from the three
months ended June 30, 1997 and 1996, selling, service and administrative
expenses would have represented 56.4% of total revenue for the three months
ended June 30, 1997 versus 46.6% of total revenue for the comparable period of
1996. Keeping with the Company's efforts to reduce its cost structure, the
Company identified and eliminated over 90 full-time positions and recorded a
$2.3 million severance provision associated with this reduction. The increase in
selling, service and administrative expenses is attributable to the provision
for severance, as well as increases in U.S.C.R.S. selling expense, trade show
and marketing expenses, management compensation and higher repair costs for U.S.
Customer Service, partially offset by lower U.S.I.V.S. selling expenses.
Research and development expenses of $3.6 million for the three months
ended June 30, 1997 were 10.0% lower than the comparable period in 1996.
The Company recorded an operating loss of $19.9 million during the second
quarter of 1997 compared to an operating loss of $2.3 million for the second
quarter of 1996. Excluding purchase accounting adjustments associated with the
Acquisition of $10.2 million and $13.5 million from the second quarter of 1997
and 1996, respectively, operating profit would have declined by $20.9 million
due to lower revenue, higher costs associated with the one time charge for
inventory obsolescence and higher expenses associated with the severance
provision and increased marketing costs.
The Company has recorded a deferred tax asset of $58.6 million included in
other assets reflecting the benefit of net operating loss carryforwards and
various book tax temporary differences. The net operating loss carryforward as
of June 30, 1997 is approximately $58.5 million which will expire beginning in
the year 2010. Realization is dependent on generating sufficient taxable income
prior to expiration of the net operating loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax asset will be realized. Accordingly, no valuation
allowance has been established as of June 30, 1997. This conclusion is based
upon (i) the impact of purchase accounting adjustments which contribute to the
current taxable loss and will be substantially amortized by 1998, thereby
returning the Company to a taxable position, (ii) the long carryforward period
available for net operating loss utilization, and (iii) the Company's expected
future profitability. The amount of the deferred tax asset considered realizable
could be reduced if estimates of future taxable income during the net operating
loss carryforward period are reduced.
19
<PAGE>
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1997 VS. SIX MONTHS ENDED JUNE
30, 1996
Total revenue for the first six months of 1997 decreased 2.8% to $161.1
million from $165.7 million for the first six months ended June 30, 1996. This
decline in revenue is attributable to lower sales revenue from U.S.V.S.,
U.S.C.R.S., Contract Manufacturing and lower revenue from U.S. Customer Service
and International Operations offset in part by increased sales revenue from U.S.
Dealer Operations. U.S.V.S. revenue declined 0.5% to $40.3 million from $40.5
million due to lower U.S.I.V.S. revenue partially offset by increased U.S.I.H.S.
and U.S. Application and Training Specialists ("U.S.A.T.S.") revenue. U.S.I.V.S.
revenue declined 10.0% to $22.6 million from $25.1 million due to lower billings
for desktops, Straight Talk(TM) and small digital systems. U.S.I.H.S. revenue
increased 9.9% to $16.7 million from $15.2 million due to higher system
installations which included $1.5 million of Enterprise Express revenue.
U.S.C.R.S. revenue declined 4.5% to $25.6 million from $26.8 million due to
lower Prolog(TM) and Sentinel(TM) installations. U.S. Customer Service revenue
(including sale of parts) declined 1.3% to $48.0 million from $48.6 million due
to lower proprietary product service contract and parts revenue partially offset
by increased installation, third party maintenance and integration revenue.
Revenue from International Operations declined 11.0% to $22.8 million from $25.6
million due to lower Communications Recording System, service and desktop and
portable revenue as well as $0.5 million of unfavorable currency exchange.
Contract Manufacturing revenue for the first six months of 1997 was 5.9% lower
than the corresponding period of 1996.
Order backlog at June 30, 1997 totalled $29.0 million representing an
increase of $4.4 million, or 17.9%, over order backlog at December 31, 1996.
Order backlog at June 30, 1996 totalled $28.4 million.
Cost of sales and rentals increased 9.5% to $71.4 million (44.3% of total
revenue) during the first six months ended June 30, 1997 from $65.2 million
(39.3% of total revenue) for the first six months ended June 30, 1996. Excluding
additional depreciation and amortization expense related to purchase accounting
adjustments associated with the Acquisition of $1.8 million and $5.8 million for
the six months ended June 30, 1997 and 1996, respectively, cost of sales and
rentals would have increased as a percent of revenue to 43.2% for the six months
ended June 30, 1997 from 35.8% for the six months ended June 30, 1996. Cost of
sales and rentals as a percent of revenue increased during the six months ended
June 30, 1997 due to a one time non-cash charge of $10.5 million associated with
the provision for excess field service parts and stock related to Digital
Express(TM) and Records Express(TM) products.
Selling, service and administrative expenses (including amortization of
intangibles) for the first six months of 1997 increased 1.0% to $103.4 million
(64.2% of total revenue) from $102.3 million (61.7% of total revenue) for the
comparable period in 1996. Excluding additional depreciation and amortization
expense associated with purchase accounting adjustments related to the
Acquisition of $18.9 million and $24.2 million, respectively, from the six
months ended June 30, 1997 and 1996, selling, service and administrative
expenses would have represented 52.4% of total revenue for the six months ended
June 30, 1997 versus 47.1% of total revenue for the comparable period of 1996.
The increase in selling, service and administrative expenses is attributable to
the $2.3 million provision for severance, as well as increases in sales support,
trade show and marketing expense, U.S.A.T.S. training costs, increased legal
expense and management compensation. Partially offsetting this increase were
lower U.S.I.V.S. selling expense and lower International Operations
administrative and service expenses.
Research and development expenses of $7.3 million for the six months ended
June 30, 1997 were 3.3% lower than the comparable period in 1996.
20
<PAGE>
The Company recorded an operating loss of $21.0 million during the first
six months of 1997 compared to an operating loss of $9.4 million for the first
six months of 1996. Excluding purchase accounting adjustments associated with
the Acquisition of $20.7 million and $30.0 million, respectively, for the first
six months of 1997 and 1996, operating profit would have declined by $20.9
million due to lower revenue, higher costs associated with the charge for
inventory obsolescence, the provision for severance and increased operating
expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements consists primarily of scheduled
payments of principal and interest on its indebtedness, working capital needs
and capital expenditures. At June 30, 1997, the Company had outstanding term
loans of $136.75 million (the "Term Loans") and a $26.0 million loan outstanding
under the $40.0 million revolving credit facility (the "Revolving Credit
Facility"). Availability under the Revolving Credit Facility at June 30, 1997
was $14.0 million. Borrowings under the Revolving Credit Facility are expected
to increase in the third and fourth quarters of 1997 as a result of, among other
factors, the scheduled interest payment of $11.75 million made under the Notes,
which payment was made on August 1, 1997. Scheduled annual principal payments on
the term loans will be $11.75 million in 1997, $15.75 million in 1998 and 1999
and $19.75 million in 2000. There are no scheduled reductions in the Revolving
Credit Facility over the next five years; however, the Company is required to
reduce loans outstanding under the Revolving Credit Facility to $15.0 million
for a period of not less than 30 consecutive days during each consecutive
12-month period, as modified by the amendment to the Bank Credit Agreement
described below.
As a result of the need for additional liquidity during the remainder of
1997, the Company entered into an agreement on August 1, 1997 with a lender to
provide a facility (the "New Facility") with a $10 million line of credit, under
which the Company drew $1.5 million on that date. Loans incurred under the
facility mature, and the facility terminates, on January 30, 1998 and such loans
bear interest at the election of the Company at either (i) 2.5% over the base
rate set forth in the Bank Credit Agreement or (ii) 3.5% over a rate related to
the Eurodollar rate quoted by the lender under the facility. Under the terms of
the New Facility, various entities related to Stonington Capital Appreciation
1994 Fund (L.P.), the Company's principal stockholder ("Stonington"), have
agreed to assume loans under the facility if the Company defaults under its
obligations under such facility. The New Facility provides that if Stonington
assumes the loans pursuant to such provisions, it will have the option to
convert all of the principal and interest due under the assumed loans into
shares of Common Stock of the Company at a conversion rate of $10.00 per share,
which is equal to the price paid by management investors upon the closing of the
acquisition of the Company. The Company repaid all outstanding borrowings under
the New Facility on August 6, 1997.
In connection with the terms of the Credit Agreement, the Company entered
into interest rate swap agreements in November 1995, effective February 16,
1996, with an aggregate notional principal amount equivalent to $75 million
maturing on February 16, 1999. The swap will effectively convert that portion of
the Company's Term Loans to a fixed rate component of 5.8%; thus, reducing the
impact of changes in interest rates, converting the total effective interest
rate on fifty percent of the initial outstanding Term Loans to 8.8%. No funds
under the swap agreements are actually borrowed or are to be repaid. Amounts due
to or from the counterparties will be reflected in interest expense in the
periods in which they accrue.
In addition, the Credit Agreement contains covenants that significantly
limit or prohibit, among other things, the ability of the Company and Dictaphone
Corporation (U.S.) to incur indebtedness, make prepayments of certain
indebtedness, pay dividends on Common Stock, make investments, engage in
transactions with stockholders and affiliates, create liens, sell assets and
engage in mergers and consolidations and requires that the Company maintain
certain financial ratios.
21
<PAGE>
On June 30, 1997, the Company and the lenders under its Credit Agreement
executed a further amendment to such credit agreement, dated as of June 27,
1997, modifying certain of the covenants contained therein. The amendment
revised the financial covenants for maximum leverage ratio, minimum consolidated
EBITDA, and minimum interest coverage ratio, suspended the outstanding revolver
limitation to reduce loans 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 until January 1, 1999, and increased allowable Other
Indebtedness (as defined therein) from $1.5 million to $10.0 million. On July
21, 1997, the Company and the lenders under its Credit Agreement executed a
clarifying amendment to such Credit Agreement which permits cash proceeds
obtained through increased Other Indebtedness to be used for working capital
purposes.
The Company had $200.0 million of Notes outstanding as of June 30, 1997.
The Notes are subordinated to the Credit Agreement financings and other senior
indebtedness, as defined in the Note Indenture. The Notes contain covenants
similar to the Credit Agreement and provide for each noteholder to have the
right to require that the Company repurchase the Notes at 101% of the principal
amount upon a change of control as defined in the Note Indenture. The Notes bear
interest of 11-3/4% per annum, payable semi-annually on each February 1 and
August 1. The Notes mature on August 1, 2005. At June 30, 1997, the fair value
of the Notes was favorable $16 million based on dealer quotes.
Capital expenditures for the first half of 1997 totaled $3.0 million. The
Company does not expect the limitation on capital expenditures in the Credit
Agreement to restrict capital expenditures in a material manner.
The Company's quarterly revenues and other operating results have been and
will continue to be affected by a wide variety of factors that could have a
material adverse effect on the Company's financial performance during any
particular quarter. Such factors include, but are not limited to, the level of
orders that are received and shipped by the Company in any given quarter, the
rescheduling and cancellation of orders by customers, availability and cost of
materials, the Company's ability to enhance its existing products and to
develop, manufacture, and successfully introduce and market new products, new
product developments by the Company's competitors, market acceptance of products
of both the Company and its competitors, competitive pressures on prices,
significant damage to or prolonged delay in operations at the Company's sole
manufacturing facility, and interest rate and foreign exchange fluctuations. The
Company is currently planning to introduce a number of new products in its
target markets in the second half of 1997 which are expected to enhance future
revenues and liquidity of the Company. However, there can be no assurance that
the Company will be able to implement its plans to introduce such products in a
timely fashion, or that such products will meet the expectations of the Company
for either revenues or profitability. The Company believes that cash flows from
operating activities, assuming the successful introduction of its new products,
and its ability to borrow under the Revolving Credit Facility and the New
Facility, will be adequate to meet the Company's debt service obligations,
including the repayment of the New Facility, working capital needs and planned
capital expenditures for the foreseeable future.
The Company may, from time to time, provide estimates as to future
performance. Such estimates would be "forward-looking" statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Because such statements include risks and
uncertainties, actual results may differ materially from those estimates
provided. The Company undertakes no duty to update such forward looking
statements. Factors that could cause actual results to differ from these forward
looking statements include, but are not limited to, those listed in the prior
paragraph.
22
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not currently applicable to the Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 to the Condensed Consolidated Statements of Operations
(Unaudited) of Dictaphone Corporation which is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.16 -- Letter Agreement, dated April 11, 1997, between
Dictaphone Corporation and Mr. Peter Tong.+
10.17 -- Letter Agreement, dated July 9, 1997, between
Dictaphone Corporation and Mr. Joseph D. Skrzypczak.+
10.18 -- Amendment No. 2 to the Dictaphone Corporation
Management Stock Option Plan.+
10.19 -- Third Amendment (Technical Correction) to Credit
Agreement, dated as of July 21, 1997, by and among
Dictaphone Corporation and the Lenders party
thereto.
27 -- Financial Data Schedule.
- -----------------------------------
+ Management contract or compensatory arrangement
UNDERTAKING:
The undersigned, Dictaphone Corporation, hereby undertakes, pursuant to
Regulation S-K, Item 601(b), paragraph (4) (iii), to furnish to the Securities
and Exchange Commission upon request all constituent instruments defining the
rights of holders of long-term debt of Dictaphone Corporation and its
consolidated subsidiaries not filed herewith for the reason that the total
amount of securities authorized under any of such instruments does not exceed 10
percent of the total consolidated assets of Dictaphone Corporation and its
consolidated subsidiaries.
(b) REPORTS ON FORM 8-K
On July 8, 1997, the Company filed a Current Report on Form
8-K, reporting, under Item 5 thereof, the amendment of certain
covenants contained in the Company's senior Bank Credit Agreement,
dated as of August 7, 1995, as amended. No other reports on Form
8-K were filed by the Company during the quarter.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 1997 DICTAPHONE CORPORATION
----------------------------
(Registrant)
By: /S/ JOHN H. DUERDEN
---------------------------------
Name: John H. Duerden
Title: Chairman, Chief Executive Officer and President
(Principal Executive Officer)
By: /S/ JOSEPH D. SKRZYPCZAK
---------------------------------
Name: Joseph D. Skrzypczak
Title: Vice President, Chief Financial Officer
and Director
(Principal Financial and Accounting Officer)
24
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBITS DESCRIPTION NUMBERED PAGE
- -------- ----------- -------------
10.16 -- Letter Agreement, dated April 11, 1997, between
Dictaphone Corporation and Mr. Peter Tong.+
10.17 -- Letter Agreement, dated July 9, 1997, between
Dictaphone Corporation and Mr. Joseph D.
Skrzypczak.+
10.18 -- Amendment No. 2 to the Dictaphone Corporation
Management Stock Option Plan.+
10.19 -- Third Amendment (Technical Correction) to Credit
Agreement, dated as of July 21, 1997, by and among
Dictaphone Corporation and the Lenders party thereto.
27 -- Financial Data Schedule
- -----------------------------------
+ Management contract or compensatory arrangement
Exhibit 10.16
-------------
John H. Duerden Dictaphone Corporation
Chairman and 3191 Broadbridge Avenue
Chief Executive Officer Stratford, CT 06497-2559
phone 203.381.7308
fax 203.381.7494
[DICTAPHONE LOGO]
April 11, 1997
Mr. Peter Tong
P.O. Box 30726
Long Beach, CA 90853
Dear Peter:
Somewhat belatedly, I have the pleasure in confirming the terms of your
appointment to the Dictaphone Board of Directors:
1. You will be paid an annual fee of $25,000 which will cover your
attendance at Board meetings. A schedule for the rest of the year is
attached.
2. In addition, we will refund any travel expenses associated with your
attendance at these meetings.
3. You will receive options, subject to Board approval, to acquire
10,000 shares of fully vested Dictaphone Common Stock with an
exercise price of $10 a share. With the exception of the graduated
vesting schedule, all of the terms and conditions to the plan as
described in the enclosed "Management Stock Option Plan" and
"Stockholder's Agreement" would apply, copies of which are enclosed
for your review.
4. I would like to offer you a consultancy contract with the company at
the daily rate of $1,500. Initially, I would expect that we will
require your services two days per month, depending upon your
availability and our needs.
<PAGE>
Mr. Peter Tong
Page 2
April 11, 1997
It is my intention to establish a technical sub-committee of the Board
consisting of yourself, Emil Jachmann and myself together with two of our Vice
Presidents, Ron Elwell and Sue White. I would like you to assume the
Chairmanship of this group.
Peter, I think these terms should meet your requirements and reflect our
discussions.
I am delighted at your decision to join the Board of Directors and look forward
to working with you to realize the potential of this company.
Sincerely,
/s/ John H. Duerden
John H. Duerden
JHD:sea
Enclosures
Exhibit 10.17
-------------
John H. Duerden Dictaphone Corporation
Chairman and 3191 Broadbridge Avenue
Chief Executive Officer Stratford, CT 06497-2559
phone 203.381.7308
fax 203.381.7494
[DICTAPHONE LOGO]
July 9, 1997
Mr. Joseph D. Skrzypczak
Vice President and Chief Financial Officer
Dictaphone Corporation
3191 Broadbridge Avenue
Stratford, CT 06497
Dear Joe:
Reference is made to the employment letter agreement (the "Letter
Agreement") dated July 21, 1995 by and between Dictaphone Corporation
("Dictaphone") and you.
This letter will set forth our agreement with respect to certain aspects of
your employment relationship with Dictaphone; provided, however, that, except as
specifically modified herein, the provisions of the Letter Agreement shall
remain in full force and effect.
In order to induce your continued employment with Dictaphone and for other
good and valuable consideration, including but not limited to your past
performance, receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
1. Salary. Your annual base salary is hereby increased to $275,000,
effective as of July 1, 1997;
2. Bonus Arrangements.
2.1 Guaranteed Bonuses. In respect of each of the calendar years 1997 and
1998, you shall be paid a minimum guaranteed bonus equal to fifty percent (50%)
of your base salary, payable in the first quarter of 1998 and 1999,
respectively.
<PAGE>
July 9, 1997
Page 2
3. Additional Severance Arrangements. Without limiting or modifying the
severance benefits described in the Letter Agreement, it is agreed that you
shall be entitled to the following additional severance benefits:
3.1 In the event that you elect to terminate your employment (for any
reason whatsoever) with Dictaphone any time after December 31, 1997, you shall
be paid immediately by Dictaphone, in a lump sum, an amount equal to two times
your annual base salary, in addition to such other severance benefits (other
than salary continuation) customarily paid by Dictaphone for executives of your
level. For example, if you were to resign your position with Dictaphone on
January 2, 1998, you would be entitled to receive the sum of $550,000 (before
withholding, taxes, etc.) as a termination payment.
3.2 In the event of such termination by you of your employment with
Dictaphone, Dictaphone shall immediately pay to you that portion of the
guaranteed 1997 or 1998 bonuses accrued and unpaid to the date of termination.
For example, if you were to resign on February 1, 1998, you would be entitled to
be paid (i) your accrued guranteed bonus (if any) with respect to 1997 and
(ii)one-twelfth of the guaranteed bonus with respect to 1998.
Please indicate your acceptance of this Agreemnet by signing in the space
provided below.
Sincerely
Dictaphone Corporation
By: /s/ John H. Duerden
------------------------------------
John H. Duerden
Chairman and Chief Executive Officer
Agreed to and Accepted:
By: /s/ Joseph D. Skrzypczak
-------------------------
Joseph D. Skrzypczak
Dated: 7/11/97
----------------------
Exhibit 10.18
-------------
AMENDMENT NUMBER 2
TO THE
DICTAPHONE CORPORATION
MANAGEMENT STOCK OPTION PLAN
AMENDMENT, dated as of August 1, 1997, to the Dictaphone Corporation
Management Stock Option Plan (the "Plan").
W I T N E S S E T H:
WHEREAS, the Board of Directors (the "Board") of the Dictaphone Corporation
(the "Company") has determined that it desires to amend the Plan to increase the
number of shares of Company common stock issuable thereunder and to make certain
clarifying changes; and
WHEREAS, Section 11(b) of the Plan provides that the Board may amend the
Plan from time to time;
NOW THEREFORE, the Plan is hereby amended as follows:
1. INCREASE IN SHARES SUBJECT TO PLAN. Section 2 of the Plan is hereby
amended by replacing the number 850,000 in each place it appears in such Section
with the number 1,200,000, and by deleting the second sentence of such Section.
2. CLARIFYING CHANGES. (a) Section 6(e)(i) of the Plan is hereby amended
by (i) deleting the words "for up to 425,000 Option Shares" from the first
sentence thereof, (ii) deleting the words "prior to the fifth anniversary of the
Effective Date" where they occur preceding the first proviso to the second
sentence thereof:
"and Service Options granted after the Effective Date shall
vest and become exercisable in accordance with such
schedules as may be established by the Board of Directors
or the Committee"
(b) Section 6(e)(ii) of the Plan is hereby amended by (i) deleting the
words "for up to 425,000 Option Shares" from the first sentence thereof, (ii)
deleting the words "prior to the fifth anniversary of the Effective Date" where
they occur in the second sentence therof, and (iii) replacing all of the second
sentence thereof prior to the first proviso thereto with the following:
"Performance Options shall become exercisable on the
tenth anniversary of the relevant date of grant (prior to the
expiration of such Options), unless sooner accelerated
based on achieving (x) in the case of Performance Options
granted on the Effective Date, the Target Enterprise
<PAGE>
Values as set forth in Schedule I hereto, or (y) in the case
of Performance Options granted after the Effective Date,
such performance goals as may be established by the
Board of Directors or the Committee."
3. EFFECTIVE DATE. This Amendment Number 2 shall be effective as of the
date first above written.
Exhibit 10.19
-------------
DICTAPHONE CORPORATION
THIRD AMENDMENT (TECHNICAL CORRECTION) TO CREDIT AGREEMENT
This THIRD AMENDMENT (TECHNICAL CORRECTION) TO CREDIT AGREEMENT (this
"AMENDMENT") is dated as of July 21, 1997 and entered into by and among
DICTAPHONE CORPORATION (formerly Dictaphone Acquisition Inc.), a Delaware
corporation ("COMPANY"), and the financial institutions listed on the signature
pages hereof ("LENDERS"), and is made with reference to that certain Credit
Agreement dated as of August 7, 1995, as amended to the date hereof (as so
amended, the "CREDIT AGREEMENT"), by and among Company, Lenders, NationsBank,
N.A. (Carolinas), as documentation agent for Lenders, and Bankers Trust Company,
as administrative agent for Lenders. Capitalized terms used herein without
definition shall have the same meanings herein as set forth in the Credit
Agreement.
RECITALS
WHEREAS, pursuant to that certain Second Amendment to Credit
Agreement dated as of June 27, 1997 (the "SECOND AMENDMENT"), Company and
Lenders amended certain provisions of the Credit Agreement for the purpose of,
among other things, permitting Company and Subsidiary Guarantors to incur up to
$10,000,000 of Indebtedness under subsection 7.1(viii) of the Credit Agreement
("OUTSIDE INDEBTEDNESS");
WHEREAS, the purpose of increasing the amount of Outside Indebtedness
that Company and Subsidiary Guarantors are able to incur was, among other
things, to permit Company and Subsidiary Guarantors to obtain additional
financing for working capital purposes;
WHEREAS, a literal interpretation of the provisions of subsection
2.4B(iii)(d) of the Credit Agreement would require Company to apply the Cash
proceeds of any debt Securities of Company or any of its Subsidiaries, including
Cash proceeds of any Outside Indebtedness as well as Cash proceeds of
intercompany Indebtedness permitted under subsection 7.1(iv) of the Credit
Agreement, Cash proceeds of Indebtedness of Foreign Subsidiaries permitted under
subsection 7.1(v) of the Credit Agreement, and Cash proceeds of purchase-money
Indebtedness permitted under subsection 7.1(vii) of the Credit Agreement, to
prepay the Term Loans;
WHEREAS, such application would cause the proceeds of such permitted
Indebtedness (including any Outside Indebtedness) to be unavailable for the
purposes for which Lenders intended to permit Company to incur such
Indebtedness; and
WHEREAS, Company and Lenders desire to correct such unintended result
of the provisions of subsection 2.4B(iii)(d) of the Credit Agreement by amending
such subsection 2.4B(iii)(d) to clarify that the Cash proceeds of any
Indebtedness permitted under subsection 7.1 of the Credit Agreement are excluded
from the prepayment requirements of such subsection 2.4B(iii)(d):
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
<PAGE>
SECTION 1. AMENDMENT TO THE CREDIT AGREEMENT
Subsection 2.4B(iii)(d) of the Credit Agreement is hereby amended by
adding the phrase ", other than Cash proceeds of any Indebtedness permitted
under subsection 7.1," immediately after the phrase "any debt or equity
Securities of Company or any of its Subsidiaries" contained therein.
SECTION 2. COMPANY'S REPRESENTATIONS AND
WARRANTIES
In order to induce Lenders to enter into this Amendment and to amend
the Credit Agreement in the manner provided herein, Company represents and
warrants to each Lender that the following statements are true, correct and
complete:
A. CORPORATE POWER AND AUTHORITY. Company has all requisite
corporate power and authority to enter into this Amendment and to carry out the
transactions contemplated by, and perform its obligations under, the Credit
Agreement as amended by this Amendment (the "AMENDED AGREEMENT").
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of
this Amendment and the performance of the Amended Agreement have been duly
authorized by all necessary corporate action on the part of Company.
C. NO CONFLICT. The execution and delivery by Company of this
Amendment and the performance by Company of the Amended Agreement do not and
will not (i) violate any provision of any law or any governmental rule or
regulation applicable to Company or any of its Subsidiaries, the Certificate or
Articles of Incorporation or Bylaws of Company or any of its Subsidiaries or any
order, judgment or decree of any court or other agency of government binding on
Company or any of its Subsidiaries, (ii) conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under any
Contractual Obligation of Company or any of its Subsidiaries, (iii) result in or
require the creation or imposition of any Lien upon any of the properties or
assets of Company or any of its Subsidiaries (other than Liens created under any
of the Loan Documents in favor of Agent on behalf of Lenders), or (iv) require
any approval of stockholders or any approval or consent of any Person under any
Contractual Obligation of Company or any of its Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by Company
of this Amendment and the performance by Company of the Amended Agreement do not
and will not require any registration with, consent or approval of, or notice
to, or other action to, with or by, any federal, state or other governmental
authority or regulatory body.
E. BINDING OBLIGATION. This Amendment and the Amended Agreement have
been duly executed and delivered by Company and are the legally valid and
binding obligations of Company, enforceable against Company in accordance with
their respective terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or limiting creditors'
rights generally or by equitable principles relating to enforceability.
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT
AGREEMENT. The representations and warranties contained in Section 4 of the
Credit Agreement are and will be true, correct and complete in all material
respects on and as of the date of effectiveness of this Amendment (the "THIRD
AMENDMENT EFFECTIVE DATE") to the same extent as though made on and as of that
date, except to the extent such representations and warranties specifically
relate to an earlier date, in which case they were true, correct and complete in
all material respects on and as of such earlier date.
G. ABSENCE OF DEFAULT. No event has occurred and is continuing or
will result from the consummation of the transactions contemplated by this
Amendment that would constitute an Event of Default or a Potential Event of
Default.
<PAGE>
SECTION 3. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT
AND THE OTHER LOAN DOCUMENTS.
(i) On and after the Third Amendment Effective Date, each reference
in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import referring to the Credit Agreement, and
each reference in the other Loan Documents to the "Credit Agreement",
"thereunder", "thereof" or words of like import referring to the Credit
Agreement shall mean and be a reference to the Amended Agreement.
(ii) Except as specifically amended by this Amendment, the Credit
Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Amendment shall
not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of
Agent or any Lender under, the Credit Agreement or any of the other Loan
Documents.
B. FEES AND EXPENSES. Company acknowledges that all costs, fees
and expenses as described in subsection 10.2 of the Credit Agreement incurred by
Agent and its counsel with respect to this Amendment and the documents and
transactions contemplated hereby shall be for the account of Company.
C. 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.
D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING
WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF
NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
E. 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 Company and Requisite Lenders and receipt by Company and
Agent of written or telephonic notification of such execution and authorization
of delivery thereof.
<PAGE>
[Remainder of page intentionally left blank]
<PAGE>
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.
COMPANY:
DICTAPHONE CORPORATION
By: /s/ Joseph D. Skrzypczak
Title: Chief Financial Officer
LENDERS:
BANKERS TRUST COMPANY
By: /s/ Robert R. Telesca
Title: Assistant Vice President
NATIONSBANK, N.A. (CAROLINAS)
By: /s/ Robert Wilson
Title: Vice President
BANQUE PARIBAS
By: /s/ Douglas Gouchoe
Title: Vice President
By: /s/ Edward Irwin
Title: Vice President
THE CHASE MANHATTAN BANK
By: /s/ Neil Sweeny
Title: Vice President
THE BANK OF NOVA SCOTIA
By:___________________________
Title:________________________
<PAGE>
THE FUJI BANK, LTD.
NEW YORK BRANCH
By:___________________________
Title:________________________
U.S. BANK
By: /s/ Monica J. Treacy
Title: Assistant Vice President
THE BANK OF TOKYO-MITSUBISHI, LIMITED
By:___________________________
Title:________________________
PILGRIM AMERICA PRIME RATE TRUST
By: /s/ Thomas C. Hunt
Title: Assistant Portfolio Manager
MERRILL LYNCH SENIOR
FLOATING RATE FUND, INC.
By:___________________________
Title:________________________
MERRILL LYNCH PRIME RATE PORTFOLIO
By:___________________________
Title:________________________
MERRILL LYNCH DEBT STRATEGIES
PORTFOLIO INC.
By:___________________________
Title:________________________
<PAGE>
ML CBO IV (CAYMAN) LTD.
By: /s/ James Dondero CPA, CFA
Title: President-Protective Asset Management, L.L.C.
ORIX USA CORPORATION
By:___________________________
Title:________________________
FIRST SOURCE FINANCIAL LLP
BY: First Source Financial, Inc., its
Agent/Manager
By: /s/ James W. Wilson
Title: Senior Vice President
CREDIT AGRICOLE INDOSUEZ
By:___________________________
Title:________________________
MORGAN STANLEY SENIOR FUNDING, INC.
By: /s/ Christopher A. Pucillo
Title: Vice President
GOLDMAN SACHS CREDIT PARTNERS L.P.
By: /s/ John E. Urban
Title: Authorized Signer
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By: /s/ Shuichi Tajima
Title: Deputy General Manager
CARGILL FINANCIAL SERVICES CORPORATION
By: /s/ Patrick Halloran
Title: Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET OF DICTAPHONE CORPORATION AT JUNE 30, 1997,
AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,821
<SECURITIES> 0
<RECEIVABLES> 54,308
<ALLOWANCES> 757
<INVENTORY> 42,795
<CURRENT-ASSETS> 114,830
<PP&E> 63,920
<DEPRECIATION> 28,159
<TOTAL-ASSETS> 483,995
<CURRENT-LIABILITIES> 92,032
<BONDS> 349,507
19,455
0
<COMMON> 95
<OTHER-SE> 12,106
<TOTAL-LIABILITY-AND-EQUITY> 483,995
<SALES> 115,584
<TOTAL-REVENUES> 161,108
<CGS> 71,399
<TOTAL-COSTS> 182,092
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,677
<INCOME-PRETAX> (41,897)
<INCOME-TAX> 14,983
<INCOME-CONTINUING> (26,914)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,914)
<EPS-PRIMARY> (2.99)
<EPS-DILUTED> (2.99)
</TABLE>
