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 March 31, 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 May 8, 1997:
9,462,000
The Common Stock of the registrant is not publicly traded.
<PAGE>
DICTAPHONE CORPORATION
----------------------
INDEX
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PAGE NO.
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Statements
of Operations for the Three Months Ended
March 31, 1997 and March 31, 1996 2
Condensed Consolidated Balance Sheets as of
March 31, 1997 (Unaudited) and December 31, 1996 3
Unaudited Condensed Consolidated Statements
of Cash Flow for the Three Months Ended
March 31, 1997 and March 31, 1996 4
Notes to Unaudited Consolidated Financial
Statements 5 - 13
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 18
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings 18
ITEM 6. Exhibits and Reports on Form 8-K 18
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amount)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1996 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Revenues:
Sales and rentals $ 57,984 $ 58,248
Support services 22,475 22,919
----------- -----------
Total revenue 80,459 81,167
----------- -----------
Costs and expenses:
Cost of sales and rentals 33,482 29,596
Selling, service and administrative 39,598 39,574
Amortization of intangibles 10,928 9,378
Research and development 3,587 3,734
----------- -----------
Operating loss (7,136) (1,115)
Interest expense 11,005 10,445
Other expense - net 13 373
----------- -----------
Loss before income taxes (18,154) (11,933)
Income tax benefit 6,724 4,099
----------- -----------
Net loss (11,430) (7,834)
Stock dividends on PIK Preferred Stock 525 635
----------- -----------
Net loss applicable to Common Stock $ (11,955) $ (8,469)
=========== ===========
Net loss per share of Common Stock $ (1.26) $ (0.90)
=========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash $ 7,927 $ 4,756
Accounts receivable, less allowances of $1,339 and $762, respectively 53,701 57,074
Inventories 56,840 54,319
Other current assets 9,833 10,528
----------- ---------
Total current assets 128,301 126,677
Property, plant and equipment, net 37,008 35,829
Deferred financing costs, net of accumulated amortization of $6,235
and $7,290, respectively 14,255 13,200
Intangibles, net of accumulated amortization of $58,177 and $67,555, respectively 271,022 261,018
Prepaid repurchases, leased equipment 5,163 4,747
Other assets 49,086 53,190
----------- ---------
Total assets $ 504,835 $ 494,661
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,634 $ 7,179
Interest payable 10,342 4,438
Accrued liabilities 29,961 23,759
Advance billings 34,808 35,827
Current portion of long-term debt 12,512 20,161
----------- ---------
Total current liabilities 95,257 91,364
Long-term debt 340,086 342,294
Other liabilities 10,114 10,436
----------- ---------
Total liabilities $ 445,457 $ 444,094
----------- ---------
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 March 31, 1997, $18,777) 18,142 18,777
Common stock ($.01 par value; 20,000,000 shares authorized;
9,462,000 shares outstanding) 95 95
Notes receivable from stockholders (1,052) (899)
Additional paid-in capital 94,905 94,905
Treasury stock, at cost (200) (380)
Accumulated deficit (51,676) (60,145)
Accumulated translation adjustment (836) (1,786)
----------- ---------
Total stockholders' equity 59,378 50,567
----------- ---------
Total liabilities and stockholders' equity $ 504,835 $ 494,661
=========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(Dollars in thousands)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1996 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Operating activities:
Net loss $ (11,430) $ (7,834)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization (including $3,689
and $694, respectively, of nonrecurring charges) 20,888 15,287
Provision for deferred income taxes (6,791) (4,015)
Changes in assets and liabilities:
Accounts receivable 5,796 (4,160)
Inventories (32) 1,450
Other current assets 901 (813)
Accounts payable and accrued liabilities (10,247) (12,010)
Advance billings (415) 1,152
Other assets and other (1,837) (833)
----------- -----------
Net cash used in operating activities (3,167) (11,776)
----------- -----------
Investing activities:
Payment for acquisition (8,000) ---
Net investment in fixed assets (883) (1,076)
----------- -----------
Net cash used in investing activities (8,883) (1,076)
----------- -----------
Financing activities:
International repayment --- (621)
Repayment under term loan facility (1,750) (2,750)
Borrowings under revolving credit facility 8,000 21,750
Repayment under revolving credit facility --- (8,500)
Other 97 (105)
----------- -----------
Net cash provided by financing activities 6,347 9,774
----------- -----------
Effect of exchange rate changes on cash (22) (93)
----------- -----------
Decrease in cash (5,725) (3,171)
Cash, beginning of period 14,279 7,927
----------- -----------
Cash, end of period $ 8,554 $ 4,756
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 14,623 $ 15,233
=========== ===========
Income taxes paid $ 678 $ 10
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
DICTAPHONE CORPORATION
NOTES TO 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 month periods ended March 31, 1997 and
March 31, 1996, but in the opinion of management contain all adjustments
which are of a normal and recurring nature necessary to present fairly
the financial position and results of operations and cash flows for the
periods presented.
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 March 31, 1997 was 9,462,000.
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31, MARCH 31,
1996 1997
------------ ----------
Raw materials and work in process $ 14,881 $ 15,294
Supplies and service parts 19,946 18,326
Finished products 22,013 20,699
----------- -----------
Total inventories $ 56,840 $ 54,319
=========== ===========
5
<PAGE>
4. INTANGIBLES
The following summarizes intangible assets, net of accumulated
amortization of $58,177 and $67,555 at December 31, 1996 and March 31,
1997, respectively. Amortization expense for the three months ended March
31, 1997 was $9,378.
DECEMBER 31, MARCH 31,
1996 1997
------------ ----------
Goodwill $ 139,687 $ 138,246
Tradenames 75,158 74,671
Service contracts 18,951 16,086
Non-compete agreement 30,057 25,342
Patents 7,169 6,673
----------- -----------
$ 271,022 $ 261,018
=========== ===========
5. INCOME TAXES
The benefit for income taxes for the three months ended March 31,
1997 is $4,099.
The Company has recorded a deferred tax asset of $48.0 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 March 31, 1997 is approximately $48.0
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 March 31, 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.
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.
6
<PAGE>
6. COMMITMENTS AND 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.
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 amended by
the First Amendment to Credit Agreement, dated June 28, 1996, on July 17,
1996 (collectively, the "Credit Agreement"), and other senior
indebtedness as defined in the indenture pursuant to which the Notes were
issued (the "Note Indenture"). Dictaphone Non-U.S. (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
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
The following are the supplemental consolidating statements of
operations and cash flow information for the three month periods ended
March 31, 1996 and 1997, and the supplemental consolidating balance
sheet information as of December 31, 1996 and March 31, 1997.
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
THREE MONTHS ENDED MARCH 31, 1996
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
------------ ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue from: $ --- $ 50,392 $ 11,016 $ (3,424) $ 57,984
Sales and rentals --- 19,650 2,825 --- 22,475
Support services ---------- ---------- ---------- --------- ----------
--- 70,042 13,841 (3,424) 80,459
Total revenues ---------- ---------- ---------- --------- ----------
Costs and expenses:
Cost of sales and rentals --- 30,592 6,206 (3,316) 33,482
Selling, service and administrative 38 42,896 7,577 15 50,526
Research and development --- 3,587 --- --- 3,587
Interest expense - net and other 853 9,481 685 (1) 11,018
---------- ---------- ---------- --------- ----------
Total costs and expenses 891 86,556 14,468 (3,302) 98,613
---------- ---------- ---------- --------- ----------
Equity (loss) earnings (4,415) --- --- 4,415 ---
---------- ---------- ---------- --------- ----------
(Loss) income before income taxes (5,306) (16,514) (627) 4,293 (18,154)
Income tax benefit 259 6,407 10 48 6,724
---------- ---------- ---------- --------- ----------
Net (loss) income $ (5,047) $ (10,107) $ (617) $ 4,341 $ (11,430)
========== ========== ========== ========= ==========
</TABLE>
8
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
THREE MONTHS ENDED MARCH 31, 1997
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
------------ ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue from:
Sales and rentals $ --- $ 52,042 $ 8,874 $ (2,668) $ 58,248
Support services --- 20,235 2,684 --- 22,919
---------- ---------- ---------- --------- ----------
Total revenues --- 72,277 11,558 (2,668) 81,167
---------- ---------- ---------- --------- ----------
Costs and expenses:
Cost of sales and rentals --- 27,421 4,896 (2,721) 29,596
Selling, service and administrative 219 42,353 6,380 --- 48,952
Research and development --- 3,734 --- --- 3,734
Interest expense - net and other 875 8,974 969 --- 10,818
---------- ---------- ---------- --------- ----------
Total costs and expenses 1,094 82,482 12,245 (2,721) 93,100
---------- ---------- ---------- --------- ----------
Equity (loss) earnings (916) --- --- 916 ---
---------- ---------- ---------- --------- ----------
(Loss) income before income taxes (2,010) (10,205) (687) 969 (11,933)
Income tax benefit 294 3,766 61 (22) 4,099
---------- ---------- ---------- --------- ----------
Net (loss) income $ (1,716) $ (6,439) $ (626) $ 947 $ (7,834)
========== ========== ========== ========= ==========
</TABLE>
9
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
DECEMBER 31, 1996
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
------------ ----------- ---------- ------------- ------------
<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 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>
10
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
MARCH 31, 1997
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
------------ ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ --- $ 3,552 $ 1,157 $ 47 $ 4,756
Accounts receivable 4,492 51,405 9,776 (8,599) 57,074
Inventories --- 47,403 8,162 (1,246) 54,319
Other current assets 92 6,079 4,357 --- 10,528
---------- ---------- ---------- ---------- ----------
Total current assets 4,584 108,439 23,452 (9,798) 126,677
Note receivable --- 17,921 --- (17,921) ---
Investments in subsidiaries 450,185 --- --- (450,185) ---
Fixed assets, net --- 32,970 2,859 --- 35,829
Intangibles, net 2,117 242,119 16,782 --- 261,018
Deferred financing costs 13,200 --- --- --- 13,200
Other assets 3,562 52,053 1,831 491 57,937
---------- ---------- ---------- ---------- ----------
Total assets $ 473,648 $ 453,502 $ 44,924 $ (477,413) $ 494,661
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable and
accrued liabilities $ 4,475 $ 28,716 $ 10,884 $ (8,699) $ 35,376
Advance billings --- 31,607 4,220 --- 35,827
Current portion of long-term debt 20,000 --- 161 --- 20,161
---------- ---------- ---------- ---------- ----------
Total current liabilities 24,475 60,323 15,265 (8,699) 91,364
Long-term debt 359,685 344,245 18,035 (379,671) 342,294
Other liabilities --- 10,144 292 --- 10,436
Stockholders' equity 89,488 38,790 11,332 (89,043) 50,567
---------- ---------- ---------- ---------- ----------
Total liabilities
and stockholders' equity $ 473,648 $ 453,502 $ 44,924 $ (477,413) $ 494,661
========== ========== ========== ========== ==========
</TABLE>
11
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
THREE MONTHS ENDED MARCH 31, 1996
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
------------ ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss $ (5,047) $ (10,107) $ (617) $ 4,341 $ (11,430)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,679 17,956 1,253 --- 20,888
Provision for deferred income taxes (301) (6,407) (83) --- (6,791)
Change in assets and liabilities:
Accounts receivable 3,475 7,665 (2,342) (3,002) 5,796
Inventories --- (1,420) 1,266 122 (32)
Other current assets --- 1,390 (458) (31) 901
Accounts payable and
accrued liabilities (5,347) (8,012) 127 2,985 (10,247)
Advance billings --- (775) 360 --- (415)
Other assets and other 4,415 (1,595) (242) (4,415) (1,837)
---------- ---------- ---------- ---------- ----------
Cash used in operating activities (1,126) (1,305) (736) --- (3,167)
---------- ---------- ---------- ---------- ----------
Investing activities:
Payment for acquisition (8,000) --- --- --- (8,000)
Net investment in fixed assets --- (807) (76) --- (883)
---------- ---------- ---------- ---------- ----------
Cash used in investing activities (8,000) (807) (76) --- (8,883)
---------- ---------- ---------- ---------- ----------
Financing activities:
Repayment under term loan facility (1,750) --- --- --- (1,750)
Borrowing from promissory notes (6,250) 6,250 --- --- ---
Borrowing from subsidiary 9,029 (9,029) --- --- ---
Borrowing from revolving credit facility 8,000 --- --- --- 8,000
Other 97 --- --- --- 97
---------- ---------- ---------- ---------- ----------
Cash provided by (used in) financing
activities 9,126 (2,779) --- --- 6,347
---------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on cash --- --- (22) --- (22)
---------- ---------- ---------- ---------- ----------
Decrease in cash --- (4,891) (834) --- (5,725)
Cash, beginning of period --- 11,591 2,688 --- 14,279
---------- ---------- ---------- ---------- ----------
Cash, end of period $ --- $ 6,700 $ 1,854 $ --- $ 8,554
========== ========== ========== ========== ==========
</TABLE>
12
<PAGE>
7. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
THREE MONTHS ENDED MARCH 31, 1997
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
------------ ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss $ (1,716) $ (6,439) $ (626) $ 947 $ (7,834)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,133 13,260 894 --- 15,287
Provision for deferred income taxes (316) (3,765) 44 22 (4,015)
Change in assets and liabilities:
Accounts receivable 5,404 (2,146) (2,398) (5,020) (4,160)
Inventories --- 130 1,373 (53) 1,450
Other current assets 425 (634) (604) --- (813)
Accounts payable and
accrued liabilities (6,185) (11,534) 689 5,020 (12,010)
Advance billings --- 361 791 --- 1,152
Other assets and other 916 (1,271) 438 (916) (833)
---------- ---------- ---------- ---------- ----------
Cash used in operating activities (339) (12,038) 601 --- (11,776)
---------- ---------- ---------- ---------- ----------
Investing activities:
Net investment in fixed assets --- (1,049) (27) --- (1,076)
---------- ---------- ---------- ---------- ----------
Cash used in investing activities --- (1,049) (27) --- (1,076)
---------- ---------- ---------- ---------- ----------
Financing activities:
Repayment under term loan facility (2,750) --- --- --- (2,750)
Borrowing from promissory notes (10,500) 10,500 (47) 47 ---
Borrowing from subsidiary 430 (430) --- --- ---
Borrowing from revolving credit facility 21,750 --- --- --- 21,750
Repayment under revolving credit facility (8,500) --- --- --- (8,500)
Other (91) --- (635) --- (726)
---------- ---------- ---------- ---------- ----------
Cash provided by (used in) financing
activities 339 10,070 (682) 47 9,774
---------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on cash --- --- (93) --- (93)
---------- ---------- ---------- ---------- ----------
Increase (decrease) in cash --- (3,017) (201) 47 (3,171)
Cash, beginning of period --- 6,569 1,358 --- 7,927
---------- ---------- ---------- ---------- ----------
Cash, end of period $ --- $ 3,552 $ 1,157 $ 47 $ 4,756
========== ========== ========== ========== ==========
</TABLE>
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
OVERVIEW
THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1997
---- ----
(IN MILLIONS)
(unaudited)
Total revenue $ 80.5 $ 81.2
Cost of sales and rentals (1) 33.5 29.6
Selling, service and administrative expense 50.5 49.0
Research and development 3.6 3.7
--------- --------
Operating loss (7.1) (1.1)
--------- --------
Net interest expense and other 11.0 10.8
Income tax benefit (6.7) (4.1)
--------- --------
Net loss $ (11.4) $ (7.8)
========= ========
EBITDA (2) $ 12.1 $ 13.1
========= ========
- ------------
(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. 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.
14
<PAGE>
THREE MONTHS ENDED
MARCH 31,
------------------------
1996 1997
------ ------
(IN MILLIONS)
(unaudited)
Revenue from:
Sales:
U.S. Integrated Voice Systems $ 12.1 $ 11.6
U.S. Integrated Health Systems 6.2 9.4
U.S. Application & Training Specialists --- 0.5
--------- --------
Total U.S. Voice Systems 18.3 21.5
U.S. Communication Recording Systems 12.5 11.9
U.S. Customer Service Parts 4.4 4.0
Contract Manufacturing
(including sales to Pitney Bowes) 10.1 9.1
U.S. Dealer Operations 1.2 2.3
International Operations 11.0 8.9
--------- --------
Total sales 57.5 57.7
--------- --------
Rentals 0.5 0.5
--------- --------
Total sales and rentals 58.0 58.2
--------- --------
Service:
U.S. Customer Service 19.7 20.3
International Operations 2.8 2.7
--------- --------
Total support service 22.5 23.0
--------- --------
Total revenue $ 80.5 $ 81.2
========= ========
RESULTS OF OPERATIONS - FIRST QUARTER 1997 VS. FIRST QUARTER 1996
Total revenue for the first three months of 1997 increased 0.9% to $81.2
million from $80.5 million during the first three months of 1996. This increase
in revenue is attributable to higher sales revenue from U.S. Voice Systems
("U.S.V.S.") and U.S. Dealer Operations and increased U.S. Customer Service
revenue offset in part by lower sales revenue from U.S. Communications Recording
Systems ("U.S.C.R.S.") and Contract Manufacturing and lower International
Operations revenue.
U.S.V.S. revenue increased 17.1% to $21.5 million from $18.3 million as a
result of a significant increase in U.S. Integrated Health Systems
("U.S.I.H.S.") revenue. U.S.I.H.S. revenue increased 51.4% to $9.4 million from
$6.2 million due to higher systems billings which included $1.0 million of
revenue associated with the Company's new digital system product, Enterprise
ExpressTM. U.S.I.H.S. orders increased 17.9% to $9.6 million during the first
quarter of 1997 from $8.1 million in the first quarter of 1996. U.S. Integrated
Voice Systems ("U.S.I.V.S.") revenue declined 4.6% to $11.6 million from $12.1
million due to lower billings for desktops, Straight TalkTM and small digital
systems. U.S. Customer Service revenue (including sale of parts) increased 0.9%
to $24.3 million from $24.1 million due to higher hourly service revenue (up
10.0%), installation revenue (up 4.5%), and integration revenue (up 24.9%).
U.S.C.R.S. revenue
15
<PAGE>
declined 4.5% to $11.9 million from $12.5 million due to lower analog logger and
Call Check revenue and fewer PrologTM installations. U.S.C.R.S. orders increased
20.7% to $13.8 million during the first quarter of 1997 from $11.4 million in
the first quarter of 1996. Revenue from International Operations declined 16.3%
to $11.6 million from $13.8 million due to lower desktop and portable
Communications Recording System and service revenue as well as the result of
$0.2 million of unfavorable currency exchange. International orders declined
7.9% to $10.8 million during the first quarter of 1997 versus $11.7 million for
the comparable period in 1996. Contract Manufacturing revenue for the first
quarter of 1997 was 11.0% lower than the corresponding period of 1996.
Cost of sales and rentals declined 11.6% to $29.6 million (36.5% of total
revenue) during the three months ended March 31, 1997 from $33.5 million (41.6%
of total revenue) for the three months ended March 31, 1996. Excluding
additional depreciation and amortization expense related to purchase accounting
adjustments associated with the Acquisition of $0.9 million and $4.4 million
for the first three months of 1997 and 1996, respectively, cost of sales and
rentals would have declined as a percent of revenue to 35.4% for the three
months ended March 31, 1997 from 36.1% for the three months ended March 31,
1996. Cost of sales and rentals as a percentage of total revenue declined during
the three months ended March 31, 1997 due to lower inventory adjustments and a
reduced content of low margin Contract Manufacturing revenue, partially offset
by lower U.S.C.R.S. price realization.
Selling, service and administrative expenses (including amortization of
intangibles) for the first quarter of 1997 decreased 3.1% to $49.0 million
(60.3% of total revenue) from $50.5 million (62.8% 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 $9.6 million and $12.1 million, respectively, from the three
months ended March 31, 1997 and 1996, selling, service and administrative
expenses would have represented 48.5% of total revenue for the three months
ended March 31, 1997 versus 47.8% of total revenue for the comparable period of
1996. This increase is attributable to increases in trade show related costs,
higher management compensation, legal expenses, and training costs, and higher
U.S.I.H.S. and U.S.C.R.S. selling expenses partially offset by lower U.S.I.V.S.
field compensation and employee-related expenses associated with reduced
staffing, and lower international selling and service expenses.
Research and development expenses of $3.7 million for the three months
ended March 31, 1997 were 4.1% higher than the comparable period in 1996 due to
increased staffing.
The Company recorded an operating loss of $1.1 million during the first
quarter of 1997 compared to an operating loss of $7.1 million for the first
quarter of 1996. Excluding purchase accounting adjustments associated with the
Acquisition of $10.5 million and $16.5 million, respectively, for the first
quarter of 1997 and 1996, operating profit would have been flat versus the prior
year period as the impact of higher revenue and improved margins was offset by
higher operating expenses.
The Company has recorded a deferred tax asset of $48.0 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 March 31, 1997 is approximately $48.0 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 March 31, 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.
16
<PAGE>
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 March 31, 1997, the Company had outstanding term loans of $139.5
million (the "Term Loans") and a $22.25 million loan outstanding under the $40.0
million revolving credit facility (the "Revolving Credit Facility").
Availability under the Revolving Credit Facility at March 31, 1997 was $17.75
million. Borrowings under the Revolving Credit Facility increased by $13.25
million during the first quarter of 1997 due to the scheduled February 1, 1997
interest payment associated with the Notes. 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.
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.
The Company had $200.0 million of Notes outstanding as of March 31, 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 March 31, 1997, the fair value
of the Notes was a favorable $15.0 million based on dealer quotes.
First quarter capital expenditures totaled $1.1 million. The Company does
not expect the limitation on capital expenditures in the Credit Agreement to
restrict capital expenditures in a material manner.
17
<PAGE>
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.
Primarily as a result of the Company's strategy and recent trends towards
investing more funds in research and development and new product delivery, the
Company at this time is uncertain as to whether, in the near term, it will be
able to meet certain existing financial covenants contained in the Credit
Facility. Although the Company is in compliance with all aspects of the Credit
Facility, its management has initiated preliminary discussions with its
administrative agent to seek certain amendments to the covenants contained
therein. There can be no assurance, however, that such amendments, if any, can
be obtained. Subject to the foregoing, 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 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
See Note 6 to the Condensed Consolidated Statements of Operations
(Unaudited) of Dictaphone Corporation which is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) EXHIBITS
--------
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
-------------------
There were no Reports on Form 8-K filed during the three
months ended March 31, 1997.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 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)
19
<PAGE>
EXHIBIT INDEX
-------------
SEQUENTIALLY
EXHIBITS DESCRIPTION NUMBERED PAGE
- -------- ----------- -------------
*27. -- Financial Data Schedule
- ----------------------
* Filed herewith.
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET OF DICTAPHONE CORPORATION AT MARCH 31,
1997, AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,756
<SECURITIES> 0
<RECEIVABLES> 57,836
<ALLOWANCES> 762
<INVENTORY> 54,319
<CURRENT-ASSETS> 126,677
<PP&E> 61,692
<DEPRECIATION> 25,863
<TOTAL-ASSETS> 494,661
<CURRENT-LIABILITIES> 91,364
<BONDS> 342,294
18,777
0
<COMMON> 95
<OTHER-SE> 31,695
<TOTAL-LIABILITY-AND-EQUITY> 494,661
<SALES> 58,248
<TOTAL-REVENUES> 81,167
<CGS> 29,596
<TOTAL-COSTS> 82,282
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,445
<INCOME-PRETAX> (11,933)
<INCOME-TAX> 4,099
<INCOME-CONTINUING> (7,834)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,834)
<EPS-PRIMARY> (0.90)
<EPS-DILUTED> (0.90)
</TABLE>
