<PAGE>
UNITED STATES
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, 1998
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 06-0996237
(State or other jurisdiction (I.R.S. Employer Identification No.)
of 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 11,
1998: 12,949,000
The Common Stock of the registrant is not publicly traded.
<PAGE>
DICTAPHONE CORPORATION
INDEX
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,
1998 and March 31, 1997 2
Condensed Consolidated Balance Sheets as of March
31, 1998 (Unaudited) and December 31, 1997 3
Unaudited Condensed Consolidated Statements of Cash
Flow for the Three Months Ended March 31, 1998 and
March 31, 1997 4
Notes to Unaudited Consolidated Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk 19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 19
ITEM 6. Exhibits and Reports on Form 8-K 19
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1997 March 31, 1998
-------------- --------------
Revenues:
<S> <C> <C>
Product sales and rentals $ 49,197 $ 49,647
Contract manufacturing sales 9,051 11,947
Support services 22,919 22,231
---------- ----------
Total revenue 81,167 83,825
---------- ----------
Costs and expenses:
Cost of sales, rentals and support services 42,815 45,012
Selling and administrative 26,355 27,110
Amortization of intangibles 9,378 7,881
Research and development 3,734 4,700
---------- ----------
Operating loss (1,115) (878)
Interest expense 10,445 9,797
Other expense (income) - net 373 (826)
---------- ----------
Loss before income taxes (11,933) (9,849)
Income tax benefit (expense) 4,099 (996)
---------- ----------
Net loss (7,834) (10,845)
Stock dividends on PIK Preferred Stock 635 729
---------- ----------
Net loss applicable to Common Stock $ (8,469) $ (11,574)
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ -------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash $ 10,277 $ 5,595
Accounts receivable, less allowances of $810 and $767, respectively 71,939 71,778
Inventories 48,779 51,967
Other current assets 11,675 10,841
---------- ----------
Total current assets 142,670 140,181
Property, plant and equipment, net 35,331 35,609
Deferred financing costs, net of accumulated amortization of $12,517
and $12,932, respectively 10,900 10,485
Intangibles, net of accumulated amortization of $99,439 and $107,320, respectively 229,322 221,237
Other assets 51,837 52,209
---------- ----------
Total assets $ 470,060 $ 459,721
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,940 $ 10,340
Interest payable 10,144 4,309
Accrued liabilities 32,373 25,642
Advance billings 37,184 38,610
Current portion of long-term debt 795 793
---------- ----------
Total current liabilities 91,436 79,694
Long-term debt 342,816 354,772
Other liabilities 10,547 11,101
---------- ----------
Total liabilities 444,799 445,567
---------- ----------
Contingencies (Note 5)
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, 1998, $21,570) 20,841 21,570
Common stock ($.01 par value; 20,000,000 shares authorized;
12,952,000 and 12,949,000 shares outstanding at December 31, 1997
and March 31, 1998, respectively) 130 130
Notes receivable from stockholders (831) (816)
Additional paid-in capital 129,870 129,870
Treasury stock, at cost (480) (510)
Accumulated deficit (122,597) (134,171)
Accumulated other comprehensive income (1,672) (1,919)
---------- ----------
Total stockholders' equity 25,261 14,154
---------- ----------
Total liabilities and stockholders' equity $ 470,060 $ 459,721
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1997 March 31, 1998
-------------- --------------
Operating activities:
<S> <C> <C>
Net loss $ (7,834) $ (10,845)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization (including $694
and $7, respectively, of nonrecurring charges) 15,287 10,778
Provision for deferred income taxes (4,015) 1,110
Changes in assets and liabilities:
Accounts receivable (4,160) (3)
Inventories 1,450 (3,220)
Other current assets (813) 791
Accounts payable and accrued liabilities (12,010) (13,073)
Advance billings 1,152 1,446
Other assets and other (833) (1,505)
---------- -----------
Net cash used in operating activities (11,776) (14,521)
---------- -----------
Investing activities:
Net investment in fixed assets (1,076) (2,194)
---------- ----------
Net cash used in investing activities (1,076) (2,194)
---------- -----------
Financing activities:
Repayment under term loan facility (2,750) ---
Borrowings under revolving credit facility 21,750 20,000
Repayment under revolving credit facility (8,500) (8,000)
Other (726) 65
---------- ----------
Net cash provided by financing activities 9,774 12,065
---------- ----------
Effect of exchange rate changes on cash (93) (32)
---------- -----------
Decrease in cash (3,171) (4,682)
Cash, beginning of period 7,927 10,277
---------- ----------
Cash, end of period $ 4,756 $ 5,595
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 15,233 $ 15,208
========== ==========
Income taxes paid $ 10 $ 57
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
DICTAPHONE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands, or as otherwise indicated)
1. 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, 1998 and
March 31, 1997, 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,
1997. Certain amounts have been reclassified to conform to current year
presentation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Costs and expenses. Operating expenses of field sales and service
offices which represent the cost of support services revenue are included
in cost of sales.
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.
2. INVENTORIES
Inventories consist of the following:
December 31, March 31,
1997 1998
------------ -----------
Raw materials and work in process $ 18,481 $ 18,996
Supplies and service parts 14,087 14,979
Finished products 16,211 17,992
---------- ---------
Total inventories $ 48,779 $ 51,967
========== =========
5
<PAGE>
3. INTANGIBLES
The following summarizes intangible assets, net of accumulated
amortization and writedowns of $99,439 and $107,320 at December 31, 1997
and March 31, 1998, respectively. Amortization expense for the three
months ended March 31, 1997 and 1998 was $9,378 and $7,881, respectively.
December 31, March 31,
1997 1998
------------ -----------
Goodwill $ 135,004 $ 133,924
Tradenames 73,211 72,724
Service contracts 8,920 6,960
Non-compete agreement 11,696 7,184
Patents 491 445
---------- ----------
$ 229,322 $ 221,237
========== ==========
4. INCOME TAXES
The provision for income taxes for the three months ended March 31,
1998 is $996.
The Company has recorded a gross deferred tax asset of $75.9
million included in other assets reflecting the benefit of net operating
loss carryforwards and various book tax temporary differences. The net
operating loss carryforward for federal income tax purposes as of March
31, 1998 is approximately $97.9 million of which $13.7 million of the net
operating loss carryforward will expire in the year 2010, $33.2 million
will expire in the year 2011 and $39.3 million will expire in the year
2012. In order to fully realize the deferred tax asset, the Company will
need to generate future taxable income prior to expiration of the net
operating loss carryforwards. In December 1997, the Company established a
valuation reserve of $24.1 million against the deferred tax assets. In
the first quarter of 1998, the Company increased its valuation reserve by
$4.7 million, resulting in a net deferred tax asset of $47.1 million.
Management has determined, based upon the Company's history of prior
operating results, its current circumstances, and its expectations for
the future, that taxable income of the Company will more likely than not
be sufficient to fully utilize the net deferred tax asset of $47.1
million recorded at March 31, 1998, prior to the earliest expiration in
the year 2010. The amount of the deferred tax asset considered
realizable, however, could be reduced if estimates of future taxable
income during the net operating loss carryforward period are reduced.
5. 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.
6
<PAGE>
5. CONTINGENCIES (Continued)
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.
6. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION
Dictaphone U.S. has fully and unconditionally guaranteed the
repayment of $200,000 of senior subordinated notes (the "Notes") issued
to finance the Acquisition. The Notes are subordinate to financing of the
Credit Agreement, dated August 7, 1995, as amended by four amendments to
Credit Agreement, dated June 28, 1996, June 27, 1997, July 21, 1997 and
November 14, 1997 (collectively, the "Credit Agreement"), and other
senior indebtedness as defined in the indenture pursuant to which the
Notes were issued (the "Note Indenture"). The Credit Agreement currently
consists of a $75.0 million Tranche B Term Loan due June 30, 2002 (the
"Tranche B Loan"), a $62.75 million Tranche C Term Loan due June 30, 2003
(the "Tranche C Loan" and together with the Tranche B Loan, the "Term
Loans") and a six-year revolving credit facility of up to $40.0 million
(the "Revolving Credit Facility"). Dictaphone Non-U.S. is not a guarantor
of the Notes. In January 1998, Dictaphone Corporation was merged into
Dictaphone Corporation (U.S.), whereupon the surviving corporation
changed its name to "Dictaphone Corporation".
7
<PAGE>
6. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (Continued)
The following are the supplemental consolidating statements of
operations for the three month periods ended March 31, 1997 and 1998, the
supplemental consolidating balance sheet information as of December 31,
1997 and March 31, 1998, and cash flow information for the three month
periods ended March 31, 1997 and 1998.
Dictaphone Corporation
Supplemental Consolidating Statement of Operations Information
Three Months Ended March 31, 1997
<TABLE>
<CAPTION>
Dictaphone Dictaphone Consolidating
Corporation Non-U.S. Adjustments Consolidated
----------- ---------- ------------- ------------
Revenue from:
<S> <C> <C> <C> <C>
Product sales and rentals $ 42,991 $ 8,874 $ (2,668) $ 49,197
Contract manufacturing sales 9,051 --- --- 9,051
Support services 20,235 2,684 --- 22,919
---------- ---------- ---------- ----------
Total revenues 72,277 11,558 (2,668) 81,167
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales, rentals and support services 38,745 6,791 (2,721) 42,815
Selling and administrative 31,248 4,485 --- 35,733
Research and development 3,734 --- --- 3,734
Interest expense - net and other 9,849 969 --- 10,818
---------- ---------- ---------- ----------
Total costs and expenses 83,576 12,245 (2,721) 93,100
---------- ---------- ---------- ----------
Equity (loss) earnings (140) --- 140 ---
---------- ---------- ---------- ----------
(Loss) income before income taxes (11,439) (687) 193 (11,933)
Income tax benefit (expense) 4,060 61 (22) 4,099
---------- ---------- ---------- ----------
Net (loss) income $ (7,379) $ (626) $ 171 $ (7,834)
========== ========== ========== ==========
</TABLE>
8
<PAGE>
6. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (Continued)
Dictaphone Corporation
Supplemental Consolidating Statement of Operations Information
Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
Dictaphone Dictaphone Consolidating
Corporation Non-U.S. Adjustments Consolidated
----------- ---------- ------------- ------------
Revenue from:
<S> <C> <C> <C> <C>
Product sales and rentals $ 46,888 $ 5,917 $ (3,158) $ 49,647
Contract manufacturing sales 11,947 --- --- 11,947
Support services 20,260 1,971 --- 22,231
---------- ---------- ---------- ----------
Total revenues 79,095 7,888 (3,158) 83,825
---------- ---------- ----------- ----------
Costs and expenses:
Cost of sales, rentals and support services 43,154 5,069 (3,211) 45,012
Selling and administrative 31,431 3,560 --- 34,991
Research and development 4,700 --- --- 4,700
Interest expense - net and other 8,318 653 --- 8,971
---------- ---------- ---------- ----------
Total costs and expenses 87,603 9,282 (3,211) 93,674
---------- ---------- ---------- ----------
Equity (loss) earnings (752) --- 752 ---
---------- ---------- ---------- ----------
(Loss) income before income taxes (9,260) (1,394) 805 (9,849)
Income tax (expense) benefit (1,173) 186 (9) (996)
---------- ---------- ---------- -----------
Net (loss) income $ (10,433) $ (1,208) $ 796 $ (10,845)
========== ========== ========== ==========
</TABLE>
9
<PAGE>
6. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (Continued)
Dictaphone Corporation
Supplemental Consolidating Balance Sheet Information
December 31, 1997
<TABLE>
<CAPTION>
Dictaphone Dictaphone Consolidating
Corporation Non-U.S. Adjustments Consolidated
----------- ---------- ------------- ------------
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash $ 8,276 $ 2,001 $ --- $ 10,277
Accounts receivable 64,884 8,699 (1,644) 71,939
Inventories 45,962 3,645 (828) 48,779
Other current assets 7,869 3,806 --- 11,675
---------- ---------- ---------- ----------
Total current assets 126,991 18,151 (2,472) 142,670
Investments in subsidiaries 34,170 --- (34,170) ---
Fixed assets, net 32,041 3,290 --- 35,331
Intangibles, net 214,070 15,252 --- 229,322
Deferred financing costs 10,900 --- --- 10,900
Other assets 49,131 2,383 323 51,837
---------- ---------- ---------- ----------
Total assets $ 467,303 $ 39,076 $ (36,319) $ 470,060
========== ========== =========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable and
accrued liabilities $ 48,649 $ 6,602 $ (1,794) $ 53,457
Advance billings 34,252 2,932 --- 37,184
Current portion of long-term debt 628 167 --- 795
---------- ---------- ---------- ----------
Total current liabilities 83,529 9,701 (1,794) 91,436
Long-term debt 342,372 17,935 (17,491) 342,816
Other liabilities 10,477 70 --- 10,547
Stockholders' equity 30,925 11,370 (17,034) 25,261
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 467,303 $ 39,076 $ (36,319) $ 470,060
========== ========== ========== ==========
</TABLE>
10
<PAGE>
6. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (Continued)
Dictaphone Corporation
Supplemental Consolidating Balance Sheet Information
March 31, 1998
<TABLE>
<CAPTION>
Dictaphone Dictaphone Consolidating
Corporation Non-U.S. Adjustments Consolidated
----------- ---------- ------------- ------------
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash $ 3,767 $ 1,828 $ --- $ 5,595
Accounts receivable 66,983 6,665 (1,870) 71,778
Inventories 48,965 3,777 (775) 51,967
Other current assets 6,575 4,257 9 10,841
---------- ---------- ---------- ----------
Total current assets 126,290 16,527 (2,636) 140,181
Investments in subsidiaries 33,268 --- (33,268) ---
Fixed assets, net 32,296 3,313 --- 35,609
Intangibles, net 206,660 14,577 --- 221,237
Deferred financing costs, net 10,485 --- --- 10,485
Other assets 49,470 2,434 305 52,209
---------- ---------- ---------- ----------
Total assets $ 458,469 $ 36,851 $ 35,599 $ 459,721
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable, interest payable
and accrued liabilities $ 37,039 $ 5,122 $ (1,870) $ 40,291
Advance billings 35,511 3,099 --- 38,610
Current portion of long-term debt 628 165 --- 793
---------- ---------- ---------- ----------
Total current liabilities 73,178 8,386 (1,870) 79,694
Long-term debt 354,372 17,891 (17,491) 354,772
Other liabilities 10,442 659 --- 11,101
Stockholders' equity 20,477 9,915 (16,238) 14,154
---------- ---------- ----------- ----------
Total liabilities and stockholders' equity $ 458,469 $ 36,851 $ (35,599) $ 459,721
========== ========== =========== ==========
</TABLE>
11
<PAGE>
6. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (Continued)
Dictaphone Corporation
Supplemental Consolidating Statement of Cash Flows Information
Three Months Ended March 31, 1997
<TABLE>
<CAPTION>
Dictaphone Dictaphone Consolidating
Corporation Non-U.S. Adjustments Consolidated
----------- ---------- ------------- ------------
Operating activities:
<S> <C> <C> <C> <C>
Net loss $ (7,379) $ (626) $ 171 $ (7,834)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 14,393 894 --- 15,287
Provision for deferred income taxes (4,081) 44 22 (4,015)
Change in assets and liabilities:
Accounts receivable (2,462) (2,398) 700 (4,160)
Inventories 130 1,373 (53) 1,450
Other current assets (209) (604) --- (813)
Accounts payable and accrued
liabilities (11,999) 689 (700) (12,010)
Advance billings 361 791 --- 1,152
Other assets and other (1,131) 438 (140) (833)
---------- ---------- ---------- ----------
Cash (used in) provided by operating
activities (12,377) 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 --- (47) 47 ---
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 10,409 (682) 47 9,774
---------- ---------- ---------- ----------
Effect of exchange rate changes on cash --- (93) --- (93)
---------- ---------- ---------- ---------
(Decrease) increase 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>
12
<PAGE>
6. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
INFORMATION (Continued)
Dictaphone Corporation
Supplemental Consolidating Statement of Cash Flows Information
Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
Dictaphone Dictaphone Consolidating
Corporation Non-U.S. Adjustments Consolidated
----------- ---------- ------------- ------------
Operating activities:
<S> <C> <C> <C> <C>
Net loss $ (10,433) $ (1,208) $ 796 $ (10,845)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 10,027 751 --- 10,778
Provision for deferred income taxes 1,153 (61) 18 1,110
Change in assets and liabilities:
Accounts receivable (2,099) 1,870 226 (3)
Inventories (3,003) (164) (53) (3,220)
Other current assets 1,294 (494) (9) 791
Accounts payable and accrued
liabilities (11,610) (1,387) (76) (13,073)
Advance billings 1,259 187 --- 1,446
Other assets and other (1,335) 732 (902) (1,505)
---------- ---------- ---------- ----------
Cash (used in) provided by operating
activities (14,747) 226 --- (14,521)
---------- ---------- ---------- ----------
Investing activities:
Net investment in fixed assets (1,748) (446) --- (2,194)
---------- ---------- ---------- ----------
Cash used in investing activities (1,748) (446) --- (2,194)
---------- ---------- ---------- ----------
Financing activities:
Repayment under term loan facility --- --- --- ---
Borrowing from revolving credit facility 20,000 --- --- 20,000
Repayment under revolving credit facility (8,000) --- --- (8,000)
Other (14) 79 --- 65
---------- ---------- ---------- ----------
Cash provided by financing activities 11,986 79 --- 12,065
---------- ---------- ---------- ----------
Effect of exchange rate changes on cash --- (32) --- (32)
Decrease in cash (4,509) (173) --- (4,682)
Cash, beginning of period 8,276 2,001 --- 10,277
---------- ---------- ---------- ----------
Cash, end of period $ 3,767 $ 1,828 $ --- $ 5,595
========== ========== ========== ==========
</TABLE>
13
<PAGE>
7. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130") as of January 1, 1998.
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components.
Total comprehensive income for the three months ending March 31,
1998 and 1997 consists of the following:
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
Net loss $ (10,845) $ (7,834)
Foreign currency translation
adjustments (247) (950)
----------- -----------
Total comprehensive income $ (11,092) $ (8,784)
=========== ===========
8. SUBSEQUENT EVENT
In May 1998, the Company entered into a sale/leaseback agreement
for the sale of its Stratford, Connecticut land and headquarters facility
(which is included in "Property, plant and equipment, net"). Cash
proceeds from the sale totalled $14.0 million. The net proceeds were used
by the Company to reduce amounts outstanding under the Term Loans and the
Revolving Credit Facility. The Company expects to realize a gain of
approximately $5.7 million on the sale which will be recognized over the
term of the lease. The lease, which is being recorded as an operating
lease, has a term of twenty years.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
OVERVIEW
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1997 1998
---- ----
(in millions)
(unaudited)
<S> <C> <C>
Total revenue $ 81.2 $ 83.8
Cost of sales, rentals and support services 42.8 45.0
Selling and administrative expense 35.8 35.0
Research and development 43.7 4.7
------- -------
Operating loss (1.1) (0.9)
------- -------
Net interest expense and other 10.8 8.9
Income tax (benefit) expense (4.1) 1.0
------- -------
Net loss $ (7.8) $ (10.8)
======= =======
EBITDA (1) $ 13.1 $ 10.4
======= ========
</TABLE>
- ---------------------
(1) EBITDA is defined as income before effect of changes in accounting
plus interest, income taxes, depreciation, amortization and other
significant non-cash, non-recurring 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, and is not necessarily comparable to similarly titled
measures of other companies.
15
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1997 1998
------ ------
(in millions)
(unaudited)
Revenue from:
Sales:
<S> <C> <C>
Integrated Voice Systems $ 11.6 $ 12.5
Integrated Health Systems 9.4 9.4
Communication Recording Systems 11.9 13.0
Customer Service Parts 4.6 4.4
International and Dealer Operations 11.2 10.1
Rentals 0.5 0.3
------- --------
Product sales and rentals 49.2 49.7
Contract Manufacturing 9.1 11.9
Support service:
Customer Service 19.7 19.3
Application & Training Specialists 0.5 0.9
International and Dealer Operations 2.7 2.0
------- --------
Total support service 22.9 22.2
------- --------
Total revenue $ 81.2 $ 83.8
======= ========
</TABLE>
RESULTS OF OPERATIONS - FIRST QUARTER 1998 VS. FIRST QUARTER 1997
Total revenue increased 3.3% to $83.8 million in the first quarter of
1998 from $81.2 million for the first quarter of 1997. This increase in revenue
is attributable to higher product sales revenue from Integrated Voice Systems
("I.V.S."), Communications Recording Systems ("C.R.S.") and higher revenue from
Contract Manufacturing and Application and Training Specialists ("A.T.S."),
offset in part by lower revenue from Customer Service (including sale of parts)
and International and Dealer Operations.
I.V.S. revenue increased 7.8% to $12.5 million from $11.6 million
due to higher Enterprise Express(TM) sales. I.V.S. orders in the first quarter
of 1998 increased 5.5% to $12.7 million from $12.0 million in the first quarter
of 1997. I.V.S. order backlog at March 31, 1998 increased 0.8% to $6.5 million
versus order backlog at December 31, 1997. Integrated Health Systems ("I.H.S.")
revenue was flat versus the first quarter of 1997 as increased Enterprise
Express(TM) revenue was offset by declines in digital and records management
system revenue. I.H.S. orders in the first quarter of 1998 declined 18.3% to
$6.6 million from $8.1 million in the first quarter of 1997. I.H.S. order
backlog at March 31, 1998 declined 24.8% to $8.9 million versus order backlog at
December 31, 1997. C.R.S. revenue increased 9.2% to $13.0 million from $11.9
million due to increased Prolog(TM)/Guardian(TM) and Insight(TM) installations.
C.R.S. orders declined 10.7% to $12.3 million in the first quarter of 1998 from
$13.8 million in the first quarter of 1997. C.R.S. order backlog at March 31,
1998 declined 10.0% to $6.7 million versus order backlog at December 31, 1997.
Customer Service revenue (including sale of parts) declined 2.4% to $23.7
million from $24.3 million due to lower proprietary product service contract
revenue, partially offset by higher installation and warranty revenue. A.T.S.
revenue increased 83.1% to $0.9 million from to $0.5 million due to increased
customer training provided in support of I.V.S. and I.H.S. products. Sales and
service revenue from International and Dealer Operations declined 13.4% to $12.1
million from $13.9 million due to lower system, desktop/portable and service
revenue as well as $0.2 million of unfavorable currency exchange. Orders from
International and Dealer Operations declined 14.6% in the first quarter of 1998
to $9.2 million from $10.8 million
16
<PAGE>
in the first quarter of 1997. International and Dealer Operations order backlog
at March 31, 1998 increased 16.4% to $2.4 million versus order backlog at
December 31, 1997. Contract Manufacturing revenue increased 31.8% to $11.9
million from $9.1 million due to growth from existing Contract Manufacturing
customers.
Cost of sales, rentals and support services increased 5.1% to $45.0
million (53.7% of revenue) during the first quarter of 1998 from the $42.8
million (52.7% of revenue) in the first quarter of 1997. Excluding additional
depreciation and amortization expenses associated with purchase accounting
adjustments related to the acquisition of the Company ("the Acquisition"), cost
of sales, rentals and support services, expressed as a percentage of revenue,
would have increased by 2.0 percentage points to 53.6%. This increase is
attributable to lower realized prices for CRS digital loggers, higher Customer
Service field and technical support costs, lower International and Dealer
Operations margins and a higher content of low margin Contract Manufacturing
revenue.
Selling and administrative expenses (including amortization of
intangibles) declined 2.1% to $35.0 million (41.7% of revenue) during the first
quarter of 1998 from $35.8 million (44.0% of revenue) in the first quarter of
1997. Excluding additional depreciation and amortization expenses associated
with purchase accounting adjustments related to the Acquisition of $7.9 million
and $9.6 million for the first quarter of 1998 and 1997, respectively, selling
and administrative expenses would have increased by $1.0 million. This increase
is attributable to higher U.S. C.R.S. field compensation, selling costs and bad
debt expenses, increased manufacturing expenses associated with assembly
facility start-up and higher expenses for International and Dealer Operations.
Research and development expenses of $4.7 million (9.5% of product sales
and rental revenue) increased 25.9% from $3.7 million (7.6% of product sales and
rental revenue), reflecting increased staffing and compensation.
The Company recorded an operating loss of $0.9 million during the first
quarter of 1998 compared to an operating loss of $1.1 million for the first
quarter 1997. Excluding the impact of purchase accounting adjustments associated
with the Acquisition of $8.0 million and $10.5 million for the first quarter of
1998 and 1997, respectively, operating profit would have declined by $2.3
million as a result of higher cost of sales, rentals and support services and
increased expenses.
The Company has recorded a gross deferred tax asset of $75.9 million
included in other assets reflecting the benefit of net operating loss
carryforwards and various book tax temporary differences. The net operating loss
carryforward for federal income tax purposes as of March 31, 1998 is
approximately $97.9 million of which $13.7 million of the net operating loss
carryforward will expire in the year 2010, $33.2 million will expire in the year
2011 and $39.3 million will expire in the year 2012. In order to fully realize
the deferred tax asset, the Company will need to generate future taxable income
prior to expiration of the net operating loss carryforwards. In December 1997,
the Company established a valuation reserve of $24.1 million against the
deferred tax assets. In the first quarter of 1998, the Company increased its
valuation reserve by $4.7 million, resulting in a net deferred tax asset of
$47.1 million. Management has determined, based upon the Company's history of
prior operating results, its current circumstances, and its expectations for the
future, that taxable income of the Company will more likely than not be
sufficient to fully utilize the net deferred tax asset of $47.1 million recorded
at March 31, 1998, prior to the earliest expiration in the year 2010. The amount
of the deferred tax asset considered realizable, however, could be reduced if
estimates of future taxable income during the net operating loss carryforward
period are reduced.
17
<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. At March 31, 1998, the Company had outstanding Term
Loans of $134.0 million and a $21.0 million loan outstanding under the $40.0
million Revolving Credit Facility, and $200.0 million of Notes. Availability
under the Revolving Credit Facility at March 31, 1998 was $19.0 million.
Scheduled annual principal payments on the Term Loans will be $0.6 million in
1998, 1999 and 2000. There are no scheduled reductions in the Revolving Credit
Facility over the next three years.
In May 1998, the Company entered into a sale/leaseback agreement for the
sale of its Stratford, Connecticut land and headquarters facility. Cash proceeds
from the sale totalled $14.0 million. The net proceeds were used by the Company
to reduce amounts outstanding under the Term Loans and the Revolving Credit
Facility.
In connection with the terms of the Credit Agreement, the Company entered
into interest rate swap agreements in November 1995, effective February 16,
1996, with an aggregate notional principal amount equivalent to $75.0 million
maturing on February 16, 1999. The swap effectively converts that portion of the
Term Loans to a fixed rate component of 5.8%; thus, reducing the impact of
changes in interest rates, converting the total effective interest rate on fifty
percent of the initial outstanding Term Loans to 9.3%. No funds under the swap
agreements are actually borrowed or are to be repaid. Amounts due to or from the
counterparties are 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, 1998.
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, 1998, the fair value
of the Notes was unfavorable $4.0 million based on dealer quotes.
Capital expenditures for the first three months of 1998 totaled $2.3
million. The Company does not expect that the limitation on capital expenditures
contained in the Credit Agreement will limit, in any material respects, the
Company's ability to fund capital expenditures.
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
18
<PAGE>
introduced a number of new products in its target markets in 1997 and plans to
introduce additional new products in 1998 which are expected to enhance future
revenues and liquidity of the Company. However, there can be no assurance that
the Company will be able to implement its plans to introduce such products in a
timely fashion, or that such products will meet the expectations of the Company
for either revenues or profitability. The Company believes that cash flows from
operating activities, the successful introduction of its new products, and
provisions under the Credit Agreement for the sale or financing of certain
assets, as well as 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.
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 5 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
--------
10.19 -- Stock Option Agreement, dated August 1, 1997, between
the Company and Peter P. Tong.
27 -- Financial Data Schedule.
UNDERTAKING:
The undersigned, Dictaphone Corporation, hereby undertakes, pursuant to
Regulation S-K, Item 601(b), paragraph (4) (iii), to furnish to the Securities
and Exchange Commission upon request all constituent instruments defining the
rights of holders of long-term debt of Dictaphone Corporation and its
consolidated subsidiaries not filed herewith for the reason that the total
amount of securities authorized under any of such instruments does not exceed 10
percent of the total consolidated assets of Dictaphone Corporation and its
consolidated subsidiaries.
(b) Reports on Form 8-K
-------------------
There were no other Reports on Form 8-K filed by the Company
during the three months ended March 31, 1998.
19
<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, 1998 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: Senior Vice President, Chief Financial Officer
and Director (Principal Financial and
Accounting Officer)
20
<PAGE>
EXHIBIT INDEX
Exhibits Description
- -------- -----------
*10.19 -- Stock Option Agreement, dated August 1, 1997,
between the Company and Peter P. Tong. +
*27 -- Financial Data Schedule.
- -----------------------------
* Filed herewith.
+ Management contract of compensatory arrangement.
<PAGE>
STOCK OPTION AGREEMENT dated as of August 1, 1997 between DICTAPHONE
CORPORATION, a Delaware corporation (the "COMPANY"), and PETER P.
TONG (the "PARTICIPANT").
WHEREAS, the Participant is currently a non-employee director of the
Company or one of its Subsidiaries and, pursuant to the Company's Management
Stock Option Plan, as may be amended consistent therewith, (the "PLAN") and upon
the terms and subject to the conditions hereinafter set forth, the Company
desires to provide the Participant with an incentive to remain as a Director of
the Company or one of its Subsidiaries and to increase his interest in the
success of the Company by granting to the Participant nonqualified stock options
(the "OPTIONS") to purchase shares of Common Stock, par value $0.01, of the
Company (the "COMMON STOCK");
NOW, THEREFORE, in consideration of the covenants and agreements
herein contained, the parties hereto agree as follows:
1. DEFINITIONS; INCORPORATION OF PLAN TERMS. Capitalized terms used
herein without definition shall have the meanings assigned to them in the Plan,
a copy of which is attached hereto. This Agreement, the Options and the shares
of Common Stock issued pursuant to the exercise of Options (the "OPTION SHARES")
shall be subject to the Plan, the terms of which are hereby incorporated herein
by reference, and in the event of any conflict or inconsistency between the Plan
and this Agreement, the Plan shall govern. The Date of Grant with respect to the
Options shall be the date specified at the foot of the signature page hereof.
2. STOCKHOLDERS AGREEMENT; CERTAIN RESTRICTIONS. In accordance with
Section 6(f) of the Plan, the Participant and the Company hereby confirm that,
effective as of the date hereof, the Participant shall, for purposes of the
Stockholders Agreement, be deemed to be a "Stockholder" with respect to the
Options and the Option Shares and the Participant agrees to be bound by all the
terms of the Stockholders Agreement applicable to such a Stockholder. None of
the Option Shares may be sold, transferred, assigned, pledged, or otherwise
encumbered or disposed of to any third party other than the Company except as
provided in the Stockholders Agreement or the Plan. None of the Options may be
sold, transferred, assigned, pledged, or otherwise encumbered or disposed of,
except by will or the laws of descent and distribution. During the Participant's
lifetime, an Option shall be exercisable only by the Participant. Each Permitted
Transferee (other than the Company) of any Option or Option Share shall, as a
condition to the transfer thereof, execute an agreement pursuant to which it
shall become a party to the Stockholders Agreement and this Agreement.
3. GRANT OF OPTIONS. Subject to the terms and conditions contained
herein and in the Plan, the Company hereby grants to the Participant, effective
as of the Date of Grant, 10,000 Service Options. Each such Option shall entitle
the Participant to purchase, upon payment of the Option Price specified at the
foot of the signature page hereof, one share of Common Stock. The Options shall
be exercisable as hereinafter provided.
4. TERMS AND CONDITIONS OF OPTIONS. The Options evidenced
hereby are subject to the following terms and conditions:
<PAGE>
(a) DURATION OF OPTIONS. The period for which these Options are
effective shall commence upon the Date of Grant and shall continue until
these Options are terminated as hereinafter provided (the "OPTION
PERIOD"). Except as otherwise expressly provided in Section 4(a) hereof,
the Options (whether or not exercisable) shall terminate immediately upon
an Employee's ceasing to be an employee or, in the case of a Director, a
Director's ceasing to be a member of the Board of Directors of the Company
or any of its subsidiaries. The Option Period of these Options shall
terminate upon the earliest to occur of (1) the tenth anniversary of the
date hereof; (2) the close of business on the date on which the Company
acquires any shares of any class of Common Stock owned by the Participant
or his Permitted Transferees (as defined in the Stockholders Agreement
dated August 11, 1995, by and among the Company, the Management Investors
(as defined in the Stockholders Agreement), the Stonington Investor (as
defined in the Stockholders Agreement) and the Institutional Investors (as
defined in the Stockholders Agreement)(as in effect from time to time, the
"STOCKHOLDERS AGREEMENT")) or any Option held by him or his estate, in
each case in connection with a Put Event (as defined in the Stockholders
Agreement); (3) the close of business on the date on which the Company
acquires all shares of Common Stock owned by the Participant or his
Permitted Transferee and Options held by him or his estate, in each case
in connection with a Call Event (as defined in the Stockholders
Agreement); and (4) the following dates:
(i) the six-month anniversary of the date upon which
the Participant holding such Option ceases to be an employee or
director of the Company or its subsidiaries by reason of death;
(ii) unless otherwise specifically provided in any agreement
between the Participant and the Company or one of its subsidiaries,
the thirty-day anniversary of the date of the Retirement or
Disability (as such terms are defined in the Stockholders Agreement)
of the Participant if the Participant retires or is disabled while
an employee or director of the Company or any of its subsidiaries,
or the thirty-day anniversary of the date of Involuntary Termination
(as defined in the Stockholders Agreement) of the Participant; or
(iii) immediately upon a Participant's Voluntary Resignation
(as defined in the Stockholders Agreement) or termination of
employment or directorship with the Company or any of its
subsidiaries for Cause (as defined in the Stockholders Agreement);
PROVIDED, HOWEVER, that notwithstanding anything to the contrary
contained in clauses (i), (ii) or (iii) of this Section 4(a), in the
event that prior to the time that any Option would otherwise cease
to be exercisable pursuant to such clauses (i), (ii), or (iii), the
Participant (A) exercises a "Put Right" with respect to such "Put
Options" (as such terms are described in Section 3.1 of the
Stockholders Agreement) and (B) withdraws all of his Put Options as
provided in the last sentence of Section 3.1(b) of the Stockholders
Agreement because a Restriction (as defined in the Stockholders
Agreement) prevents payment by the Company in cash in respect of
such Put Options, then such Options shall not expire, and shall
continue to be exercisable until the earlier of
-2-
<PAGE>
(x) the acquisition by the Company for cash of such Put Options
pursuant to Section 3.1(e) or 3.2(d) (or by the Company's designee
pursuant to Section 3.1(f) or 3.2(c)) of the Stockholders Agreement;
(y) the later of (1) the thirtieth day after the expiration of any
applicable "holdback" or similar arrangement that the Participant
has entered into with one or more underwriters in connection with an
IPO (as defined in the Stockholders Agreement), (2) if no such
agreement is entered into, the thirtieth day after an IPO or (3) the
thirtieth day following the effectiveness of a registration
statement on Form S-8 with respect to the Option Shares; and (z) the
tenth anniversary of the date hereof. In addition, in the event that
the Participant has delivered to the Company a Put Notice (as
defined in the Stockholders Agreement) with respect to Put Options,
and has not withdrawn such Put Notice pursuant to Section 3.1(b) of
the Stockholders Agreement, the related Option shall not expire
until it has been acquired by the Company (or a designee of the
Company) pursuant to Section 3.1 or 3.2 of the Stockholders
Agreement.
(b) EXERCISABILITY AND VESTING OF OPTIONS. Options granted hereunder
shall become exercisable pursuant to the following terms and (except as
otherwise expressly provided for hereunder or in any agreement between the
Company and the Participant) only if the Employee is employed by the
Company or any of its subsidiaries (as determined pursuant to Section 10
of the Plan) or, in the case of a Director, only if the Director is a
member of the Board of Directors of the Company or any of its subsidiaries
on the date on which such Option becomes exercisable. An Option (or
portion thereof) which becomes exercisable pursuant to the terms of this
Section 4(b) is referred to as a "VESTED OPTION." The Options granted
hereunder shall vest and become exercisable as of the effective date
hereof upon the execution and delivery of this Agreement by Participant
and the Company.
(c) PROCEDURE FOR EXERCISE AND PAYMENT FOR SHARES. Exercise of these
Options shall be made by the Participant's giving written notice to the
Company. Such written notice shall be deemed sufficient for this purpose
only if it (i) is delivered to the Company at its principal offices, (ii)
states the number of Option Shares with respect to which the Option is
being exercised, and (iii) states the date, no earlier than the fifth
business day after, and no later than the tenth business day after, the
date of such notice, upon which the Option Shares shall be purchased and
payment therefor shall be made. The payments for Option Shares purchased
pursuant to exercise of these Options shall be made at the principal
offices of the Company. Upon (x) the exercise of any Option, in compliance
with the provisions of this Section 4(c), (y) receipt by the Company of
the payment for the Option Shares so purchased together with cash in the
amount of (or the making of arrangements referred to in Section 13 of the
Plan with respect to) any taxes required to be collected or withheld as a
result of the exercise of this Option, and (z) receipt by the Company of
an executed copy of the Stockholders Agreement (unless such Participant is
already a party thereto or the Company receives such other evidence as the
Company may reasonably require to ensure that the Option Shares issuable
upon exercise of the Option will be subject to the Stockholders
Agreement), the Company shall deliver
-3-
<PAGE>
or cause to be delivered to the Participant so exercising an Option a
certificate or certificates for the number of Option Shares with respect
to which these Options are exercised and payment is made. The Option
Shares shall be registered in the name of the exercising Participant;
PROVIDED that in no event shall any Option Shares be issued pursuant to
exercise of an Option until full payment therefor shall have been made in
one of the manners set forth below; and PROVIDED, FURTHER, that until such
payment has been made, the exercising Participant shall have no rights of
a shareholder. For purposes of this paragraph, the date of issuance shall
be the date upon which payment in full has been received by the Company as
provided herein. Notwithstanding the foregoing, if a Put Right has been
exercised by the Participant or a Call Right has been exercised by the
Company pursuant to the Stockholders Agreement, with respect to the
Option, such Option shall be cancelled, effective upon receipt by the
Participant of the consideration provided for in the Stockholders
Agreement. The exercise price shall be payable at the election of the
Participant, in whole or in part, in any one or a combination of cash or
Mature Common Stock valued at the Fair Value Price (as defined below) as
of the date the notice of exercise is given. Mature Common Stock is
defined as shares of Common Stock held by such Participant for more than
six months.
(d) CASH-OUT OF CERTAIN OPTIONS.
(i) Without limiting any rights of the Company under the
Stockholders Agreement, the Committee or the Board of Directors may
in its sole discretion cancel the vested portion of any Option or
Options held by a person who is at such time no longer an employee
or director of the Company or its subsidiaries in exchange for a
cash payment equal to the excess of (x) the Fair Value Price (as
defined in the Plan) of the Option Shares subject to such Vested
Option, over (y) the Option Price for such Option Shares, multiplied
by the number of Option Shares subject to such cancelled Options;
PROVIDED, HOWEVER, that the exercise of the right of the Committee
or Board of Directors hereunder shall not be made in contemplation
of a Sale or an IPO.
(ii) Without limiting any rights of the Company under the
Stockholders Agreement, the Committee or the Board of Directors may
cancel any outstanding Options in exchange for a cash payment, or in
the discretion of the Committee or the Board of Directors payment of
other property, to the Participant equal to the excess of (x) the
fair market value (as determined in good faith by the Board of
Directors of the Company) of the consideration received per
Stonington Share by the Stonington Investor in any sale (by merger,
stock purchase or otherwise) to a Person which is not an Affiliate
of the Company or any Stonington Investor of all the then issued and
outstanding Stonington Shares (as defined in the Stockholders
Agreement) (a "TRANSFER EVENT"), over (y) the Option Price for such
Option Shares, multiplied by the number of Option Shares subject to
such cancelled Options, in each case effective upon the consummation
of the Transfer Event.
-4-
<PAGE>
(e) STOCKHOLDER RIGHTS. The Participant shall have no rights as a
stockholder with respect to any Option Shares until such Participant shall
have exercised the related Options and until a certificate or certificates
evidencing such shares shall have been issued to the Participant, and no
adjustment shall be made for dividends or distributions or other rights in
respect of any share for which the record date is prior to the date upon
which the Participant shall become the holder of record thereof.
(f) DIVIDENDS AND DISTRIBUTIONS. Any shares of Common Stock or other
securities of the Company received by the Participant as a result of a
stock distribution to holders of Option Shares, as a stock dividend on
Option Shares or pursuant to a similar transaction shall be subject to the
same restrictions as such Option Shares, and all references to Option
Shares hereunder shall be deemed to include such shares of Common Stock or
other securities.
5. REQUIREMENTS OF LAW AND OF CERTAIN AGREEMENTS. If any law or any
regulation of any commission or agency of competent jurisdiction shall require
the Company or the exercising Participant to take any action with respect to any
Option Shares, then the date upon which the Company shall issue or cause to be
issued the certificate or certificates for such Option Shares shall be postponed
until full compliance has been made with all such requirements of law or
regulation; PROVIDED that the Company shall use reasonable efforts to take all
necessary action to comply with such requirements of law or regulation. Further,
if requested by the Company, at or before the time of the issuance of such
Option Shares, the Participant shall deliver to the Company his or her written
statements satisfactory in form and content to the Company, that he or she
intends to hold the Option Shares so acquired by him or her for investment and
not with a view to resale or other distribution thereof to the public in
violation of the Securities Act or any applicable state securities or "blue sky"
law. Moreover, in the event that the Company shall determine in its sole
discretion that, in compliance with the Securities Act or any applicable state
securities or "blue sky" law, it is necessary to register any of the Option
Shares, or to qualify any such Option Shares for exemption from any of the
requirements of the Securities Act or any other applicable statute or
regulation, no Options may be exercised until the required action has been
completed; PROVIDED that the Company shall use reasonable efforts to take all
necessary action to comply with such requirements of law or regulation. All
Option Shares shall bear the legends provided for in the Stockholders Agreement.
6. MISCELLANEOUS.
(a) NO RIGHTS TO GRANTS OR CONTINUED EMPLOYMENT. The Participant
shall not have any claim or right to receive grants of Options under the
Plan. Neither the Plan nor this Agreement nor any action taken or omitted
to be taken hereunder or thereunder shall be deemed to create or confer on
the Participant any right to be retained in the employ of the Company or
any Subsidiary or other affiliate thereof, or to interfere with or to
limit in any way the right of the Company or any Subsidiary or other
affiliate thereof to terminate the employment of the Participant at any
time.
(b) TAX WITHHOLDING. No later than the date as of which an amount
first becomes includible in the gross income of the Participant for
Federal income tax purposes with respect to Option Shares acquired
pursuant to the exercise of any Option hereunder, such Participant shall
pay to the Company, or make arrangements reasonably satisfactory to the
Company regarding the payment of, any Federal, state, local or foreign
taxes of any kind required by law to be withheld with respect to such
amount; PROVIDED, HOWEVER, that such arrangements need not involve the
advancement by the Company of any funds to, for or on behalf of any
Participant or the incurrence or payment by the Company of any
-5-
<PAGE>
costs or expenses. The obligations of the Company hereunder shall be
conditional on such payment or arrangements, and the Company shall, to the
extent permitted by law, have the right to deduct any such taxes from any
payment otherwise due to the Participant.
(c) NO RESTRICTION ON RIGHT OF COMPANY TO EFFECT CORPORATE CHANGES.
Neither the Plan nor this Agreement shall affect in any way the right or
power of the Company or its stockholders to make or authorize any or all
adjustments, recapitalizations, reorganizations or other changes in the
capital structure or business of the Company, or any merger or
consolidation of the Company, or any issue of stock or of options,
warrants or rights to purchase stock or of bonds, debentures, preferred or
prior preference stocks whose rights are superior to or affect the Common
Stock or the rights thereof or which are convertible into or exchangeable
for Common Stock, or the dissolution or liquidation of the Company, or any
sale or transfer of all or any part of the assets or business of the
Company, or any other corporate act or proceeding, whether of a similar
character or otherwise.
(d) 1934 ACT. Notwithstanding anything contained in the Plan or this
Agreement to the contrary, if the consummation of any transaction under
the Plan or this Agreement would result in the possible imposition of
liability to the Participant pursuant to Section 16(b) of the 1934 Act,
the Board of Directors or the Committee shall have the right, in its sole
discretion, but shall not be obligated, to defer such transaction to the
extent necessary to avoid such liability, but in no event for a period in
excess of 180 days.
7. SURVIVAL; ASSIGNMENT.
(a) All agreements, representations and warranties made herein and
in any certificates delivered pursuant hereto shall survive the issuance
to the Participant of the Options and the Option Shares and,
notwithstanding any investigation heretofore or hereafter made by the
Participant or the Company or on the Participant's or the Company's
behalf, shall continue in full force and effect. Without the prior written
consent of the Company, the Participant may not assign any of his rights
hereunder except by will or the laws of descent and distribution. Whenever
in this Agreement any of the parties hereto is referred to, such reference
shall be deemed to include the heirs and permitted successors and assigns
of such party; and all agreements herein by or on behalf of the Company,
or by or on behalf of the Participant, shall bind and inure to the benefit
of the heirs and permitted successors and assigns of such parties hereto.
(b) The Company shall have the right to assign to any of its
affiliates any of its rights, or to delegate to any of its affiliates any
of its obligations, under this Agreement.
8. CERTAIN REMEDIES. Without intending to limit the remedies
available to the Company, the Participant agrees that damages at law will be an
insufficient remedy in the event the Participant violates the terms of this
Agreement. The Participant agrees that the Company may apply for and have
injunctive or other equitable relief in any court of competent jurisdiction
-6-
<PAGE>
to restrain the breach or threatened breach of, or otherwise specifically to
enforce, any of the provisions hereof.
9. NOTICES. All notices and other communications provided for herein
shall be in writing and shall be delivered by hand or sent by certified or
registered mail, return receipt requested, postage prepaid, addressed, if to the
Participant, to his attention at the mailing address set forth at the foot of
this Agreement (or to such other address as the Participant shall have specified
to the Company in writing) and, if to the Company, c/o Stonington Partners,
Inc., 767 Fifth Avenue, New York, New York 10153, Attention: Scott M. Shaw,
Principal. All such notices shall be conclusively deemed to be received and
shall be effective, if sent by hand delivery, upon receipt, or if sent by
registered or certified mail, on the fifth day after the day on which such
notice is mailed.
10. WAIVER. The waiver by either party of compliance with any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any other provision of this Agreement, or of any subsequent
breach by such party of a provision of this Agreement.
11. ENTIRE AGREEMENT; GOVERNING LAW. This Agreement and the other
related agreements expressly referred to herein set forth the entire agreement
and understanding between the parties hereto and supersede all prior agreements
and understandings relating to the subject matter hereof. This Agreement may be
executed in one or more counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
agreement. The headings of sections and subsections herein are included solely
for convenience of reference and shall not affect the meaning of any of the
provisions of this Agreement. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Participant has executed this
Agreement, both as of the day and year first written above.
DICTAPHONE CORPORATION
By: /s/ Daniel P. Hart
------------------------------
Name: Daniel P. Hart
Title: Vice President, Business
Development and General Counsel
PARTICIPANT
/s/ Peter P. Tong
------------------------------------
Name: Peter P. Tong
Number of Service Options: 10,000
Option Price: $10.00
Effective Date of Grant: August 1, 1997
-7-
<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, 1998
and the condensed consolidated statement of operations for the quarter ended
March 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5595
<SECURITIES> 0
<RECEIVABLES> 72,545
<ALLOWANCES> 767
<INVENTORY> 51,967
<CURRENT-ASSETS> 140,181
<PP&E> 68,493
<DEPRECIATION> 32,884
<TOTAL-ASSETS> 459,721
<CURRENT-LIABILITIES> 79,694
<BONDS> 354,772
21,570
0
<COMMON> 130
<OTHER-SE> (7,546)
<TOTAL-LIABILITY-AND-EQUITY> 459,721
<SALES> 49,647
<TOTAL-REVENUES> 83,825
<CGS> 45,012
<TOTAL-COSTS> 84,703
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,797
<INCOME-PRETAX> (9,849)
<INCOME-TAX> (996)
<INCOME-CONTINUING> (10,845)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,845)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
