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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
|_| 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 OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3191 BROADBRIDGE AVENUE, STRATFORD, CT 06497
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 381-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 24, 1998 was $0.00.
As of March 24, 1998, there were 12,949,000 shares of the registrant's common
stock, $.01 par value (the "Common Stock") outstanding. There is no established
trading market for the Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE. None
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TABLE OF CONTENTS
PAGE
REFERENCED
ITEM NUMBER FORM 10-K
PART I
ITEM 1. BUSINESS................................................ 1
ITEM 2. PROPERTIES.............................................. 7
ITEM 3. LEGAL PROCEEDINGS....................................... 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..... 8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................... 8
ITEM 6. SELECTED FINANCIAL DATA................................. 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................. 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................... 58
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...... 58
ITEM 11. EXECUTIVE COMPENSATION.................................. 61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.............................................. 68
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 69
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K..................................... 72
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN WHICH EXPRESS "BELIEF,"
"ANTICIPATION," "EXPECTATION," OR "INTENTION" OR ANY OTHER PROJECTION, INCLUDING
STATEMENTS CONCERNING THE LAUNCH OF NEW PRODUCTS, FUTURE COMPANY PERFORMANCE AND
CAPITAL EXPENDITURES, INSOFAR AS THEY MAY APPLY PROSPECTIVELY AND ARE NOT
HISTORICAL FACTS, ARE "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934. BECAUSE SUCH STATEMENTS INCLUDE RISKS AND UNCERTAINTIES, ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE
NOT LIMITED TO, THE RISK FACTORS IDENTIFIED IN DICTAPHONE'S REGISTRATION
STATEMENT ON FORM S-1 AND IN OTHER DOCUMENTS FILED BY DICTAPHONE WITH THE
SECURITIES AND EXCHANGE COMMISSION.
PART I
ITEM 1. BUSINESS
GENERAL
On April 25, 1995, Dictaphone Acquisition Corporation ("Successor
Company", also referred to herein as the "Company" or "Dictaphone") entered into
a Stock and Asset Purchase Agreement, as amended August 11, 1995 (the
"Acquisition Agreement") with Pitney Bowes Inc. ("Pitney Bowes") for the purpose
of acquiring (the "Acquisition") Dictaphone Corporation, the United States
Dictaphone Subsidiary of Pitney Bowes, and certain foreign affiliates as set
forth in the Acquisition Agreement (collectively, the "Predecessor Company"). On
August 11, 1995, the Acquisition was consummated and the Company acquired the
Predecessor Company. Subsequent to the Acquisition, the Company changed its name
to "Dictaphone Corporation", and the Predecessor Company changed its name to
"Dictaphone Corporation (U.S.)". In January 1998, Dictaphone Corporation was
merged into Dictaphone Corporation (U.S.), whereupon the surviving corporation
changed its name to "Dictaphone Corporation".
The Company is the successor to a business begun by Alexander Graham Bell
in 1876. Today, the Company is a leader (in certain vertical markets) in the
development, manufacture, marketing, service and support of Integrated Voice and
Data Management ("IVDM"(TM)) systems and software, which include dictation,
voice processing, voice response, unified messaging, records management, court
recording, call center monitoring systems and communications recording.
The Company's dictation and voice management products ("Integrated Voice
Systems", or "I.V.S." and "Integrated Health Systems", or "I.H.S."), sales of
which represented 31% of the Company's 1997 total revenue, consist of portable
and desktop dictation products, and voice management and voice processing
systems used primarily by professionals such as physicians, attorneys and
business executives, and by enterprises such as hospitals, governmental
agencies, financial institutions, courts, insurance agencies and law firms.
Voice processing systems are generally larger, more sophisticated versions of
dictation products designed to accommodate multiple users. The Company's
communications recording systems ("C.R.S."), sales of which represented 23% of
the Company's 1997 total revenue, consist primarily of multi-channel archiving
recorders and emergency message repeaters used primarily by police departments,
fire departments, air traffic controllers and other public safety agencies, as
well as by financial services firms and other businesses. These products perform
continuous, reliable recording of multiple telephone or other communications
lines, such as radio channels, to protect customers who face potentially severe
financial or safety risks posed by lost or misinterpreted telephone
conversations or voice broadcasts. The Company's communications recording
systems products also include quality monitoring, productivity and training
products used primarily by call centers. Dictaphone's service business, revenue
from which represented 33% of the Company's 1997 total revenue, provides its
customers with service hardware and software support, expedited repairs and
remote diagnostics. Many Dictaphone customers, including a majority of customers
purchasing large systems, purchase Company service contracts at the time of
product purchase.
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DICTATION AND VOICE MANAGEMENT
The dictation products market consists of (i) the professional and
commercial market and (ii) the consumer market. The voice management market also
consists primarily of the professional and commercial market. Customers in the
professional and commercial market include professionals such as physicians,
attorneys and business executives, and enterprises that require swift and
efficient document creation such as hospitals, governmental entities, insurance
agencies, financial institutions and law firms. Customers in this market
typically purchase products through direct sales or dealer representatives of
established companies that can provide reliable, long-term service through their
service networks. Dictation products marketed to customers in the professional
and commercial segment are generally more expensive than those sold in the
consumer segment because they represent more durable construction for longer
product life and provide special features geared to office and transcription
use. The consumer segment consists of customers who typically purchase lower
priced desktop and portable machines through retail, catalog and mail order
establishments.
The Company believes that dictation products in its markets are purchased
primarily by existing industry customers. According to the Company's market
surveys, approximately 70% of the purchasing activity in the marketplace is from
existing customers who are expanding and upgrading their equipment, 15% is from
users changing brands, and 15% is from non-users making their first purchase.
Dictation products consist of desktop and portable products and dictation
systems (also referred to as voice processing systems). Desktop and portable
dictation products, the traditional products of this industry, typically use
analog magnetic tape recording methods to store and replay voice. All portable
products are designed to be compatible with Dictaphone desktops in terms of
features and appearance. In the United States, there is a base of approximately
260,000 Dictaphone portables eligible for future upgrade.
Voice processing systems are generally larger, more sophisticated versions
of dictation products designed to accommodate multiple users. Voice processing
systems equipment usually consists of one or more centralized dictation units,
which include the equipment which records and replays voice data, and a series
of telephones or similar devices, which connect with the dictation units to
record voice data and access previously recorded data. This equipment permits
users to transmit voice data to transcriptionists without requiring such users
to physically transport audio tapes carrying this data. Digital dictation
systems currently offer many advantages over their analog predecessors including
higher reliability, random and simultaneous accessibility to work, remote access
and playback over telephone lines, and the ability to handle multiple software
applications, such as dictation, voice mail and voice response. Digital
dictation systems also permit feature customization and may interface with other
customer systems, such as local area network systems.
In 1996, the Company acquired the rights to a dictation, transcription and
information management software system which utilizes a Microsoft(R) Windows(TM)
NT operating system platform. This system, called the Enterprise Express(TM)
System, which was launched by the Company in the first half of 1997, represents
the Company's latest voice processing system. The Enterprise Express(TM) System
went into production in June 1997 and has seen significant growth since then.
The Enterprise Express(TM) System replaces the Digital Express(TM) 7000 Voice
Processing System which was introduced in 1988 and has a worldwide installed
base of over 1,600 systems as well as the Records Express(TM) Transcription
System.
In 1993, Dictaphone introduced digital voice processing systems, called
the Digital Express(R) 4000 and Digital Express(R) 2500 products. The Company's
Straight Talk(TM) product is its smallest digital desktop system. Introduced in
mid-1990, Straight Talk(TM) is provided as an upgrade for clustered analog
desktop users.
In 1996, Dictaphone introduced Synergy(TM), a multi-application voice
processing and management system based on OS/2(TM) and industry standard
hardware. Synergy(TM) provides multiple computer telephony features, including
auto-attendant, voice mail, fax mail, unified messaging and E-mail integration
among others. Synergy(TM) systems may be integrated with the majority of
telephone switches and can also be linked to both mainframe and client-server
data sources. Synergy(TM) is an OEM (original equipment manufacturer) product
which is largely sourced from a third party.
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Also in late 1996, Dictaphone introduced the For the Record(TM) Court
Recording System, a digital recording product designed to provide for access,
management and archiving of court and other similar hearing proceedings. For the
Record(TM) provides a centralized source where information can be managed for
transcription, review and retrieval and utilizes a Microsoft(R) Windows(TM) NT
operating platform. In late 1997, the Company introduced a portable version of
the For the Record(TM) product. For the Record(TM) is an OEM product which is
sourced from a third party.
The Company also anticipates working with third party developers of
continuous speech recognition software, in order to introduce continuous speech
recognition products into the Company's I.H.S. and I.V.S. marketplace.
COMMUNICATIONS RECORDING SYSTEMS
The safety and/or liability communications recording systems market
consists primarily of multi-channel continuous archiving recorders and emergency
message repeaters. Communications recording systems are designed to perform
continuous, reliable recording of multiple telephone or communications lines to
protect customers who face potentially severe financial or safety risks posed by
lost or misinterpreted telephone conversations or voice broadcasts.
Multi-channel archiving recorders, also called "telephone loggers" or "loggers",
are sophisticated systems that capture large volumes of voice data transmitted
over multiple telephone or other communication lines, such as radio channels,
and allow the user to retrieve and play back specific conversations. Emergency
message repeaters, sometimes referred to as "Call Checks", are much smaller
machines that attach to telephone lines or other communications devices to
capture a smaller volume of voice data.
Customers of safety and liability communications recording systems include
public safety agencies, such as police departments, fire departments and air
traffic control departments, financial services firms, such as traders and
brokers, call centers and other businesses. Dictaphone believes that many of
these customers rely heavily on these systems as an integral part of their
operations, particularly in the case of governmental safety agencies and
financial institutions.
In the early 1990's, the communications recording systems market began to
experience technological change as analog reel-to-reel recorders began to be
displaced by analog VHS-based products and, more frequently, digital products
including those based on magnetic disk, optical disk or digital audio tape. For
example, in the case of Dictaphone, revenue from sales of communications
recording products based on digital technology increased as a percentage of
product sales revenue from all communications recording products from only 13%
in 1992 to over 97% in 1997. These technological changes both improved product
flexibility and, in the case of digital recording platforms, increased data
capacity and network integration.
The Company's multi-channel continuous archive recorders consist of the
ProLog(TM), Guardian(TM) and Sentinel(TM) models. In the second half of 1997,
the Company introduced the Symphony CTI(TM) system, a product designed to engage
the computer telephony integration market. The Symphony CTI(TM) system provides
for an advanced call retrieval capability, enabling integration with telephone
switches and other systems and databases to capture more information related to
each phone call.
The Company's midsized Guardian(TM) model, introduced in 1994, has been
designed to provide many of the services provided by the ProLog(TM) to customers
requiring fewer features or to those who prefer a single unit that does not
include a stand-alone personal computer ("PC") workstation.
The Company's Sentinel(TM) digital logger product is geared toward smaller
capacity and price sensitive customers. The Company began shipments of the
Sentinel(TM) in the third quarter of 1995. The Sentinel(TM) logger replaced the
Model 9800, Dictaphone's first digital logger, which was partially sourced from
an outside supplier.
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Dictaphone's emergency message products include the Series 5700, 5900 and
6600. The vast majority of these units is installed in public safety
organizations, where they are used extensively for replaying emergency telephone
calls.
In the fourth quarter of 1996, Dictaphone introduced its Insight(TM) call
center product. The Insight(TM) product is a call center quality monitoring,
productivity, training and management system which provides fully automated
monitoring, recording and evaluation/reporting capabilities in a single package,
integratable into existing network environments. The monitored record is both
voice and screen data which is synchronously played back to enable accurate
training and evaluation of call center agents and the generation of a variety of
management reports. Insight(TM) is an OEM product which is sourced from a third
party.
Dictaphone believes it has a number of significant opportunities in
marketing its products, including, for example, the continuing transition from
analog to digital technology, expansion of the Company's efforts in Europe, Asia
and Latin America and leveraging the Company's distribution strengths into
adjacent market opportunities.
SERVICE
The Company has an extensive service organization. The Company has
approximately 545 service representatives operating out of 173 offices in North
America. The United States service organization is supported by approximately
200 employees in service support, diagnostic center and repair services, and
distribution. In addition, Dictaphone has service locations in the United
Kingdom, Ireland and Continental Europe and sales and service representation
through dealers in approximately 40 other countries in Europe, South America and
Asia. See "-- Sales and Marketing".
Dictaphone's service business provides its customers with service support,
expedited repairs and remote diagnostics. Service revenue includes sales of
"Assured Performance Plans", which are long term warranties sold in one year
increments and frequently purchased by the Company's systems customers, and
revenue from repair of systems software and hardware not under warranty as well
as sales of parts. Dictaphone also receives revenue from service contracts which
provide for higher levels of technical support, such as its "SOS Alert" and
"Response Network" services, for dispatching maintenance in advance of a product
shut down and for services providing 24-hour system protection. Many Dictaphone
customers, including a majority of customers purchasing large systems, purchase
Dictaphone service contracts at the time of product purchase. In 1996,
Dictaphone instituted a mail-in service program for its desktop and portable
products. Under this program, desktop and portable products are sent by
overnight mail to a central service facility in Melbourne, Florida for rapid
turnaround or replacement. As a result of this program, desktops and portables
are no longer required to be serviced in U.S. field offices.
In addition to the repair of its own proprietary product, the Company also
provides service support, expedited repairs and remote diagnostics to other
companies through its third party contract service business. As Dictaphone's
service network expands its expertise in digital and other advanced
technologies, the Company believes there will be increasing opportunities to
obtain service contracts from companies in the telecommunications, cable and
other related industries which utilize these complex technologies. Dictaphone
has negotiated a number of such arrangements and is actively marketing its
services to companies in such industries.
NEW PRODUCTS
The Company is continually evaluating its product line both with respect
to feature content and development. The Company intends to continue to develop
and enhance its product line and introduce new products, some of which may be
sourced through third parties.
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CUSTOMERS
Although no single customer, other than Pitney Bowes, represents more than
1% of the Company's sales, customers for each of Dictaphone's product categories
are concentrated in certain industries. Dictaphone receives approximately 75% of
its United States dictation products revenue from medical, legal, insurance and
financial firms, educational entities and government agencies. This
industry-oriented user concentration enables Dictaphone to focus on customizing
solutions for specific user needs and applications.
Communications recording systems customers are predominately public safety
agencies, financial services entities and call centers. Approximately 55% of
U.S. Communications Recording Systems revenue is derived from financial services
firms and governmental agencies.
Although approximately 85% of Dictaphone's revenues are generated in the
United States, the Company has a significant customer base outside the United
States. Dictaphone's international customers are in many of the same industries
that the Company serves domestically, such as medical, legal and financial firms
and governmental agencies.
SALES AND MARKETING
The wide geographic coverage of the Company's sales and service offices in
the United States permits Dictaphone to sell its products to customers of all
sizes and in virtually all United States locations. Consequently, less than 1%
of all United States sales are through dealers. The placement of the service and
sales offices throughout the United States also provides a system for the rapid
distribution and service of its products. See "-- Service". Distribution of
Dictaphone products is handled mostly through the Company's distribution
facility in Melbourne, Florida and branch and district locations. The Company
also anticipates the expanded use of alternative channels, such as catalogs,
web-stores and mass marketers for the distribution of certain of its desktop and
portable products. Outside of North America the Company is shifting from direct
to indirect channels, such as dealers and distributors for the sale and
distribution of products.
WARRANTIES. Every product sold by Dictaphone, new or previously owned, has
a minimum limited warranty for parts and labor that is 90 days in duration; many
of the Company's more sophisticated products, however, are currently being sold
with one (1) year parts and labor warranties. Upon purchase of a new or
previously owned Dictaphone product, a customer may purchase an "Assured
Performance Plan." See "-- Service". If a Dictaphone customer decides not to
purchase the Assured Performance Plan, Dictaphone will repair its products at an
hourly service rate, in addition to parts.
ADVERTISING. The focus of Dictaphone's advertising and marketing
communications over the past few years reflects a shift away from broad based
major publication advertising to an approach targeting dictation and
communications recording intensive markets where product use and applications
are the greatest. Dictaphone currently uses nationwide corporate direct mail
programs, field generated programs, print advertising, product trade shows, user
group communications, telemarketing and other publicity to market, advertise and
promote its products.
LEASED SALES. Dictaphone provides its customers with flexible lease
programs through Pitney Bowes Credit Corporation ("PBCC"), Mellon First United
Leasing ("First United") and other finance companies. These companies provide
customers of the Company with lease financing and Dictaphone with a source of
used equipment, available through terminations or defaults, that may be
repurchased and remarketed by the Company.
RESEARCH AND DEVELOPMENT
During the last few years, the Company's research and development
organization has evolved from one with a hardware engineering orientation to one
in which software engineering dominates. The Company employs software engineers,
digital signal processing engineers and test engineers to develop software for
its products as well as to
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perform SMT printed circuit board designs and mechanical designs and to work
closely with its Melbourne, Florida factory and service operation to implement
these designs. The research and development organization also creates
application-specific integrated circuit designs.
The Company's research and development expenditures (including $6.9
million and $6.2 million of capitalized software costs in 1996 and 1997,
respectively) grew as a percentage of product sales and rental revenue from 7.1%
in 1996 to 7.2% in 1997. As of December 31, 1997, the Company's research and
development staff consisted of 148 personnel (including temporary employees).
INTELLECTUAL PROPERTY
The Company has approximately 90 patents protecting features and methods
covering Integrated Voice Systems, Integrated Health Systems and Communications
Recording Systems product lines. The Company believes that there is no single
patent or group of related patents the loss of which would have a material
adverse effect on its business. The Company also has approximately 100 U.S.
trademarks, including the well known "Dictaphone(R)" registered trademark, in
use throughout the world.
MANUFACTURING OPERATIONS
Dictaphone's vertically integrated manufacturing process and non-union
manufacturing workforce enable it to respond quickly and cost-effectively to
changing markets and customer requirements. The Company's flexible manufacturing
enables it to offer its customers a variety of product models.
The Company's primary manufacturing facility is located in Melbourne,
Florida. Manufacturing currently employs approximately 600 personnel. The
manufacturing team consists of four production departments: fabrication, wire
and cable, printed circuit assembly and final assembly.
Management assures manufacturing and raw material quality through formal
operator certification training classes, roving quality auditors and a formal
"Supplier Certification System", which is used to continually monitor the
supplier base. The manufacturing facility is currently ISO 9002 certified.
The Company currently purchases from approximately 400 suppliers, although
80% of the annual dollar volume is procured from 90 suppliers. Most agreements
with major suppliers are expressed in letters of intent or blanket purchase
orders covering one year or less. The Company is not materially dependent on any
single supplier.
Approximately 60% of all items processed at the Melbourne, Florida
facility are Dictaphone products, with the remainder comprised of contract
manufacturing. The Company's contract manufacturing program provides electronics
design and manufacturing capabilities for customers unaffiliated with the
Company. In 1997, revenue from contract manufacturing was $42.8 million.
COMPETITION
The markets in which the Company competes are highly competitive. The
Company competes with large and established national and multinational
companies, as well as smaller start up companies, in all of its operations.
Furthermore, as products sold in the Company's markets evolve toward software
and digital technology, new competitors with expertise in these areas are
entering the industry. Some of these competitors have, and new competitors may
have, greater resources than the Company.
In the dictation market, the Company faces two primary systems product
competitors, the Lanier division of Harris Corporation ("Lanier"), and Sudbury
Systems, Inc. ("Sudbury"). Philips Electronics N.V. and Sony Corporation
represent competitors for desktop and portable products.
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Dictaphone is a leading participant in the communications recording
product market in North America. Some of Dictaphone's North American competitors
include Racal Recorders Limited, Seltronics, Inc., TEAC Corporation of America,
Nice Systems Ltd. (loggers and quality monitoring), Magnasync Moviola
Corporation, Teknekron Infoswitch (quality monitoring) and Comverse Technology,
Inc. (loggers). Dictaphone expects that, with the increasing prevalence of
digital recording technology in this market, a large number of product oriented
companies will attempt to enter this marketplace in both North America and
Europe. The Company believes that while these companies may have difficulty in
entering the communications recording systems market in the United States due to
the lack of customer base and the absence of a direct sales and service network,
their entry will increase competitive pressure. The Company also anticipates
that its existing and potential competitors will be introducing new and enhanced
products.
EMPLOYEES
As of December 31, 1997, the Company had 2,478 employees worldwide, of
which 2,167 were based in the United States. As of December 31, 1997, less than
1% of the Company's workers were unionized. Two union contracts, one in New
York, New York covering 13 employees and one in Toronto, Ontario, Canada
covering 6 employees, expire on September 1, 1998, and January 15, 1998,
respectively. The Company is currently negotiating a new contract with Canadian
employees. The Company believes that a new contract will be obtained. The
Company believes its relations with employees are satisfactory.
ITEM 2. PROPERTIES
The Company operates a manufacturing and service/distribution center
facility in Melbourne, Florida, in addition to its numerous sales and service
offices. The Company's executive offices are located in Stratford, Connecticut.
In general, the Company believes that its properties are in good condition and
are adequate to meet its current and anticipated needs for the foreseeable
future.
The following is additional information concerning the major facilities
owned by the Company:
FACILITY PURPOSE SQUARE FOOTAGE
- ---------------------- ----------------------- --------------
Stratford, Connecticut Headquarters 138,000
Melbourne, Florida Manufacturing 120,160
Melbourne, Florida Customer Service 118,000
Toronto, Ontario, Canada Canadian Corporate Office 14,146
Killwangen, Switzerland Switzerland Sales Office 90,000
In addition, the Company leases sales, service and distribution offices in
certain countries in which it has operations, including 157 offices in the
United States, 20 offices in Canada, 13 offices in the United Kingdom and an
additional office in Germany.
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ITEM 3. LEGAL PROCEEDINGS
On February 14, 1995, Pitney Bowes filed a complaint against Sudbury in
the United States District Court for the District of Connecticut alleging
intentional and wrongful interference with Pitney Bowes's plans to sell the
Company. The complaint seeks damages and a declaratory judgment relating to the
validity of a patent owned by Sudbury entitled "Rapid Simultaneous Multiple
Access Information Storage and Retrieval System" and the alleged infringement
thereof by the Company. Sudbury responded by answering the complaint and filing
a third-party complaint against the Company alleging patent infringement and
seeking preliminary and permanent injunctive relief and treble damages. The
third-party complaint filed by Sudbury did not quantify the amount of the
damages sought. The litigation is in the discovery stage and the Company cannot
currently make a reasonable estimate of the amount of damages that will be
sought by Sudbury. Management believes that the Company has meritorious defenses
to the claims against it. Consequently, the Company has not provided for any
loss exposure in connection with this complaint. Additionally, regardless of the
outcome of this litigation, Pitney Bowes has agreed to defend this action and to
indemnify Dictaphone for any liabilities arising from such litigation.
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
cleanup 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
of 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 of results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is currently no established trading market for the Company's common
stock, $.01 par value per share (the "Common Stock"). As of March 15, 1998,
there were 12 holders of record of the Common Stock.
Under the terms of the Company's Credit Agreement, dated August 7, 1995,
as modified by four amendments to Credit Agreement, dated June 28, 1996, June
27, 1997, July 21, 1997 and November 14, 1997 (collectively, the "Credit
Agreement"), with a syndicate of financial institutions for whom Bankers Trust
Company is
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the Administrative Agent and NationsBank, N.A. (Carolinas) is the Documentation
Agent, the Company and Dictaphone U.S. are restricted from paying dividends on
their capital stock. In addition, under the terms of an Indenture (the "Note
Indenture") between the Company, Dictaphone U.S. and Shawmut Bank Connecticut,
National Association, relating to the Company's 11-3/4% Senior Subordinated
Notes Due 2005 (the "Notes"), the Company and certain of its subsidiaries are
restricted from paying dividends on their capital stock. In addition, as a
holding company, the Company's ability to pay cash dividends is also dependent
on the earnings and cash flows of its subsidiaries and the ability of its
subsidiaries to make funds available to the Company for such purpose.
The Company presently intends to retain earnings to fund working capital
and for general corporate purposes, and, therefore, does not intend to pay any
cash dividends on shares of Common Stock in the foreseeable future. The payment
of future cash dividends, if any, would be made only from assets legally
available therefore, and would also depend on the Company's financial condition,
results of operations, current and anticipated capital requirements,
restrictions under then-existing indebtedness and other factors deemed relevant
by the Company's Board of Directors.
On November 20, 1997, the Company sold 3.5 million shares of its Common
Stock to Stonington Capital Appreciation 1994 Fund, L.P. ("Stonington"). The
sale was effected in reliance upon the exemption from the registration
requirements provided by Section 4(2) of the Securities Act of 1933, as amended,
on the basis that such transaction did not involve a public offering. There were
no underwriters employed in connection with such sale. The proceeds derived from
such sale were used by the Company to repay amounts outstanding under the
Company's Revolving Credit Facility as well as fees associated with the issuance
of the Tranche C Term Loan.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is the selected consolidated financial data of Dictaphone
Corporation (Successor Company) at December 31, 1997 and December 31, 1996, for
the years then ended, and for the twenty week period ended December 31, 1995.
Also set forth below is the selected combined financial data of the Predecessor
Company for the thirty two week period ended August 11, 1995 and for each of the
two years in the period ended December 31, 1994. Certain amounts have been
reclassified to conform to current year presentation.
The selected financial data should be read in conjunction with "Item 7. --
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes included elsewhere in this
Report.
The capital structure and accounting basis of the assets and liabilities
of the Company as of August 12, 1995 and thereafter differ from those of the
Predecessor Company in prior periods as a result of the Acquisition. Financial
data of the Predecessor Company for periods prior to August 12, 1995 are
presented on a historical cost basis. Financial data of the Company as of August
12, 1995 and thereafter reflect the Acquisition under the purchase method of
accounting, under which the purchase price has been allocated to assets and
liabilities based upon their estimated fair values. Accordingly, amounts at
December 31, 1997, 1996 and 1995, and for the years and twenty week period then
ended should not be compared to periods prior thereto.
9
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
------------------------- --------------------------------------------
YEARS ENDED 32 WEEKS 20 WEEKS YEAR YEAR
DECEMBER 31, ENDED ENDED ENDED ENDED
------------ AUGUST 11, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1995 1996 1997
------ ------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (DOLLAR AMOUNTS IN MILLIONS)
Total revenue $343.2 $346.8 $202.1 $150.6 $332.5 $340.0
Cost of sales, rentals and
support services 179.2 178.0 107.6 90.1(c) 181.1(c) 194.4(c)
Selling and administrative 96.3 96.0 60.4 62.4(d) 149.2(d) 155.5(d)
Research and development
(net of software
capitalization) 10.6 12.3 7.0 4.6 14.2 14.7
Operating profit (loss) 57.1 60.5 27.1 (6.5) (12.0) (24.6)
Net interest (income)
expense and other (1.2) (1.0) (1.4) 16.1(e) 41.6(e) 44.7(e)
Income (loss) before
effect of changes in
accounting 35.0 36.6 17.1 (13.9) (34.7) (68.2)
Net income (loss) 35.0 33.8(b) 17.1 (13.9) (34.7) (68.2)
Stock dividend on PIK
Preferred Stock --- --- --- .8 2.3 2.7
Net loss applicable to
Common Stock --- --- --- (14.7) (37.0) (70.9)
OTHER DATA:
EBITDA(a) $ 65.3 $ 68.6 $ 32.0 $ 32.3 $ 54.2 $ 48.2
Depreciation and
amortization 8.2 8.1 4.9 39.1 65.8 62.2
Capital expenditures 5.0 5.9 5.5 .8 6.3 6.9
Software capitalization --- --- 2.5 1.7 4.7 6.2
EBITDA margin 19.0% 19.8% 15.8% 21.5% 16.3% 14.2%
BALANCE SHEET DATA
(AT END OF PERIOD):
Working capital $ 59.2 $ 64.2 $ 43.3 $ 33.0 $ 51.2
Total assets 241.5 268.5 550.7 504.8 470.1
Long term debt --- --- 350.0 352.6 343.6
Total liabilities 66.7 70.4 456.2 445.4 444.8
Stockholders' equity 174.8 198.1 94.5 59.4 25.3
- --------------------
</TABLE>
(a) 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.
(b) Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 112, which resulted in a one-time
non-cash, after-tax charge of $2.8 million (net of approximately $1.9
million of income taxes).
(c) Cost of sales and rentals for the twenty weeks ended December 31, 1995 and
years ended December 31, 1996 and 1997 includes $14.7 million, $8.8 million
and $2.4 million, respectively, of charges related to the amortization of
inventory write-up and depreciation associated with purchase accounting
adjustments.
(d) Selling and administrative for the twenty weeks ended December 31, 1995 and
years ended December 31, 1996 and 1997 includes $21.8 million, $46.2
million and $41.5 million, respectively, of non-cash purchase accounting
charges.
(e) Includes $.9 million, $5.3 million and $6.3 million of non-cash interest
expense from amortization of deferred financing fees for the twenty weeks
ended December 31, 1995 and years ended December 31, 1996 and 1997,
respectively.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On April 25, 1995, the Company entered into the Acquisition Agreement with
Pitney Bowes for the purpose of the Acquisition. On August 11, 1995, the Company
acquired the Predecessor Company for $450.0 million, subject to certain
post-closing adjustments as set forth in the Acquisition Agreement. On March 6,
1996, the Company and Pitney Bowes reached agreement as to final purchase
adjustments. Total purchase adjustments amounted to $12.2 million for an
aggregate purchase price of $462.2 million.
The following discussion should be read in conjunction with the financial
statements and accompanying notes included in "Item 8. -- Financial Statements
and Supplementary Data."
The capital structure and accounting basis of the assets and liabilities of
the Company as of August 12, 1995 and thereafter differ from those of the
Predecessor Company in prior periods as a result of the Acquisition. Financial
data of the Predecessor Company for periods prior to August 12, 1995 are
presented on a historical cost basis. Financial data of the Company as of August
12, 1995 and thereafter reflect the Acquisition under the purchase method of
accounting, under which the purchase price has been allocated to assets and
liabilities based upon their estimated fair values. Certain amounts have been
reclassified to conform to current year presentation.
To facilitate the discussion below of the twelve month period ended
December 31, 1996 against the results of operations for the same period of 1995,
the historical operations of the Successor Company and Predecessor Company have
been combined, since the Acquisition occurred thirty-two weeks into the twelve
month period ended December 31, 1995.
TWELVE MONTHS ENDED
DECEMBER 31,
--------------------------
1995 1996 1997
---- ---- ----
(IN MILLIONS)
Net revenue................................. $ 352.7 $ 332.5 $ 340.0
Cost of sales, rentals and support services. 197.7 181.1 194.4
Selling and administrative expense.......... 122.8 149.2 155.5
Research and development.................... 11.6 14.2 14.7
------- ------- -------
Operating profit (loss)................ 20.6 (12.0) (24.6)
------- ------- -------
Net interest expense and other.............. 14.7 41.6 44.7
Income tax provision (benefit).............. 2.7 (18.9) (1.1)
------- ------- -------
Net income (loss)........................... $3.2 $(34.7) $(68.2)
======= ======= ======
11
<PAGE>
TWELVE MONTHS ENDED
DECEMBER 31,
--------------------------
1995 1996 1997
---- ---- ----
(IN MILLIONS)
Revenue:
Sales:
Integrated Voice Systems................. $ N/A $ 49.1 $ 45.7
Integrated Health Systems................ N/A 31.4 37.4
------ ------ -------
Total U.S. Voice Systems.............. 92.6 80.5 83.1
Communications Recording Systems......... 60.8 57.7 59.3
Customer Service Parts................... 19.6 18.4 18.0
International and Dealer Operations...... 43.5 40.4 40.7
Rentals.................................. 2.0 2.1 1.8
------ ------ -------
Product sales and rentals............. 218.5 199.1 202.9
====== ====== =======
Contract Manufacturing................... 44.5 40.6 42.8
Support service:
Customer Service......................... 74.7 80.0 81.3
Application and Training Specialists..... 1.4 1.3 2.6
International and Dealer Operations...... 13.6 11.5 10.4
------ ------ -------
Total support service................. 89.7 92.8 94.3
------ ------ -------
Total revenue............................... $352.7 $332.5 $ 340.0
====== ====== =======
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Total revenue increased 2.3% to $340.0 million in 1997 from $332.5 million
in 1996. This increase in revenue is attributable to higher product sales
revenue from I.H.S., Communications Recording Systems ("C.R.S.") and higher
revenue from Customer Service (including sale of parts), Application and
Training Specialists ("A.T.S."), and Contract Manufacturing, offset in part by
lower revenue from I.V.S. and International and Dealer Operations support
services.
I.V.S. revenue declined 6.9% to $45.7 million in 1997 due to lower billings
of desktops, small digital systems and Straight Talk(TM). I.V.S. order backlog
increased 51.6% during 1997 to $6.5 million. Installations of Enterprise
Express(TM) which was launched in the first half of 1997, and went into
production in June 1997, accounted for I.H.S. revenue growth which increased
19.1% to $37.4 million. I.H.S. orders which increased 18.7% to $40.8 million
also reflect the impact of Enterprise Express(TM). I.H.S. order backlog
increased 24.4% to $11.8 million. C.R.S. revenue increased 2.8% to $59.3 million
due to increased Guardian(TM) installations. C.R.S. orders increased 5.1% to
$59.3 million. C.R.S. order backlog declined 5.5% in 1997 to $7.5 million.
Customer Service revenue (including sale of parts) grew 0.9% to $99.3 million
due to increased installation and third party maintenance revenue partially
offset by lower proprietary product service contract revenue and hourly revenue.
A.T.S. revenue increased by $1.3 million to $2.6 million due to increased
customer training provided in support of I.V.S., I.H.S. and C.R.S. products.
Sales and service revenue from International and Dealer Operations declined by
1.7% to $51.1 million due to lower service and desktop and portable revenue as
well as $1.3 million of unfavorable currency exchange. Orders from International
and Dealer Operations increased 4.9% to $41.0 million. International and Dealer
backlog declined 28.8% in 1997 to $2.0 million. Contract Manufacturing revenue
increased 5.5% to $42.8 million. The Company expects a weakening of total
backlog and sales activity in the first quarter of 1998 for I.V.S. and C.R.S. as
early trends in the first quarter indicate lower demand for these products.
Early trends also indicate that I.H.S. sales activity remains strong as orders
for its Enterprise Express(TM) product continue to grow.
12
<PAGE>
Cost of sales, rentals and support services increased 7.3% to $194.4
million (57.2% of total revenue) versus $181.1 million (54.5% of total revenue)
for 1996. Excluding additional depreciation and amortization expenses associated
with purchase accounting adjustments related to the Acquisition, cost of sales,
rentals and support services as a percentage of revenue would have increased by
4.7 percentage points to 56.5% due primarily to non-recurring non-cash charges
of $14.9 million associated with the provision for excess field service parts
and stock related to the Company's Digital Express(TM) and Records Express(TM)
products. In connection with the launch of Enterprise Express(TM) which went
into production in June 1997, the Company provided for excess service parts and
field stock, as well as the prepayment of inventory associated with those
products that the Enterprise Express(TM) product replaces. Lower price
realization for C.R.S. digital loggers, I.H.S. digital and records management
systems and I.V.S. desktops and portables also contributed to higher cost of
sales, rentals and support services as a percentage of revenue.
Selling and administrative expenses (including amortization of intangibles
which included a $5.4 million non-cash charge to write down patent assets and
associated goodwill to their fair value) increased 4.3% to $155.5 million (45.7%
of revenue) from $149.2 million (44.9% of revenue) for 1996. Excluding
additional depreciation and amortization expense associated with purchase
accounting adjustments related to the Acquisition of $41.5 million and $46.2
million for 1997 and 1996, respectively, selling and administrative expenses
expressed as a percent of revenue, would have increased by 2.5 percentage
points. This increase is attributable to a $2.3 million severance provision
associated with the Company's efforts to reduce its cost structure through the
elimination of over 90 full-time positions, and a non-cash charge of $1.0
million to write down capitalized software to its estimated realizable value. In
addition, higher I.H.S. and C.R.S. field selling and home office sales support
expenses, increased A.T.S. training costs, higher trade show, advertising and
marketing expenses, and increased legal/settlement costs, management
compensation and employee benefit costs contributed to this expense increase.
I.V.S. and International expense reductions partially offset the increase.
Research and development expenses of $14.7 million (7.2% of product sales
and rental revenue) increased 4.0% from $14.1 million (7.1% of product sales and
rental revenue), reflecting increased staffing and compensation.
The Company recorded an operating loss of $24.6 million (7.2% of total
revenue) for 1997 compared to an operating loss of $12.0 million (3.6% of total
revenue) for 1996. Excluding the impact of purchase accounting adjustments from
both 1997 and 1996 discussed above, operating profit would have declined by
55.2% due to higher costs associated with the charge for inventory obsolescence,
the provision for severance, the charge to capitalized software and increased
operating expenses.
1996 COMPARED TO 1995
Total revenue decreased 5.7% to $332.5 million in 1996 from $352.7 million
in 1995. This decrease in revenue was attributable to declines in sales revenue
from U.S. Voice Systems ("U.S.V.S."), C.R.S., Contract Manufacturing, and lower
revenue from International and Dealer Operations, offset in part by higher
Customer Service revenue.
U.S.V.S. revenue declined 13.0% to $80.5 million due to lower demand for
desktops and portable products and lower installations of voice processing
systems. U.S.V.S. order backlog increased by $3.1 million during 1996 to $13.8
million. Sales revenue from C.R.S. declined 5.1% to $57.7 million due to lower
Prolog(TM) installations, and the presence, in the fourth quarter of 1995, of a
significant one-time installation. C.R.S. order backlog declined 14.2% to $7.9
million. Sales revenue from Contract Manufacturing (including sales to Pitney
Bowes) declined 8.9% to $40.6 million principally due to lower sales to Pitney
Bowes. Total revenue from International and Dealer Operations declined 8.9%
versus 1995. Lower sales and service revenue in the United Kingdom offset
improvement in C.R.S. sales revenue in Canada, Switzerland and Germany. Revenue
from Customer Service (including sales of parts) increased 4.3% to $98.4 million
due to increased proprietary product service contract revenue which increased
4.3% as well as higher third party maintenance revenue.
13
<PAGE>
Cost of sales, rentals and support services declined 8.4% to $181.1
million (54.5% of total revenue) versus $197.7 million (56.1% of total revenue)
for 1995. Excluding additional depreciation and amortization expense related to
purchase accounting adjustments associated with the Acquisition of $8.8 million
and $14.7 million from 1996 and 1995, respectively, cost of sales, rentals and
support services would have declined as a percent of revenue to 51.8% in 1996.
This decline is attributable to lower inventory adjustments and reduced content
of low margin Contract Manufacturing revenue, partially offset by lower C.R.S.
price realization.
Selling and administrative expenses increased 21.5% to $149.2 million
(44.9% of total revenue) from $122.8 million (34.8% of total revenue) for 1995.
Excluding additional depreciation and amortization expense associated with
purchase accounting adjustments related to the Acquisition of $46.2 million and
$21.8 million for 1996 and 1995, respectively, selling and administrative
expenses would have increased by 2.0%. This increase is attributable to higher
sales development, marketing and advertising expenses, higher international
expenses for sales office expansion, and a $1.1 million charge associated with
the planned reorganization of United States field personnel and related
severance, partially offset by reduced U.S.V.S. compensation-related expenses
and lower employee benefit costs.
Research and development expenses increased 22.0% to $14.2 million (4.3%
of total revenue) from $11.6 million (3.3% of total revenue) in 1995, reflecting
the impact of increased staffing and compensation.
The Company recorded an operating loss of $12.0 million for 1996 compared
to an operating profit of $20.6 million for 1995. Excluding the impact of the
purchase accounting adjustments from both 1996 and 1995 discussed above,
operating profit would have declined by 24.9%. This reduction reflects the
impact of lower revenue and higher expenses.
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 December 31, 1997, the Company had outstanding term
loans of $134.0 million (the "Term Loans") and loans of $9.0 million outstanding
under the $40.0 million revolving credit facility (the "Revolving Credit
Facility"), and $200.0 million of senior subordinated notes (the "Notes").
Availability under the Revolving Credit Facility at December 31, 1997 was $31.0
million. Scheduled annual principal payments will be $0.6 million in 1998, 1999
and 2000. There are no scheduled reductions in the Revolving Credit Facility
over the next five years.
On November 14, 1997, the Company and the lenders executed a fourth
amendment to the Credit Agreement. The amendment permitted the Company to issue
a new Tranche C Term Loan (the "Tranche C Loan") in the amount of $62.8 million,
the proceeds of which were used by the Company to extinguish the outstanding
balance of the Tranche A Term Loan (the "Tranche A Loan") and to prepay certain
required principal payments on the outstanding amounts under the Tranche B Term
Loan (the "Tranche B Loan"). The Tranche C Loan requires amortization equal to
1% of the total loan amount annually through 2001, 30% in 2002 and 66% in 2003.
In addition, certain of the financial covenants in the Credit Agreement were
revised. In the fourth quarter, the Company recorded a pre-tax non-cash charge
of $2.1 million associated with the write-off of the unamortized debt issuance
costs resulting from the early extinguishment of the outstanding balance under
the Tranche A Loan.
In connection with the fourth amendment, the Company sold an additional
$35.0 million shares of Common Stock to certain of its existing stockholders,
the proceeds of which were used to repay all amounts outstanding under a
facility (the "New Facility") which was established on August 1, 1997, and to
pay down the Revolving Credit Facility.
In connection with the terms of the Credit Agreement, the Company entered
into interest rate swap agreements in November 1995, effective February 16,
1996, with an aggregate notional principal amount equivalent to $75.0 million
maturing on February 16, 1999. The swap effectively converts 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 9.3%. No funds
under the swap
14
<PAGE>
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. The fair value of the interest rate swaps as of December 31, 1997 was
unfavorable $0.1 million, based on dealer quotes.
In addition, the Credit Agreement contains covenants that significantly
limit or prohibit, among other things, the ability of the Company and Dictaphone
(U.S.) to incur indebtedness, make prepayments of certain indebtedness, pay
dividends on Common Stock, make investments, engage in transactions with
stockholders and affiliates, create liens, sell assets and engage in mergers and
consolidations and requires that the Company maintain certain financial ratios.
The Company had $200.0 million aggregate principal amount of Notes
outstanding as of December 31, 1997. The Notes are subordinated to the Credit
Agreement and other senior indebtedness, as defined in the Note Indenture. The
Notes contain covenants similar to the Credit Agreement and provide for each
noteholder to have the right to require that the Company repurchase the Notes at
101% of the principal amount upon a change of control (as defined in the Note
Indenture). The Notes bear interest of 11-3/4% per annum, payable semi-annually
on each February 1 and August 1. The Notes mature on August 1, 2005. The fair
value of the Notes at December 31, 1997 was favorable $6.0 million, based upon
dealer quotes.
Working capital increased by $18.2 million primarily due to increased
trade receivables. The increase in receivables was due to improved revenue
performance and a higher mix of digital systems and communications recording
revenue in the fourth quarter of 1997, coupled with an increase in days sales
outstanding.
Capital expenditures for 1997 totaled $6.9 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 has introduced a number of new products in its target markets in 1997
and plans to introduce additional 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, refinancing including the issuance of a Tranche C loan, the New
Equity, and provisions under the fourth amendment 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.
As of December 31, 1997, the Company has tax net operating loss
carryforwards ("NOL's") of approximately $87.9 million, which begin to expire in
the year 2010. Statement of Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109") requires that the tax benefit of such NOL's be recorded as
an asset to the extent that management assesses the utilization of such NOL's to
be "more likely than not". Management evaluates the realizability of its defined
tax assets on a quarterly basis and considers historical trends, current
circumstances and estimates of future taxable income. Management has determined,
based on the Company's history of prior operating results, current circumstances
and its expectations for the future, that taxable income of the Company will
more likely not be sufficient to fully utilize the net deferred tax assets
recorded as of December 31, 1997, prior to the earliest expiration in the year
2010 and has established a valuation reserve of $24.1 million against the $33.3
million of deferred tax assets.
15
<PAGE>
A reconciliation of the Company's loss before taxes for financial
statement purposes to taxable loss for the years ended December 31, 1996 and
1997 is as follows (in thousands).
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Loss before taxes for financial statement purposes $(53,591) $(69,282)
Differences between loss for financial statement
purposes and taxable loss:
State income taxes - current portion......... 1,701 2,692
Permanent differences:
Goodwill.................................. 1,158 1,375
All other permanent items................. 2,043 4,235
Temporary differences:
Intangible amortization................... 20,959 21,309
All other temporary differences (net)..... 618 6,333
-------- -------
Total differences...................... $26,478 $35,944
-------- -------
Taxable loss................................. $(27,113) $(33,338)
======== ========
</TABLE>
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130") which requires a statement of comprehensive income to be
included in the financial statements for fiscal years beginning after December
15, 1997. The Company will include such statement beginning with the first
quarter of 1998.
In addition, in June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 requires disclosure of certain
information about operating segments and about products and services, the
geographic areas in which a company operates, and their major customers. The
Company is presently in the process of evaluating the effect which this new
standard will have on disclosures in the Company's financial statements and the
required information will be reflected in the Company's financial statements for
the year ended December 31, 1998.
The Company is actively engaged in resolving issues associated with the
Year 2000 challenge. In 1997, the Company began a review of its systems to
identify Year 2000 issues and is on schedule to complete its assessment,
modifications and testing of its strategic business systems in 1998 and 1999.
The Company is also assessing the scope of the Year 2000 issue in its physical
plant and infrastructure and will begin corrective actions in 1998. The Company
is also in communication with its major customers and suppliers to resolve Year
2000 interface issues. While the Company anticipates success in this cooperative
effort, it cannot guarantee the performance of third parties.
Additionally, the Company has performed assessments of its current
products. Certain products will require engineering changes which are being
developed. The Company believes most of its currently sold products will be Year
2000 compliant provided they have the appropriate engineering upgrades and is in
the process of communicating the Year 2000 status of such current products to
customers. The Company does not currently plan to develop modifications to
certain of its older products to ensure Year 2000 compliance and is evaluating
plans to notify affected maintenance customers of this plan.
The Company expects to utilize both internal and external resources to
resolve Year 2000 issues. The total cost to the Company of these Year 2000
compliance activities has not been and is not anticipated to be material to its
financial position or results of operations in any given year. These costs and
the date on which the Company plans to complete the Year 2000 modification and
testing processes are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans. The overall cost of
Year 2000 projects is not expected to be material based upon current estimates.
16
<PAGE>
Failure by the Company and/or vendors and customers to complete Year 2000
compliance work in a timely manner would have a material adverse effect on
certain of the Company's operations.
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 such forward
looking statements include, but are not limited to, those previously discussed
herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not currently applicable to the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1997
----
Net revenue......... $81,167 $79,941 $87,716 $91,218
Cost of sales, rentals
and support services 42,815 55,630 46,129 49,858
Net loss ........... (7,834) (19,080)(a) (6,023) (35,285)(b)
Net loss applicable to
Common Stock....... $(8,469) $(19,758) $(6,704) $(35,990)
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
------------- ------------- ------------- -------------
1996
----
Net revenue......... $80,459 $85,252 $83,447 $ 83,310
Cost of sales, rentals
and support services 46,874 45,224 45,394 43,656
Net loss ........... (11,430) (7,890) (8,505) (6,835)
Net loss applicable to
Common Stock....... $(11,955) $(8,497) $(9,098) $(7,437)
- ---------------------
</TABLE>
(a) Net loss includes after tax charges of $6.7 million for digital product
obsolescence and $1.5 million for severance.
(b) Net loss includes after tax charges of $3.8 million to write down patent
assets, associated goodwill, and capitalized software, $2.6 million for
digital product obsolescence, and $24.1 million to establish a deferred
tax valuation reserve.
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Dictaphone Corporation
We have audited the accompanying consolidated balance sheets of Dictaphone
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1997, 1996 and the twenty week period ended
December 31, 1995. Our audits also included the financial statement schedule as
of and for the years ended December 31, 1997 and 1996 and for the twenty week
period ended December 31, 1995, listed in the Index at Item 14. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Dictaphone Corporation and
Subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for the years ended December 31, 1997, 1996 and the twenty
week period ended December 31, 1995 in conformity with generally accepted
accounting principles. Also, in our opinion, the financial statement schedule as
of and for the years ended December 31, 1997 and 1996, and for the twenty week
period ended December 31, 1995, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
March 2, 1998
18
<PAGE>
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 7,927 $ 10,277
Accounts receivable, less allowance of
$1,339 and $810, respectively 53,701 71,939
Inventories 56,840 48,779
Other current assets 9,833 11,675
------- --------
Total current assets 128,301 142,670
Property, plant and equipment, net 37,008 35,331
Deferred financing costs, net of accumulated
amortization of $6,235 and $12,517, respectively 14,255 10,900
Intangibles, net of accumulated amortization of
$58,177 and $99,439, respectively 271,022 229,322
Prepaid repurchases, leased equipment 5,163 776
Other assets 49,086 51,061
-------- --------
Total assets $504,835 $470,060
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,634 $ 10,940
Interest payable 10,342 10,144
Accrued liabilities 29,961 32,373
Advance billings 34,808 37,184
Current portion of long-term debt 12,512 795
-------- --------
Total current liabilities 95,257 91,436
Long-term debt 340,086 342,816
Other liabilities 10,114 10,547
-------- --------
Total liabilities 445,457 444,799
-------- --------
Commitments, contingencies and concentration of
risks (Note 12)
Stockholders' equity:
Preferred stock ($.01 par value; 10,000,000
shares authorized; 1,500,000 shares of 14%
PIK perpetual preferred stock issued and
outstanding, liquidation value at
December 31, 1997, $20,841) 18,142 20,841
Common stock ($.01 par value; 20,000,000 shares
authorized; 9,480,000 and 12,952,000 shares
outstanding at December 31, 1996 and 1997,
respectively) 95 130
Notes receivable from stockholders (1,052) (831)
Additional paid-in capital 94,905 129,870
Treasury stock, at cost (200) (480)
Accumulated deficit (51,676) (122,597)
Accumulated translation adjustment (836) (1,672)
-------- --------
Total stockholders' equity 59,378 25,261
-------- --------
Total liabilities and stockholders' equity $504,835 $470,060
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amount)
<TABLE>
<CAPTION>
TWENTY WEEKS ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Revenues:
Product sales and rentals $ 96,014 $199,024 $202,894
Contract manufacturing sales 18,892 40,614 42,864
Support services 35,686 92,830 94,284
-------- -------- --------
Total revenue 150,592 332,468 340,042
-------- -------- --------
Costs and expenses:
Cost of sales, rentals and support
services 90,126 181,148 194,432
Selling and administrative 45,409 108,008 114,263
Amortization of intangibles 16,968 41,209 41,262
Research and development 4,587 14,135 14,705
-------- -------- --------
Operating loss (6,498) (12,032) (24,620)
Interest expense 15,850 42,897 44,438
Other expense (income) - net 232 (1,338) 224
-------- -------- --------
Loss before income taxes (22,580) (53,591) (69,282)
Income tax benefit 8,706 18,931 1,060
-------- -------- --------
Net loss (13,874) (34,660) (68,222)
Stock dividends on PIK Preferred Stock 815 2,327 2,699
-------- -------- --------
Net loss applicable to Common Stock $(14,689) $(36,987) $(70,921)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)
<TABLE>
<CAPTION>
TWENTY WEEKS ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Operating activities:
Net loss $ (13,874) $ (34,660) $ (68,222)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization (including
$11,691, $5,775 and $8,114, respectively,
of nonrecurring charges) 39,972 71,135 68,515
Provision for deferred income taxes (9,035) (18,876) (1,767)
Non-recurring charge for digital product
obsolescence (Note 4) --- --- 14,902
Changes in assets and liabilities:
Accounts receivable (12,684) 3,320 (18,869)
Inventories 16,786 3,833 (4,528)
Other current assets 5,358 (513) (1,876)
Accounts payable and accrued liabilities 20,020 (5,672) 5,896
Advance billings (1,134) 167 2,502
Other assets and other (18,837) (12,416) (10,996)
------- ------- --------
Net cash provided by (used in) operating
activities 26,572 6,318 (14,443)
------- ------- --------
Investing activities:
Payments for acquisition (454,239) (8,000) ---
Net investment in fixed assets (805) (6,225) (5,899)
------- ------- ---------
Net cash used in investing activities (455,044) (14,225) (5,899)
------- ------- ---------
Financing activities:
Net proceeds from sale of senior subordinated notes 194,000 --- ---
Borrowings under term loan facility 150,000 --- 62,750
Repayment under term loan facility --- (7,750) (71,000)
Proceeds from sale of common stock 95,000 --- 35,000
Proceeds from sale of preferred stock 15,000 --- ---
Borrowings under revolving credit facility 15,000 32,000 88,600
Repayment under revolving credit facility (15,000) (23,000) (88,600)
International borrowing, net --- 1,277 (717)
Payment of deferred financing costs (13,699) (791) (2,927)
Capital lease obligations --- (198) (266)
Repayment of management loans 113 108 221
Payments to acquire treasury stock (100) (100) (280)
------- ------- --------
Net cash provided by financing activities 440,314 1,546 22,781
------- ------- --------
Effect of exchange rate changes on cash (26) 9 (89)
------- ------- --------
Increase (decrease) in cash 11,816 (6,352) 2,350
Cash, beginning of period 2,463 14,279 7,927
------- ------- --------
Cash, end of period $14,279 $ 7,927 $ 10,277
======= ======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 4,060 $38,142 $ 38,372
======= ======= ========
Income taxes paid $ --- $ 1,960 $ 1,039
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE TWENTY WEEKS ENDED DECEMBER 31, 1995
AND YEARS ENDED DECEMBER 31, 1996 AND 1997
(In millions, except per share amounts)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE ACCUMULATED ACCUMULATED
PREFERRED COMMON FROM TREASURY PAID-IN ACCUMULATED TRANSLATION TOTAL
STOCK STOCK STOCKHOLDERS STOCK CAPITAL DEFICIT ADJUSTMENTS EQUITY
--------- ------ ------------ -------- ----------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization
at August 12, 1995 $ 15,000 $ 95 $ (1,273) $ --- $ 94,905 $ --- $ --- $ 108,727
Net loss --- --- --- --- --- (13,874) --- (13,874)
Stock Dividends 815 --- --- --- --- (815) --- ---
Repayment of
management loans --- --- 113 --- --- --- --- 113
Treasury stock --- --- --- (100) --- --- --- (100)
Translation
adjustments --- --- --- --- --- --- (363) (363)
-------- ----- -------- ------ -------- -------- ------ ---------
Balance at
December 31, 1995 15,815 95 (1,160) (100) 94,905 (14,689) (363) 94,503
Net loss --- --- --- --- --- (34,660) --- (34,660)
Stock Dividends 2,327 --- --- --- --- (2,327) --- ---
Repayment of
management loans --- --- 108 --- --- --- --- 108
Treasury stock --- --- --- (100) --- --- --- (100)
Translation
adjustments --- --- --- --- --- --- (473) (473)
-------- ----- -------- ------ -------- -------- ------ ---------
Balance at
December 31, 1996 18,142 95 (1,052) (200) 94,905 (51,676) (836) 59,378
Net Loss --- --- --- --- --- (68,222) --- (68,222)
Stock Dividends 2,699 --- --- --- --- (2,699) --- ---
Sale of common stock --- 35 --- --- 34,965 --- --- 35,000
Repayment of
management loans --- --- 221 --- --- --- --- 221
Treasury stock --- --- --- (280) --- --- --- (280)
Translation
adjustments --- --- --- --- --- --- (836) (836)
-------- ----- -------- ------ -------- -------- ------ ---------
Balance at
December 31, 1997 $ 20,841 $ 130 $ (831) $ (480) $129,870 $(122,597) $(1,672) $ 25,261
======== ===== ======== ====== ======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
1. THE ACQUISITION
On April 25, 1995, Dictaphone Corporation (Successor Company) (the
"Company") entered into a Stock and Asset Purchase Agreement, as amended
August 11, 1995 (the Acquisition Agreement"), with Pitney Bowes Inc.
("Pitney Bowes") for the purpose of acquiring (the "Acquisition")
Dictaphone Corporation, the United States Dictaphone Subsidiary of Pitney
Bowes ("Dictaphone U.S. (Predecessor Company)") and certain foreign
affiliates ("Dictaphone Non-U.S. (Predecessor Company)") as set forth in
the Acquisition Agreement (collectively, the "Predecessor Company"). On
August 11, 1995, the Company acquired the Predecessor Company for $450.0
million, which was subject to certain post-closing adjustments as defined
in the Acquisition Agreement. On March 6, 1996, the Company and Pitney
Bowes reached agreement as to final purchase adjustment. Total purchase
adjustments amounted to $12.2 million for an aggregate purchase price of
$462.2 million.
The Acquisition, including approximately $22,178 of related
transaction and financing fees, was financed with the borrowing of
approximately $165,000 under a credit agreement, which consisted of two
term loans and a revolving credit facility, the sale of senior subordinated
notes with an aggregate principal amount of $200,000 and equity
contributions of $110,000.
2. NATURE OF OPERATIONS
The Company is engaged principally in the design, manufacture,
marketing and service of integrated voice and data management systems and
software, which include dictation, voice processing, voice response,
unified messaging, records management, court recording, call center
monitoring systems and communications recording. Dictaphone markets these
products worldwide with most of its revenue generated from the U.S. market.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The capital structure and accounting basis of
the assets and liabilities of the Company as of August 12, 1995 and
thereafter differ from those of the Predecessor Company in prior periods as
a result of the Acquisition. The Acquisition was accounted for under the
purchase method of accounting in accordance with Accounting Principles
Board Opinion No. 16, "Accounting for Business Combinations". 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.
CONSOLIDATION. The consolidated financial statements include the
Company and all majority-owned subsidiaries as follows: Dictaphone
Corporation U.S. ("Dictaphone U.S."), Dictaphone Canada Ltd/Ltee
("Dictaphone Canada"), Dictaphone Company Ltd. ("Dictaphone U.K."),
Dictaphone Deutschland GmbH ("Dictaphone Germany"), Dictaphone Netherlands
BV ("Dictaphone Netherlands") and Dictaphone International A.G.
("Dictaphone Switzerland"). All significant intercompany accounts and
transactions have been eliminated.
23
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS. Cash equivalents include short-term, highly
liquid investments with a maturity of three months or less from the date of
acquisition.
INVENTORY VALUATION. Inventories are valued at the lower of cost or
market. Cost is determined on the first-in, first-out (FIFO) method.
COMPUTER SOFTWARE DEVELOPMENT COSTS. The Company capitalizes certain
software costs (approximately $4,171, $6,945 and $6,225 for the years ended
December 31, 1995, 1996 and 1997, respectively) in accordance with the
provisions of Statement of Financial Accounting Standard ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." Such amounts are amortized as the related products are
sold. In 1997, the Company wrote down $1.0 million of capitalized software
to its estimated realizable value. Amortization expense in 1995, 1996 and
1997 related to the capitalized amounts was $0, $1,418 and $5,821,
respectively.
FIXED ASSETS AND DEPRECIATION. Property, plant and equipment are
stated at cost and depreciated using the straight line method over the
useful lives of the various assets ranging from one to twelve years for
machinery and equipment and up to 35 years for buildings. Major
improvements which add to productive capacity or extend the life of an
asset are capitalized while repairs and maintenance are charged to expense
as incurred. Rental equipment and other depreciable assets are depreciated
using the straight line method over the related useful lives.
INTANGIBLES. Patents and non-compete agreement are amortized on a
straight line basis over five and three years, respectively. Service
contracts are amortized using a systematic method based on expected rate of
nonrenewals over four years. All other intangibles are being amortized on a
straight line basis over 40 years. The Company periodically evaluates the
recoverability of goodwill and other intangible assets by assessing whether
the unamortized intangible asset can be recovered over its remaining useful
life through future operating cash flows on an undiscounted basis.
DEFERRED FINANCING COSTS. Deferred financing costs are amortized over
the expected terms of the related debt using the effective interest method.
RENTAL ARRANGEMENTS AND ADVANCE BILLINGS. The Company rents equipment
to its customers under short-term rental agreements, generally for periods
of three to five years. Maintenance contracts (support services) are billed
in advance; the related revenue is included in advance billings and taken
into income as earned.
REVENUE. For large dictation and communication recording systems that
have technical installation requirements, the Company recognizes revenue
upon installation, which is when all of its contractual obligations have
been satisfied. Technical installations are installations of product
estimated to exceed 30 days. Revenue for all other products is recognized
upon shipment, net of estimated returns.
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.
INCOME TAXES. Income tax benefit is based upon reported results of
operations and reflects the impact of temporary differences between the
amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. All U.S. Federal and
State taxes are provided currently on the undistributed earnings of foreign
subsidiaries giving recognition to current tax rates and applicable foreign
tax credits.
24
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
TRANSLATION OF FOREIGN CURRENCIES. Assets and liabilities of
subsidiaries are translated at the rate of exchange in effect on the
balance sheet date; income and expenses are translated at the average rates
of exchange prevailing during the period. The related translation
adjustments are reflected in the accumulated translation adjustment within
the stockholders' equity section of the consolidated balance sheet. Foreign
currency gains and losses resulting from transactions are included in
results of operations.
4. INVENTORIES
Inventories consist of the following:
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Raw materials and work in process $ 14,881 $ 18,481
Supplies and service parts 19,946 14,087
Finished products 22,013 16,211
--------- --------
Total inventories $ 56,840 $ 48,779
========= ========
With the production of Enterprise Express(TM) in June 1997, the
Company provided for excess service parts and field stock, inclusive of
prepaid amounts, associated with those products that the Enterprise
Express(TM) product would replace. During 1997, these non-cash charges
totalled $14.9 million.
As a result of the Acquisition, inventories were recorded at their
fair value at August 12, 1995. Such fair value represented selling price
less estimated costs of completion for work in process and selling costs
and a reasonable profit allowance for the selling and completion effort
for finished goods. Raw materials were valued at replacement cost. The
fair value of inventories was $19,197 in excess of their historical cost.
Of such excess, $11,691, $5,775 and $1,713 was charged to cost of sales
and rentals during the twenty-week period ended December 31, 1995 and
years ended December 31, 1996 and 1997, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Land $ 1,781 $ 1,766
Buildings 16,958 17,228
Machinery and equipment 43,034 47,497
-------- --------
Subtotal 61,773 66,491
Accumulated depreciation (24,765) (31,160)
-------- --------
Property, plant and equipment, net $ 37,008 $ 35,331
======== ========
Depreciation expense for the twenty-week period ended December 31,
1995 and years ended December 31, 1996 and 1997 was $10,413, $15,130 and
$7,739, respectively.
25
<PAGE>
6. IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121"), the Company has recorded a
non-cash pretax charge of $5.4 million to write down certain patents and
associated goodwill to their fair value. The Company assessed impairment
based upon an analysis of anticipated future revenue of applicable
products and the resulting undiscounted cash flows. Fair value was based
upon a royalty saved valuation technique. The charge is reported in the
Consolidated Statement of Operations as amortization of intangibles.
7. INTANGIBLES
The following summarizes intangible assets, net of accumulated
amortization and writedowns of $58,177 and $99,439 for the years ended
December 31, 1996 and 1997, respectively. Amortization expense for the
years ended December 31, 1996 and December 31, 1997 was $41,209 and
$41,262, respectively.
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Goodwill $139,687 $135,004
Tradenames 75,158 73,211
Service contracts 18,951 8,920
Non-compete agreement 30,057 11,696
Patents 7,169 491
-------- --------
$271,022 $229,322
======== ========
8. DEBT
The following summarizes the debt structure of the Company:
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Current portion of long-term debt $ 12,512 $ 795
--------- ---------
Long-term debt:
Senior debt:
Term loans:
Tranche A 57,000 ---
Tranche B 73,500 71,250
Tranche C --- 62,122
Revolving credit loans 9,000 9,000
International debt 586 444
Subordinated notes 200,000 200,000
-------- ---------
Total long-term debt 340,086 342,816
-------- ---------
Total debt $352,598 $ 343,611
========= =========
In connection with the financing of the Acquisition, the Company
entered into a 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") with
a syndicate of financial institutions for whom Bankers Trust Company
("Bankers Trust") is the Administrative Agent and NationsBank, N.A.
(Carolinas) ("Nations") is the Documentation Agent.
26
<PAGE>
8. DEBT (CONTINUED)
The fourth amendment to the Credit Agreement provided for the
issuance of a new Tranche C Loan in the amount of $62,750, the proceeds of
which were utilized by the Company to extinguish the outstanding balance
of the Tranche A Loan and to prepay certain required principal payments on
the outstanding borrowings under the Tranche B Loan. The Credit Agreement
consists of a $75,000 Tranche B Term Loan due June 30, 2002, and a $62,750
Tranche C Term Loan due June 30, 2003, and a six-year Revolving Credit
Facility of up to $40,000, collectively, the "Facilities". A portion of
the Revolving Credit Facility is available to provide for the working
capital requirements and general corporate purposes of the Company and to
issue commercial and standby letters of credit.
In connection with the fourth amendment, the Company also sold an
additional $35,000 of equity, the proceeds of which were used to repay all
amounts outstanding on a facility which was established August 1, 1997,
and to pay down the Revolving Credit Facility.
At December 31, 1997, the Company had Term Loans of $134,000 and
loans of $9,000 outstanding under the Revolving Credit Facility. The
maturity schedule relating to the $134,000 of outstanding Term Loans is as
follows:
1998 $ 628
1999 628
2000 628
2001 38,128
2002 52,575
Thereafter 41,413
--------
$134,000
========
The Company will be required to make certain prepayments, subject to
certain exceptions, on the Facilities with 75% of Excess Cash Flow (as
defined in the Credit Agreement) and with the proceeds from certain asset
sales, issuances of debt and equity securities and any pension plan
reversion. Such prepayments will be applied first to required principal
payments of the Tranche B Term Loan and thereafter to amounts outstanding
under the Revolving Credit Facility.
There are no scheduled reductions in the Revolving Credit Facility
over the next five years. Availability under the Revolving Credit Facility
at December 31, 1997 was $31,000. The Company had outstanding letters of
credit of $2,210 as of December 31, 1997.
Borrowings under the Revolving Credit Facility bear interest at a
rate per annum equal to, at the Company's option, the higher of (1)
Bankers Trust's Prime Rate or (2) the rate which is 1/2 of 1% in excess of
the Federal Funds effective rate, (together the "Base Rate") plus 1.75% or
the reserve Eurodollar Rate (as defined in the Credit Agreement) plus
2.75%. The Tranche B Loan bears interest at a rate per annum equal to, at
the Company's option, the Base Rate plus 2.25% or the reserve Eurodollar
Rate plus 3.25%. The Tranche C Loan bears interest at a rate per annum
equal to, at the Company's option, the Base Rate plus 2.75% or the reserve
Eurodollar Rate plus 3.75%. In addition, the Company is required to pay
Bankers Trust a quarterly commitment fee of .50% per annum on the daily
average unused portion of the Revolving Credit Facility. The carrying
amount of the Facilities approximates fair value as the interest rate
reprices quarterly and is reflective of currently available market rates.
The Company entered into an interest rate swap contract in November 1995,
effective February 16, 1996, with an aggregate notional principal amount
equivalent to $75,000 maturing on February 16, 1999. The swap effectively
converts 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 9.3%. No funds under the swap agreements
are actually borrowed or are to be repaid. The amounts due to or
27
<PAGE>
8. DEBT (CONTINUED)
from the counterparties are reflected in interest expense in the periods
in which they accrue. The fair value of the interest rate swaps as of
December 31, 1997 was unfavorable $0.1 million, based upon dealer quotes.
Dictaphone is exposed to credit-related losses in the event of
non-performance by the counterparties to these swaps, although no such
losses are expected as the counterparties are commercial banks having an
investment grade credit rating. The effective interest rate for the year
ended December 31, 1997 was 8.45%, 8.95% and 8.40% on the Tranche B Loan,
Tranche C Loan and the Revolving Credit Facility, respectively.
Dictaphone U.S., the Company's wholly-owned U.S. Subsidiary,
guarantees the Company's obligations under the Facilities. The Company's
obligations and the guarantees of its domestic subsidiaries are secured by
substantially all existing and acquired personal property of the Company
and its domestic subsidiaries, including a pledge of 100% of the stock of
each of the Company's domestic subsidiaries and 66% of the stock of each
of the Company's first-tier foreign subsidiaries. The Company's
obligations are also secured by liens on certain real property of the
Company and its domestic subsidiaries.
In addition, the Credit Agreement contains covenants that
significantly limit or prohibit, among other things, the ability of the
Company and Dictaphone U.S. to incur indebtedness, make prepayments of
certain indebtedness, pay dividends on Common Stock (as hereinafter
defined), 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 Acquisition was also financed through the issuance of $200,000
senior subordinated notes (the "Notes"). The Notes are subordinated to the
Credit Agreement financing and other senior indebtedness as defined in the
indenture pursuant to which the Notes were issued (the "Note Indenture").
The Notes bear interest of 11-3/4% per annum, payable semiannually on each
February 1 and August 1. The Notes mature on August 1, 2005. The fair
value of the Notes at December 31, 1997 was favorable $6.0 million, based
on dealer quotes. The Notes are fully and unconditionally guaranteed by
Dictaphone U.S. The Notes contain covenants similar to the Facilities and
provides for each noteholder to have the right to require that the Company
repurchase the Notes at 101% of the principal amount upon a change of
control as defined in the Note Indenture.
9. EQUITY AND STOCK OPTIONS
COMMON STOCK
On December 31, 1997, the Company had 20 million shares of common
stock, $.01 par value ("Common Stock") authorized of which 12,952,000
shares were issued, outstanding and owned by Stonington Capital
Appreciation 1994 Fund, L.P. ("Stonington"), an affiliate of a limited
partner of Stonington, and by management of the Company. (See Note 11).
At December 31, 1996 and 1997, the Company had 20,000 and 48,000
shares of treasury stock, respectively.
PREFERRED STOCK AND WARRANT
The Company is authorized to issue up to 10 million shares of
preferred stock, $.01 par value, in one or more series as authorized by
the Board of Directors and to fix the terms, rights, restrictions and
qualifications of shares of each series. In connection with the
acquisition, the Company issued 1.5 million shares of 14% Pay-In-Kind
Perpetual Preferred Stock ("PIK Preferred Stock"). The PIK Preferred Stock
is nonvoting and has a stated value and liquidation preference of $10 per
share and carries a cumulative pay-in-kind dividend of 14% per year
payable quarterly in arrears from September 30, 1995 until July 31, 2006,
and thereafter the annual dividend rate will increase by 200 basis points
every twelve months (but in no event will exceed 24%). The PIK Preferred
Stock ranks senior to all classes and series of stock of the Company with
28
<PAGE>
9. EQUITY AND STOCK OPTIONS (CONTINUED)
respect to dividend rights and rights on liquidation, winding up and
dissolution of the Company. It is redeemable at the option of the Company
or in certain limited circumstances at the option of the holder upon the
occurrence of certain events. The Company accrued the 14% pay-in-kind
dividend and charged accumulated deficit $815, $2,327 and $2,699 for the
twenty weeks ended December 31, 1995 and years ended December 31, 1996 and
1997, respectively, as a result of the required dividends representing
81,500, 232,700 and 269,900 shares of the PIK Preferred Stock,
respectively. Such shares of PIK Preferred Stock were declared and issued
in respect of the period up to December 31, 1997.
Together with the issuance of the PIK Preferred Stock, the Company
issued a warrant to purchase 350,000 shares of the Company's Common Stock
at a price of $10 per share (the "Warrant") representing the fair value of
Common Stock on the date of issuance. The Warrant may not be transferred
or exchanged, in whole or in part, separately from, but may be transferred
or exchanged only together with, an equivalent proportion of such PIK
Preferred Stock.
The Warrant expires on August 11, 2005 and is currently exercisable.
The Company has reserved 350,000 shares of its Common Stock for issuance
upon exercise of the Warrant. As set forth in the related agreement (the
"Warrant Agreement"), the Warrant is subject to certain antidilution
provisions related to the future adjustments to the Company's capital
stock or the issuance of its Common Stock or rights, options or warrants
to purchase such Common Stock at a price below the current market price as
defined in the Warrant Agreement.
MANAGEMENT STOCK OPTION PLAN
At the date of Acquisition, the Company adopted a Management Stock
Option Plan (the "Plan") and issued options to purchase 713,000 shares of
Common Stock at $10.00 per share (fair market value) to officers, key
employees and non-employee directors of the Company. The Plan provides
that one-half of the options granted under the Plan will vest
automatically over a five year period and the other one-half became
eligible for vesting as to 10% on April 15, 1996, as to 20% on April 15,
1997, and the remaining options become eligible for vesting as to an
additional 20% on each of April 15, 1998, 1999, and 2000, and as to the
remaining 10% on April 15, 2001, if the Company attains certain
predetermined financial performance goals, or in any case no later than
the tenth anniversary of the Acquisition. Based upon the Company's 1995
performance, the Company's Board of Directors determined that 60% of the
Performance Options eligible for vesting on April 15, 1996 would vest.
Based upon the Company's 1996 performance, the Company's Board of
Directors determined that 0% of the Performance Options eligible for
vesting on April 15, 1997 would vest. The options expire ten years from
the date of grant or earlier in certain circumstances. In the event of a
Sale or an IPO (as defined in the Plan) of the Company prior to August 11,
2000, all outstanding service-based options and performance-based options
will become immediately vested and exercisable prior to the effective date
of such Sale or IPO. At the date of the Acquisition, the Company reserved
850,000 shares of its Common Stock for issuances under the Plan. Effective
August 1, 1997, the number of shares reserved for issuances under the Plan
was increased to 1,200,000. A summary of options outstanding is as
follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
Outstanding, beginning of year --- 683,000 650,000
Granted 713,000 89,000 551,500
Cancelled (30,000) (122,000) (105,000)
------- -------- ---------
Outstanding, end of year 683,000 650,000 1,096,500
======= ======== =========
Exercisable, end of year 0 82,680 161,470
======= ======== =========
The estimated fair value of the stock was $10.00 for all periods.
29
<PAGE>
9. EQUITY AND STOCK OPTIONS (CONTINUED)
Statement of Financial Accounting Standards Number 123, "Accounting
For Stock-Based Compensation" ("SFAS 123") encourages, but does not
require, companies to record at fair value compensation cost of
stock-based employee compensation plans. Dictaphone has elected to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting For Stock Issued to Employees" ("APB No. 25") and related
interpretations. Under the intrinsic value based method, compensation cost
is the excess, if any, of the quoted market price of the stock at grant
date over the exercise price of the option. Typically, grants of stock
options pursuant to stock option plans have no intrinsic value at grant
date, and accordingly, no compensation cost has been recognized by
Dictaphone. Had compensation cost for the stock option been determined
based on the fair value of the option at a date of grant consistent with
the requirements of SFAS No. 123, Dictaphone's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
1995 1996 1997
---- ---- ----
Net loss As reported $(14,689) $(36,987) $(70,921)
Pro Forma $(14,770) $(37,182) $(71,503)
The fair value of each stock option has been estimated at the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
1995 1996 1997
---- ---- ----
Risk free interest rate 5.44% 6.21% 5.72%
Expected life 5 years 5 years 5 years
Expected volatility --- --- ---
Expected dividend yield --- --- ---
10. INCOME TAXES
The provision (benefit) for income taxes for the twenty weeks ended
December 31, 1995 and years ended December 31, 1996 and 1997 consists of
the following:
TWENTY WEEKS ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- ----------------- -----------------
Current:
Federal $ --- $ --- $ ---
State --- --- ---
Foreign 329 (55) 707
---------- ---------- ---------
Total $ 329 $ (55) $ 707
---------- ---------- ---------
Deferred:
Federal $ (7,228) $ (14,686) $ 1,059
State (1,216) (3,139) (2,203)
Foreign (591) (1,051) (623)
---------- ---------- ---------
Total (9,035) (18,876) (1,767)
---------- ---------- ---------
Total $ (8,706) $ (18,931) $ (1,060)
========== ========== =========
30
<PAGE>
10. INCOME TAXES (CONTINUED)
The difference between the Company's effective income tax rate and
the United States statutory rate for the twenty-week period ended December
31, 1995 and years ended December 31, 1996 and 1997 is reconciled below:
<TABLE>
<CAPTION>
TWENTY WEEKS ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
United States statutory rate 35.00% 35.00% 35.00%
State income taxes, net of Federal
income tax benefit 3.50% 3.81% 4.32%
Effect of foreign operations 1.09% (1.39%) (0.17%)
Miscellaneous (1.03%) (2.09%) (2.83%)
Net operating loss carryforwards
with no anticipated benefit --- --- (34.79%)
------- ------- --------
Total 38.56% 35.33% 1.53%
======= ======= =======
</TABLE>
See Footnote 13 for disaggregated information as to domestic and
foreign income before taxes.
Deferred tax assets and liabilities arise from the impact of
temporary differences between the amount of assets and liabilities
recognized for financial reporting purposes and such amounts recognized
for tax purposes and resulted from the following:
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $15,702 $33,321
Amortization - identifiable intangibles 12,951 22,694
Postretirement and pension benefits 4,107 5,010
Depreciation 5,570 3,683
Other 4,779 6,357
-------- -------
Total gross deferred tax assets 43,109 71,065
-------- -------
Less: valuation allowance 0 (24,100)
-------- -------
Net deferred tax assets $43,109 $46,965
======== =======
Deferred tax liabilities:
Amortization - goodwill $(2,363) $(3,735)
Capitalized software costs (2,084) (2,240)
Other (893) (1,451)
-------- --------
Total deferred tax liabilities $(5,340) $(7,426)
======== =======
The Company has recorded a gross deferred tax asset of $71.1 million
included in other assets reflecting the benefit of net operating loss
carryforwards and various book tax temporary differences. The net
operating loss carryforward for federal income tax purposes as of December
31, 1997 is approximately $86.2 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. 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 not be sufficient to fully utilize the net deferred tax
asset recorded for December 31, 1997, prior to the earliest expiration in
the year 2010, and has established a valuation reserve
31
<PAGE>
10. INCOME TAXES (CONTINUED)
of $24.1 million against the $33.3 million of deferred tax assets. The
valuation allowance did not change in 1996. 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.
11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH STONINGTON CAPITAL APPRECIATION 1994 FUND, L.P.
In the fourth quarter of 1997, the Company received an additional
$35.0 million from the purchase of 3.5 million additional shares of Common
Stock by Stonington.
Stonington, together with an affiliate of a limited partner of
Stonington, own 98.8% of the outstanding Common Stock of the Company, has
the power to determine the composition of the Board of Directors of the
Company and otherwise control the business and affairs of the Company.
Four of the eight members of the Board of Directors of the Company are
employees of an affiliate of Stonington and serve as representatives of
Stonington.
TRANSACTIONS WITH MANAGEMENT
In connection with the Acquisition, the Company sold 197,000 shares
of Common Stock to certain members of the Company's management (the
"Management Investors") for $1,970, the fair value of the Common Stock at
the date of sale (the "Management Placement"). The Company financed $1,273
of the Management Placement with non-recourse loans bearing interest at a
rate equal to the Adjusted Eurodollar Rate in effect for the Revolving
Credit Facility under the Credit Agreement plus 2.75%. Interest is due
annually starting in August 1998. Unless prepaid, all principal, accrued
and unpaid interest is due and payable on August 7, 2005. The obligations
under the management notes are secured by a pledge of the proportionate
number of shares of Common Stock pursuant to a Stockholder's Agreement.
Under the terms of the Stockholders Agreement relating to the
Management Placement, for a period of five years from August 11, 1995,
unless the Company has completed an initial public offering, Management
Investors will not be permitted to sell, transfer or otherwise dispose of
their shares of Common Stock, except to (i) a "Permitted Transferee" or
(ii) to the Company pursuant to certain put and call arrangements set
forth in the Stockholders' Agreement (the "Puts and Calls"). A "Permitted
Transferee" includes certain beneficiaries, trusts and family members. The
Puts and Calls provide for the sale of shares of Common Stock to the
Company upon the termination of employment. The purchase price for shares
purchased pursuant to the Stockholders Agreement is based upon the
original per share purchase price Adjusted Book Value (as defined in the
Stockholders Agreement), cost, or Fair Market Value (as defined).
The Stockholders Agreement provides that in the event that, after
August 11, 2000, an initial public offering has not occurred, Management
Investors will be permitted to sell Common Stock to third parties after
first giving the Company and other Management Investors a right of first
refusal for the same number of shares of Common Stock at the same price.
12. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK
CONCENTRATIONS OF RISKS
A substantial portion of the Company's revenues are derived from the
sale of products manufactured at the Company's sole manufacturing facility
which is located in Melbourne, Florida. This manufacturing facility is
subject to the normal hazards of any such facility that could result in
damage to the facility. Any such damage to this facility or prolonged
delay in the operations of this facility for repairs or other reason would
have a materially adverse effect on the Company's financial position and
results of operations.
32
<PAGE>
12. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK (CONTINUED)
COMMITMENTS
The Company leases certain factory and office facilities under lease
agreements extending from one to twenty-five years. In addition to factory
and office facilities leased, the Company leases computer and information
processing equipment under lease agreements extending from three to five
years.
Future minimum lease payments for operating leases as of December
31, 1997 are as follows:
YEARS ENDING DECEMBER 31,
1998 $ 3,643
1999 2,878
2000 2,352
2001 1,310
2002 937
Later years 2,438
-------
Total minimum lease payments $13,558
=======
Rental expense under operating leases was $2,255, $5,168 and $5,073
for the twenty-week period ended December 31, 1995 and years ended
December 31, 1996 and 1997, respectively.
CONTINGENCIES
On February 14, 1995, Pitney Bowes filed a complaint against Sudbury
Systems, Inc. ("Sudbury") in the United States District court for the
District of Connecticut alleging intentional and wrongful interference
with Pitney Bowes's plans to sell the Company. The complaint seeks damages
and a declaratory judgment relating to the validity of a patent owned by
Sudbury entitled "Rapid Simultaneous Multiple Access Information Storage
and Retrieval System" and the alleged infringement thereof by the Company.
Sudbury responded by answering the complaint and filing a third-party
complaint against the Company alleging patent infringement and seeking
preliminary and permanent injunctive relief and treble damages. The
third-party complaint filed by Sudbury did not quantify the amount of
damages sought. The litigation is in the discovery stage and the Company
cannot currently make a reasonable estimate of the amount of damages that
will be sought by Sudbury. Management believes the Company has meritorious
defenses to the claims against it. Consequently, the Company has not
provided for any loss exposure in connection with this complaint.
Additionally, regardless of the outcome of this litigation, Pitney Bowes
has agreed to defend this action and to indemnify the Company for any
liabilities arising from such litigation.
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 thousand 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.
33
<PAGE>
12. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK (CONTINUED)
CONTINGENCIES (CONTINUED)
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.
13. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
INFORMATION
Dictaphone U.S. has fully and unconditionally guaranteed the Notes
(See Note 8). Dictaphone Non-U.S. is not a guarantor of the Notes. Separate
financial statements of Dictaphone U.S. are not presented because
management has determined that they would not be meaningful to investors in
the Notes. Subsequent to December 31, 1997, the Company merged Dictaphone
Corporation and Dictaphone Corporation (U.S.).
The following are the supplemental consolidating statement of
operations and cash flow information for the twenty-week period ended
December 31, 1995 and years ended December 31, 1996 and 1997, and the
supplemental consolidating balance sheet information as of December 31,
1996 and 1997.
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
TWENTY WEEKS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue from:
Product sales and rentals $ --- $85,633 $15,212 $(4,831) $ 96,014
Contract manufacturing sales --- 18,892 --- --- 18,892
Support services --- 31,031 4,655 --- 35,686
------- -------- ------- ------- --------
Total revenues --- 135,556 19,867 (4,831) 150,592
------- -------- ------- ------- --------
Costs and expenses:
Cost of sales, rentals and support
services ---- 83,029 11,499 (4,402) 90,126
Selling and administrative 83 54,728 7,563 3 62,377
Research and development ---- 4,587 --- --- 4,587
Interest expense - net and other 5,472 9,455 1,155 --- 16,082
-------- -------- -------- ------- --------
Total costs and expenses 5,555 151,799 20,217 (4,399) 173,172
-------- -------- -------- ------- --------
Equity (loss) earnings (4,035) --- --- 4,035 ---
-------- -------- -------- ------- --------
(Loss) income before income taxes (9,590) (16,243) (350) 3,603 (22,580)
Benefit for income taxes 1,945 6,316 262 183 8,706
-------- ------- -------- ------ --------
Net (loss) income $(7,645) $(9,927) $ (88) $3,786 $(13,874)
======== ======== ======== ======= =========
</TABLE>
34
<PAGE>
13. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
INFORMATION (CONTINUED)
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Revenue from:
Product sales and rentals $ --- $174,952 $36,229 $(12,157) $199,024
Contract manufacturing sales --- 40,614 --- --- 40,614
Support services --- 81,311 11,519 --- 92,830
------- -------- -------- --------- --------
Total revenues --- 296,877 47,748 (12,157) 332,468
------- -------- -------- --------- --------
Costs and expenses:
Cost of sales, rentals and support
services --- 163,752 29,101 (11,705) 181,148
Selling and administrative 203 125,854 23,160 --- 149,217
Research and development --- 14,135 --- --- 14,135
Interest expense - net and other 3,830 36,557 1,158 14 41,559
-------- --------- ------- -------- --------
Total costs and expenses 4,033 340,298 53,419 (11,691) 386,059
-------- --------- ------- -------- --------
Equity (loss) earnings (7,024) --- --- 7,024 ---
-------- --------- ------- -------- --------
(Loss) income before income taxes (11,057) (43,421) (5,671) 6,558 (53,591)
Benefit for income taxes 1,185 16,323 1,232 191 18,931
-------- --------- ------- -------- ---------
Net (loss) income $(9,872) $(27,098) $(4,439) $ 6,749 $(34,660)
======== ========= ======== ======== =========
</TABLE>
35
<PAGE>
13. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
INFORMATION (CONTINUED)
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue from:
Product sales and rentals $ --- $183,200 $32,356 $(12,662) $ 202,894
Contract manufacturing sales --- 42,864 --- --- 42,864
Support services --- 83,918 10,366 --- 94,284
------ --------- -------- -------- ---------
Total revenues --- 309,982 42,722 (12,662) 340,042
------ --------- -------- -------- ---------
Costs and expenses:
Cost of sales, rentals and support
services --- 180,501 27,064 (13,133) 194,432
Selling and administrative 400 141,349 13,776 --- 155,525
Research and development --- 14,705 --- --- 14,705
Interest expense - net and other 4,878 37,233 2,551 --- 44,662
-------- --------- -------- -------- ---------
Total costs and expenses 5,278 373,788 43,391 (13,133) 409,324
-------- --------- -------- -------- ---------
Equity (loss) earnings (11,382) --- --- 11,382 ---
-------- --------- -------- -------- ---------
(Loss) income before income taxes (16,660) (63,806) (669) 11,853 (69,282)
Income tax benefit (expense) 1,319 (156) 87 (190) 1,060
-------- -------- -------- -------- ---------
Net (loss) income $(15,341) $(63,962) $ (582) $ 11,663 $ (68,222)
======== ========= ======== ========= =========
</TABLE>
36
<PAGE>
13. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
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>
37
<PAGE>
13. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
DECEMBER 31, 1997
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ --- $ 8,276 $ 2,001 $ --- $ 10,277
Accounts receivable 10,644 64,711 8,699 (12,115) 71,939
Inventories --- 45,962 3,645 (828) 48,779
Other current assets --- 7,869 3,806 --- 11,675
------ ------- ------- ---------- ---------
Total current assets 10,644 126,818 18,151 (12,943) 142,670
Note receivable --- 16,942 --- (16,942) ---
Investments in subsidiaries 464,234 --- --- (464,234) ---
Fixed assets, net --- 32,041 3,290 --- 35,331
Intangibles, net 2,076 211,994 15,252 --- 229,322
Deferred financing costs 10,900 --- --- --- 10,900
Other assets 4,736 44,395 2,383 323 51,837
------- ------- ------- ---------- ----------
Total assets $492,590 $432,190 $39,076 $(493,796) $ 470,060
======== ======== ======= ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable and
accrued liabilities $10,421 $48,699 $ 6,602 $ (12,265) $ 53,457
Advance billings --- 34,252 2,932 --- 37,184
Current portion of long-term debt 628 --- 167 --- 795
------- ------- ------- ---------- ----------
Total current liabilities 11,049 82,951 9,701 (12,265) 91,436
Long-term debt 359,328 322,495 17,935 (356,942) 342,816
Other liabilities --- 10,477 70 --- 10,547
Stockholders' equity 122,213 16,267 11,370 (124,589) 25,261
------- ------- ------- ---------- ----------
Total liabilities
and stockholders' equity $492,590 $432,190 $39,076 $(493,796) $ 470,060
======== ======== ======= ========== ==========
</TABLE>
38
<PAGE>
13. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
TWENTY WEEKS ENDED DECEMBER 31, 1995
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss $(7,645) $ (9,927) $ (88) $ 3,786 $ (13,874)
Adjustments to reconcile net
loss to cash provided by (used in)
operating activities:
Depreciation and amortization 924 37,086 1,962 --- 39,972
Provision for deferred income taxes (1,936) (6,508) (591) --- (9,035)
Change in assets and liabilities:
Accounts receivable (10,609) (9,881) (246) 8,052 (12,684)
Inventories --- 16,179 178 429 16,786
Other current assets --- 5,631 (242) (31) 5,358
Accounts payable and
accrued liabilities 10,829 13,305 4,084 (8,198) 20,020
Advance billings --- (951) (183) --- (1,134)
Other assets and other 541 (18,617) (3,544) 2,783 (18,837)
-------- -------- ---------- ---------- -----------
Cash (used in) provided by
operating activities (7,896) 26,317 1,330 6,821 26,572
-------- -------- ---------- ---------- -----------
Investing activities:
Payment to acquire net assets of
Dictaphone Corporation (454,239) (429,763) (35,500) 465,263 (454,239)
Net investment in fixed assets --- (695) (110) --- (805)
--------- ---------- ---------- ---------- -----------
Cash used for investing activities (454,239) (430,458) (35,610) 465,263 (455,044)
--------- ---------- ---------- ---------- -----------
Financing activities:
Net proceeds from sale of senior
subordinated notes 194,000 --- --- --- 194,000
Borrowings under term loan facility 150,000 --- --- --- 150,000
Borrowing from promissory notes --- 347,509 17,491 (365,000) ---
Borrowings from subsidiary 6,821 --- --- (6,821) ---
Proceeds from sale of common stock 95,000 82,254 18,009 (100,263) 95,000
Proceeds from sale of preferred stock 15,000 --- --- --- 15,000
Borrowings from revolving credit
facility 15,000 --- --- --- 15,000
Repayment under revolving credit
facility --- (15,000) --- --- (15,000)
Payment of deferred financing costs (13,699) --- --- --- (13,699)
Repayment of management loans 113 --- --- --- 113
Payment to acquire treasury stock (100) --- --- --- (100)
-------- ---------- ---------- ---------- -----------
Cash provided by (used in) financing
activities 462,135 414,763 35,500 (472,084) 440,314
-------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on cash --- --- (26) --- (26)
-------- ---------- ---------- ---------- -----------
Increase in cash --- 10,622 1,194 --- 11,816
Cash, beginning of period --- 969 1,494 --- 2,463
-------- ---------- ---------- ---------- -----------
Cash, end of period $ --- $ 11,591 $ 2,688 $ --- $ 14,279
======== ========== ========== ========== ===========
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
13. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31, 1996
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss $(9,872) $(27,098) $ (4,439) $ 6,749 $ (34,660)
Adjustments to reconcile net
loss to cash provided by (used in)
operating activities:
Depreciation and amortization 5,388 61,501 4,246 --- 71,135
Provision for deferred income taxes (1,310) (16,323) (1,052) (191) (18,876)
Change in assets and liabilities:
Accounts receivable (2,387) 1,363 167 4,177 3,320
Inventories --- 2,346 1,021 466 3,833
Other current assets (517) 273 (204) (65) (513)
Accounts payable and
accrued liabilities (336) (2,124) 900 (4,112) (5,672)
Advance billings --- 715 (548) --- 167
Other assets and other 7,295 (11,249) (1,438) (7,024) (12,416)
------- -------- --------- ------- ---------
Cash (used in) provided by
operating activities (1,739) 9,404 (1,347) --- 6,318
------- -------- --------- ------- ---------
Investing activities:
Payment for acquisition (8,000) --- --- --- (8,000)
Net investment in fixed assets --- (5,007) (1,218) --- (6,225)
------- -------- --------- ------- ---------
Cash used for investing activities (8,000) (5,007) (1,218) --- (14,225)
------- -------- --------- ------- ---------
Financing activities:
Repayment under term loan facility (7,750) --- --- --- (7,750)
Borrowing from promissory notes (1,397) 1,250 147 --- ---
Borrowings from subsidiary 10,669 (10,669) --- --- ---
Borrowings from revolving credit
facility 32,000 --- --- --- 32,000
Repayment under revolving credit
facility (23,000) --- --- --- (23,000)
Other (783) --- 1,079 --- 296
-------- -------- -------- ------- ---------
Cash provided by (used in) financing
activities 9,739 (9,419) 1,226 --- 1,546
------- -------- -------- ------- ---------
Effect of exchange rate changes on cash --- --- 9 --- 9
------- -------- -------- ------- ---------
Decrease in cash --- (5,022) (1,330) --- (6,352)
Cash, beginning of period --- 11,591 2,688 --- 14,279
------- -------- -------- ------- ---------
Cash, end of period $ --- $ 6,569 $ 1,358 $ --- $ 7,927
======= ======== ======== ======= =========
</TABLE>
40
<PAGE>
13. SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31, 1997
DICTAPHONE DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION U.S. NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss $(15,341) $(63,962) $ (582) $ 11,663 $(68,222)
Adjustments to reconcile net
loss to cash provided by (used in)
operating activities:
Depreciation and amortization 6,337 58,778 3,400 --- 68,515
Provision for deferred income taxes (1,490) 156 (623) 190 (1,767)
Non-recurring charge for digital
product obsolescence --- 13,426 1,476 --- 14,902
Change in assets and liabilities:
Accounts receivable (748) (15,452) (1,165) (1,504) (18,869)
Inventories --- (8,442) 4,385 (471) (4,528)
Other current assets 517 (2,424) 31 --- (1,876)
Accounts payable and
accrued liabilities (239) 8,449 (3,815) 1,501 5,896
Advance billings --- 3,006 (504) --- 2,502
Other assets and other 11,499 (11,165) 169 (11,499) (10,996)
------- -------- -------- ---------- ---------
Cash provided by (used in)
operating activities 535 (17,630) 2,772 (120) (14,443)
-------- -------- -------- ---------- ---------
Investing activities:
Investment in subsidiary (35,000) --- --- 35,000 ---
Net investment in fixed assets --- (4,962) (937) --- (5,899)
-------- -------- -------- ---------- ---------
Cash used for investing activity (35,000) (4,962) (937) 35,000 (5,899)
-------- -------- -------- ---------- ---------
Financing activities:
Borrowing under term loan facility 62,750 --- --- --- 62,750
Repayment under term loan facility (71,000) --- --- --- (71,000)
Borrowing from promissory notes 11,250 (11,250) --- --- ---
Borrowings from subsidiary (549) 549 --- --- ---
Proceeds from sale of common stock 35,000 35,000 --- (35,000) 35,000
Borrowings from revolving credit
facility 88,600 --- --- --- 88,600
Repayment under revolving credit
facility (88,600) --- --- --- (88,600)
Other (2,986) --- (1,103) 120 (3,969)
-------- --------- -------- ---------- ---------
Cash provided by (used in) financing
activities 34,465 24,299 (1,103) (34,880) 22,781
------- --------- -------- ---------- ---------
Effect of exchange rate changes on cash --- --- (89) --- (89)
------- --------- -------- ---------- ---------
Increase in cash --- 1,707 643 --- 2,350
Cash, beginning of period --- 6,569 1,358 --- 7,927
------- --------- -------- ---------- ---------
Cash, end of period $ --- $ 8,276 $ 2,001 $ --- $ 10,277
========= ========= ======== ========== =========
</TABLE>
41
<PAGE>
14. RETIREMENT PLANS
Effective with the Acquisition on August 11, 1995, the Company
established a defined benefit pension plan for all active U.S. employees.
Responsibility for retired U.S. employees was retained by Pitney Bowes.
Certain employees in other countries are covered under contributory and
non-contributory defined benefit pension plans. The new Dictaphone Plan
("Dictaphone Plan") provides for benefits based on employees' compensation
and years of service. Company contributions are determined based on the
funding requirements of the Employee Retirement Income Security Act of
1974 and other governmental laws and regulations.
The Company sponsors a defined contribution plan (401K) for domestic
employees. In 1997, the Company matched 50% of employee contributions up
to 3% of eligible compensation, subject to certain limitations. Total
Company contributions were $151, $345 and $840 for the twenty-week period
ended December 31, 1995 and years ended December 31, 1996 and 1997,
respectively.
Net pension expense for defined benefit plans for the twenty-week
period ended December 31, 1995 and years ended December 31, 1996 and 1997
included the following components:
<TABLE>
<CAPTION>
UNITED STATES
-----------------------------------------------------------------------
TWENTY WEEKS ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Service cost -- benefits earned during period $ 995 $2,157 $ 2,022
Interest cost on projected benefit obligations 885 2,127 2,301
Actual return on assets (1,014) (3,965) (2,980)
Net (deferral) and amortization --- 1,342 (231)
------ ------ -------
Net periodic defined benefit pension expense $ 866 $1,661 $ 1,112
====== ====== =======
FOREIGN
-------------------------------------------------------------------
TWENTY WEEKS ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- ----------------- -----------------
Service cost -- benefits earned during period $ 48 $ 311 $ 163
Interest cost on projected benefit obligations 274 831 896
Actual return on assets (756) (927) (2,323)
Net (deferral) and amortization 289 (333) 1,065
------ ------ ------
Net periodic defined benefit pension income $ (145) $ (118) $ (199)
====== ====== ======
</TABLE>
42
<PAGE>
14. RETIREMENT PLANS (CONTINUED)
The following summarizes amounts included in the Company's
consolidated balance sheet and the funded status of the Company's U.S. and
foreign defined benefit plans at December 31, 1996 and 1997:
UNITED STATES
-----------------------------
DECEMBER 31,
1996 1997
---- ----
Actuarial present value of:
Vested benefits.................. $22,099 $27,496
------- -------
Accumulated benefit obligations.. $25,461 $31,527
------- -------
Projected benefit obligations....... $31,968 $38,323
------- -------
Plan assets at fair value, primarily stocks
and bonds, adjusted by:........... $31,517 $37,037
Unrecognized net loss (gain)..... (5,393) (5,671)
Unrecognized net asset........... --- ---
Unamortized prior service costs from
plan amendments................ --- ---
------- ------
Net pension liability .............. $ 5,844 $6,957
======= ======
The assumptions used in determining
pension costs and funded status for
defined benefit plans is as follows:
Discount rate....................... 7.50% 7.00%
Rate of increase in future
compensation levels............... 4.75% 4.75%
Expected long-term rate of return
on plan assets................... 9.50% 9.50%
FOREIGN
-------------------
DECEMBER 31,
1996 1997
---- ----
Actuarial present value of:
Vested benefits.................. $10,938 $10,953
------- -------
Accumulated benefit obligations.. $10,938 $10,953
------- -------
Projected benefit obligations....... $12,161 $11,859
------- -------
Plan assets at fair value, primarily
stocks and bonds,adjusted by:.... $13,041 $14,917
Unrecognized net loss............ 1,551 667
Unrecognized net asset........... (707) (989)
Unamortized prior service costs
from plan amendments.......... 664 ---
------- ------
Net pension liability (asset)....... $(2,388) $(2,736)
======= =======
The assumptions used in determining
pension costs and funded status for
defined benefit plans is as follows:
Discount rate....................... 7.75 - 8.25% 7.00 - 7.25%
Rate of increase in future
compensation levels............. 5.50 - 6.00% 5.00 - 6.00%
Expected long-term rate of return
on plan assets................. 9.00 - 9.50% 9.00 %
43
<PAGE>
15. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company provides certain postretirement health care and life
insurance benefits for qualifying employees in the United States and
Canada. Substantially all of these employees may become eligible for
coverage. Most retirees outside the United States and Canada are covered
by government sponsored and administered programs.
This obligation was determined by application of the terms of the
postretirement health care and life insurance plan together with relevant
actuarial assumptions. These assumptions as of December 31, 1996 and
December 31, 1997 for years then ended were as follows:
1996 1997
---- ----
Discount rate 7.50% 7.00%
Initial health care cost trend rate 10.75% 9.75%
Ultimate health care cost trend rate 5.75% 5.75%
Year in which ultimate trend rate achieved 2001 2001
An increase in assumed health care trend rates of 1% in each year
would increase aggregate service and interest costs by $167 and would
increase the December 31, 1997 accumulated postretirement benefit
obligation by $1,177.
The Company's total net postretirement benefit costs for the
twenty-week period ended December 31, 1995 and years ended December 31,
1996 and 1997 consisted of the following components:
<TABLE>
<CAPTION>
TWENTY WEEKS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- ----------------- ------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 340 $ 664 $ 630
Interest cost on accumulated postretirement
benefit obligations 206 630 685
Net deferral (2) 26 (3)
------ ------ ------
Net periodic postretirement benefit costs $ 544 $1,320 $1,312
====== ====== ======
</TABLE>
Postretirement benefits are paid by the Company as incurred. The
following summarizes the status of these benefits at December 31, 1996 and
1997:
DECEMBER 31,
-----------------
1996 1997
Accumulated postretirement benefit obligations:
Retirees and dependents $ 71 $ 632
Fully eligible active plan participants 1,232 1,380
Other active plan participants 8,216 8,976
Unrecognized net (loss) gain (929) (1,272)
Unrecognized prior service credit --- 6
------ -------
Accrued postretirement benefits $8,590 $9,722
====== ======
44
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Dictaphone Corporation
We have audited the accompanying combined statements of income and cash flows of
Dictaphone Corporation and its related affiliated Dictaphone companies
(Predecessor Company) for the 32 week period ended August 11, 1995. Our audit
also included the financial statement schedule as of and for the 32 week period
ended August 11, 1995 listed in the Index at Item 14. These financial statements
and the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the combined
financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall combined financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined results of operations and cash flows of
Dictaphone Corporation and its related affiliated Dictaphone companies
(Predecessor Company) for the 32 week period ended August 11, 1995 in conformity
with generally accepted accounting principles. Also, in our opinion, such
financial statement schedule as of and for the 32 week period ended August 11,
1995, when considered in relation to the basic combined financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
As described in Note 1, Dictaphone Corporation and its related affiliated
Dictaphone companies (Predecessor Company) were sold to Dictaphone Corporation
(Successor Company).
/s/ Deloitte & Touche LLP
Stamford, Connecticut
February 22, 1996
45
<PAGE>
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
COMBINED STATEMENT OF INCOME
(Dollars in thousands)
32 WEEKS ENDED
AUGUST 11, 1995
---------------
Revenue from:
Sales $128,264
Sales to Pitney Bowes Inc. 18,575
Rentals 1,253
Support services 54,011
---------
Total revenue 202,103
---------
Cost and expenses:
Cost of sales and support services 90,237
Cost of sales to Pitney Bowes Inc. 17,119
Cost of rentals 282
Selling and administrative 60,404
Research and development 7,004
--------
Total cost and expenses 175,046
--------
Operating profit 27,057
Interest income (1,400)
Income before income taxes and
effect of changes in accounting 28,457
Provision for income taxes 11,398
---------
Net income $17,059
=========
See accompanying notes to combined financial statements.
46
<PAGE>
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
COMBINED STATEMENT OF CASH FLOW
(Dollars in thousands)
32 WEEKS ENDED
AUGUST 11, 1995
---------------
Cash flows from operating activities:
Net income $ 17,059
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,931
Increase (decrease) in deferred income taxes ---
Changes in assets and liabilities:
Accounts receivable (1,304)
Inventories (7,190)
Other current assets and prepayments (9,945)
Accounts payable and accrued liabilities 2,056
Advance billings 2,719
Other assets and other (4,318)
-------
Net cash provided by operating activities 4,008
-------
Cash flows from investing activities:
Net investment in fixed assets (5,538)
Cash flows from financing activities ---
Effect of exchange rate changes on cash 77
-------
Net cash flow financed by Pitney Bowes Inc. $(1,453)
========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 8
=======
Income taxes paid $13,454
=======
See accompanying notes to combined financial statements.
47
<PAGE>
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands or as otherwise indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. On April 25, 1995, Dictaphone Corporation
(Successor Company) (the "Company") entered into a Stock and Asset Purchase
Agreement, as amended August 11, 1995 (the "Acquisition Agreement"), with
Pitney Bowes Inc. ("Pitney Bowes") for the purpose of acquiring (the
"Acquisition") Dictaphone Corporation, the U.S. Dictaphone subsidiary of
Pitney Bowes ("Dictaphone U.S. (Predecessor Company)") and certain foreign
affiliates ("Dictaphone Non-U.S. (Predecessor Company)") as set forth in
the Acquisition Agreement. Dictaphone U.S. (Predecessor Company) and
Dictaphone Non-U.S. (Predecessor Company) are collectively referred to as
the "Predecessor Company". Effective August 11, 1995, the Predecessor
Company was sold to the Company.
COMBINATION. The combined financial statements include the combination
of the following entities: Dictaphone U.S. (Predecessor Company) and
Dictaphone Non-U.S. (Predecessor Company) (the latter of which consists of
Dictaphone Canada Ltd/Ltee ("Dictaphone Canada"), Dictaphone Company Ltd.
("Dictaphone U.K."), Dictaphone Deutschland GmbH ("Dictaphone Germany"),
Dictaphone Netherlands BV ("Dictaphone Netherlands") and Dictaphone
International A.G. ("Dictaphone Switzerland")). All Predecessor Company
intercompany transactions have been eliminated. See Note 5 to the combined
financial statements.
CASH AND CASH EQUIVALENTS. Cash equivalents include short-term, highly
liquid investments with a maturity of three months or less from date of
acquisition. The Company places its temporary cash and short-term
investments with financial institutions and limits the amount of credit
exposure with any one financial institution. Dividends of $12.3 million
were paid to Pitney Bowes during the thirty-two week period ended August
11, 1995 out of the net cash flow available to Pitney Bowes in the combined
statement of cash flows.
COMPUTER SOFTWARE DEVELOPMENT COSTS. The Company capitalizes certain
software costs in accordance with the provisions of Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed". No amortization of such
capitalized costs, approximately $2.6 million as of August 11, 1995, has
been recorded as the related products have not yet been made available for
sale.
RENTAL ARRANGEMENTS AND ADVANCE BILLINGS. The Company rents equipment
to its customers under short-term rental agreements, generally for periods
of three to five years. Charges for maintenance contracts (support
services) are billed in advance; the related revenue is included in advance
billings and taken into income as earned.
REVENUE. For dictation systems and communications recording equipment
that have technical installation requirements, the Company recognizes
revenue upon installation which is when all of its contractual obligations
have been satisfied. Revenue for all other products is recognized upon
shipment.
COSTS AND EXPENSES. Operating expenses of field sales and service
offices which represent the cost of support services revenue are included
in cost of sales.
48
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES. The Company's U.S. taxable income is included in the
consolidated federal and certain state income tax returns of Pitney Bowes.
The Company computes its provision for taxes on a separate company basis.
The deferred tax provision is determined under the liability method.
Deferred tax assets and liabilities are recognized based on differences
between the book and tax bases of assets and liabilities using presently
enacted tax rates. The provision for income taxes is the sum of the amount
of income tax paid or payable to Pitney Bowes for the year as determined by
applying the provisions of enacted tax laws to the taxable income for that
year and the net change during the year in the Company's deferred tax
assets and liabilities.
Deferred taxes on income result principally from expenses not currently
recognized for tax purposes and the excess of tax over book depreciation.
It has not been necessary to provide for income taxes on $41.5 million
of cumulative undistributed earnings of subsidiaries outside the U.S. These
earnings will be either indefinitely reinvested or remitted substantially
free of additional tax. Determination of the liability that would result in
the event all of these earnings were remitted to the U.S. is not
practicable. It is estimated however, that withholding taxes on such
remittance would approximate $3.4 million.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of subsidiaries
operating outside the U.S. are translated at rates in effect at the end of
the period, and revenues and expenses are translated at average rates
during the period. The functional currency for each foreign subsidiary is
its local currency. Net deferred translation gains and losses are
accumulated in stockholders' equity.
The Company enters into foreign exchange contracts for purposes other
than trading primarily to minimize its risk of loss from fluctuations in
exchange rates on the settlement of firm and budgeted intercompany
receivables and payables arising in connection with transfers of finished
goods inventories between affiliates as well as certain intercompany loans.
Gains and losses on foreign exchange contracts entered into as hedges are
deferred and recognized as part of the cost of the underlying transaction.
Gains and losses related to changes in the value of speculative contracts
are recognized in income currently. At December 31, 1994, the Company had
approximately $2.4 million of foreign exchange contracts outstanding,
maturing through 1995, to buy or sell various currencies. Risks arise from
the possible non-performance by counterparties in meeting the terms of
their contracts and from movements in securities values and interest and
exchange rates. However, the Company does not anticipate non-performance by
the counterparties as they are composed of major international financial
institutions. Maximum risk of loss on these contracts is limited to the
amount of the difference between the spot rate at the date of the contract
delivery and the contracted rate.
Foreign currency transaction gains and (losses) were not significant
for the thirty-two week period ended August 11, 1995.
2. RELATED PARTY TRANSACTIONS
The Company arranges financing for certain of its products primarily
through Pitney Bowes Credit Corporation ("PBCC") in the U.S., and leasing
subsidiaries in Canada and the U.K., all wholly owned subsidiaries of
Pitney Bowes. Sales to finance subsidiaries were $13.2 million for the
thirty-two weeks ended August 11, 1995. The Company recognizes revenue on
sales to PBCC consistent with its revenue recognition policy in Note 1.
Historically, Dictaphone purchased and sourced second-hand/used equipment
from PBCC. The inventory purchased was in turn profitably remarketed by
Dictaphone. In January 1995, the Company paid $11.2 million to PBCC for
equipment that will become available to Dictaphone, principally through
1998. This amount is reflected in other assets on the combined balance
sheet and will be reclassified to inventory as the related equipment is
received by the Company. On a quarterly basis the Company evaluates the
future recoverability of the remaining asset.
49
<PAGE>
2. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company manufactures selected printed circuit boards for Pitney
Bowes at its Melbourne, Florida facility. All printed circuit boards sold
to Pitney Bowes are sold at prices substantially equivalent to those which
have been or would have been realized by third parties. Although there is
no obligation on behalf of Pitney Bowes for minimum order quantities,
prices are guaranteed at specified levels not exceeding current prices
through 1998.
The Company earns interest income from its investment in and loans to
affiliates of Pitney Bowes. Interest rates charged are reflective of market
rates which would have been realized by unrelated third parties. The
interest earned from these affiliates of Pitney Bowes was $1.1 million for
the thirty-two week period ended August 11, 1995.
Certain of the Company's expenses are allocated to and from Pitney
Bowes. Expenses allocated to Pitney Bowes for administrative support
services relate to corporate officers' salary, rent, usage of computer
systems, invoice processing and certain product refurbishment performed at
the Company's Melbourne facility. Rent is allocated based on actual square
footage used; computer and invoice processing is allocated based on actual
computer usage; and officers' salaries are allocated based on estimated
time dedicated to other divisions. Expenses allocated from Pitney Bowes
consist primarily of insurance program costs, which are allocated based on
loss experience and exposure. Management believes that the allocations to
and from Pitney Bowes are reasonable and reflect the actual costs incurred
to provide these services. Expenses of the Company allocated to Pitney
Bowes totaled $.8 million for the thirty two-week period ended August 11,
1995. Expenses charged to the Company from Pitney Bowes totaled $1.2
million for the thirty-two weeks ended August 11, 1995. Management believes
that, if the Company were to operate as an independent entity, the Company
would expect to initially incur approximately $0.5 million per year of
additional operating expenses. However, as a result of the planned
transaction, Dictaphone will no longer provide the above mentioned
administrative support services to Pitney Bowes. Accordingly, the related
credits ($.8 million for the thirty-two week period ended August 11, 1995)
which were previously offset against operating expenses will not be
generated in the future.
The Company leases space to Pitney Bowes at its Melbourne, Florida
facility. The rental rates charged to Pitney Bowes are reflective of market
rates which would have been realized by unrelated third parties. The rental
income associated with this arrangement is approximately $0.1 million per
year pursuant to a lease expiring in the year 2000.
3. TAXES ON INCOME
The provision for income taxes consists of the following:
32 WEEKS ENDED
AUGUST 11, 1995
---------------
Current:
Federal $ 7,388
State 1,992
Foreign 548
--------
Total 9,928
========
Deferred: 1,470
--------
Total $11,398
========
50
<PAGE>
3. TAXES ON INCOME (CONTINUED)
The reconciliation between the provision for income taxes and the
provision for income taxes at the U.S. federal statutory rate is as
follows:
32 WEEKS ENDED
AUGUST 11, 1995
----------------
PERCENT OF PRETAX INCOME
U.S. federal statutory rate 35.00%
State and local income taxes 4.55%
Other 0.50%
------
Effective income tax rate 40.05%
======
4. NET STOCKHOLDERS' EQUITY
The changes in net stockholders' equity were as follows:
<TABLE>
<CAPTION>
CAPITAL IN CUMULATIVE
PREFERENCE COMMON EXCESS OF RETAINED TRANSLATION
STOCK STOCK PAR VALUE EARNINGS ADJUSTMENTS
---------- ------ --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 600 $ 270 $113,777 $79,170 $4,284
Net income --- --- --- 17,059 ---
Dividends paid to Pitney Bowes Inc. --- --- --- (12,255) ---
Stock transfer of Dictaphone Canada --- 68 130 --- ---
Translation adjustments --- --- --- --- 1,825
------- ------ -------- ------- ------
Balance, August 11, 1995 $ 600 $ 338 $113,907 $83,974 $6,109
======= ====== ======== ======= ======
</TABLE>
5. RETIREMENT PLANS
The Company has several defined benefit and defined contribution
pension plans covering substantially all employees worldwide. Benefits are
primarily based on employees' compensation and years of service. Company
contributions are determined based on the funding requirements of U.S.
federal and other governmental laws and regulations.
Total pension expense was $.5 million for the thirty-two week period
ended August 11, 1995. Net pension expense for defined benefit plans for
the thirty-two week period ending August 11, 1995 included the following
components:
32 WEEKS ENDED
AUGUST 11, 1995
-------------------------
UNITED STATES FOREIGN
------------- -------
Service cost -- benefits earned during period $1,005 $ 80
Interest cost on projected benefit obligations 2,423 417
Actual return on assets (6,168) (553)
Net amortization (deferral) 3,219 (154)
------- ------
Net periodic defined benefit pension
expense (income) $ 479 $(210)
======= ======
51
<PAGE>
5. RETIREMENT PLANS (CONTINUED)
The funded status at August 11, 1995 for the Company's defined benefit
plans was:
32 WEEKS ENDED
AUGUST 11, 1995
------------------------------
UNITED STATES FOREIGN
------------- ---------
Actuarial present value of:
Vested benefits $42,212 $ 8,203
------ -------
Accumulated benefit obligations $45,623 $ 8,203
------- -------
Projected benefit obligations $51,467 $ 9,297
------- -------
Plan assets at fair value, primarily stocks
and bonds, adjusted by: $55,615 $11,473
Unrecognized net loss (gain) (2,835) 1,691
Unrecognized net asset (1,832) (1,353)
Unamortized prior service costs from
plan amendments 1,080 ---
------ -------
52,028 11,811
------ -------
Net pension asset $ (561) $(2,514)
====== =======
Assumptions for defined benefit plans*:
Discount rate 8.75% 7.75%-8.25%
Rate of increase in future
compensation levels 5.75% 5.5%-6.0%
Expected long-term rate of return
on plan assets 9.50% 9.0%-9.5%
- ----------
* Pension costs are determined using assumptions as of the beginning of
the year while the funded status of the plans is determined using
assumptions as of the end of the year.
6. NONPENSION POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company provides certain postretirement health and life insurance
benefits for employees. Full-time employees electing retirement who have
attained age 60 and have at least ten years service are entitled to
postretirement healthcare as provided to active employees on the date of
retirement. Life insurance coverage upon retirement for employees having
attained age 60 with at least 10 years of service is provided at 25% of the
Company provided amount in effect on the date of retirement, to a maximum
of $10,000 and a minimum of $2,500. In the first quarter of 1993, the
Company announced certain changes to its health care plans, including plan
cost maximums, which should significantly reduce the ongoing incremental
impact of FAS 106 on future earnings.
The Company's total net nonpension postretirement benefit costs for the
thirty-two week period ended August 11, 1995 consisted of the following
components:
AUGUST 11, 1995
----------------
Service cost-benefits earned during the period $ 334
Interest cost on accumulated postretirement
benefit obligations 529
Net deferral (729)
------
Net periodic postretirement benefit costs $ 134
======
52
<PAGE>
6. NONPENSION POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
The Company's nonpension postretirement benefit plans are not funded.
The status of the plans was as follows:
AUGUST 11, 1995
---------------
Accumulated postretirement benefit obligations:
Retirees and dependents $ 7,924
Fully eligible active plan participants 929
Other active plan participants 2,285
Unrecognized net (loss) gain 3,684
Unrecognized prior service credit 2,881
-------
Net periodic postretirement benefit costs $17,703
=======
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligations was 11.75% in 1994. This was
assumed to gradually decline to 5.75% by the year 2000 and remaining at
that level thereafter. A one-percentage-point increase in the assumed
health care cost trend rate would increase the net periodic postretirement
health care cost by $0.1 million for the thirty-two week period ended
August 11, 1995.
The assumed weighted average discount rate used in determining the
accumulated postretirement benefit obligations was 8.75% for the thirty-two
week period ended August 11, 1995.
7. COMMITMENTS AND CONTINGENCIES
On February 14, 1995, Pitney Bowes Inc. filed a complaint against
Sudbury Systems, Inc. in the United States District court for the District
of Connecticut alleging intentional and wrongful interference with Pitney
Bowes Inc.'s plans to sell Dictaphone. The complaint seeks damages and a
declaratory judgment relating to the validity of Sudbury Systems Inc.'s
claim and the alleged infringement by Dictaphone. On February 14, 1995,
Sudbury Systems, Inc. filed a complaint against Dictaphone in the United
States District Court for the District of Massachusetts alleging patent
infringement and seeking preliminary and permanent injunctive relief and
treble damages. The complaint filed by Sudbury did not quantify the amount
of damages sought. The litigation is still in preliminary stages and the
Company cannot currently make a reasonable estimate of the amount of
damages that will be sought by Sudbury. Management believes it has
meritorious defenses to the complaint against Dictaphone. Consequently, the
Company has not provided for any loss exposure in connection with this
complaint. Additionally, regardless of the outcome of this litigation,
Pitney Bowes Inc. has agreed to defend this action and to indemnify
Dictaphone for any liabilities arising from such litigation. Moreover,
Pitney Bowes Inc. believes it will prevail in its actions against Sudbury
Systems, Inc.
On June 23, 1995, a complaint was filed in the United States District
Court for the Northern District of Illinois by Failsafe Disk Company
("Failsafe") against the Company. The complaint alleged that the Company
violated Sections 1 and 2 of the Sherman Antitrust Act (the "Sherman Act")
by preventing Failsafe from selling 10 through 60 channel recording tapes
which, according to the complaint, are equal in quality to and lower in
price than 10 through 60 channel tapes sold by the Company and others. On
July 5, 1995, the complaint was served upon the Company. The complaint
sought damages of $19.2 million, subject to being trebled in accordance
with the provisions of the Sherman Act, together with Failsafe's costs and
expenses, including reasonable attorneys' fees. Discovery only recently
commenced and the Company is not in a position to fully assess the expected
outcome of this litigation, but management of the Company does not believe
that it has engaged in any violations of the Sherman Act and intends to
vigorously contest this litigation. Although it is not possible to predict
the outcome of any litigation with any assurance, the Company does not
believe this complaint is likely to have a material adverse effect on the
Company's financial condition and results of operations.
53
<PAGE>
7. 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 cost of remediation, the timing and
extent of remedial actions which may be required by governmental
authorities, and the amount of liability, if any, of the Company alone or
in relation to that of any other responsible parties. When it is possible
to make a reasonable estimate of the Company's liability with respect to
such a matter, a provision will be made as appropriate. Additionally, the
Company has settled and paid its liability at three other third party
disposal sites. At a fourth site, the Company has paid approximately
$10,000 for its share of the costs of the first phase of the cleanup of the
site and the Company believes that it has no continuing material liability
for any later phases of the cleanup. Consequently, the Company believes
that its future liability, if any, for these four sites is not material. In
addition, regardless of the outcome of such matters, Pitney Bowes has
agreed to indemnify Dictaphone in connection with retained environmental
liabilities and for breaches of the environmental representations and
warranties, subject to certain limitations.
The Company is a defendant in a number of additional lawsuits and
administrative proceedings, none of which will, in the opinion of
management, have a material adverse effect on the Company's combined
financial position or results of operations.
Dictaphone does not believe that the Sudbury and Failsafe litigations
and the environmental matters described above in the aggregate, create a
material loss exposure to the Company's financial position and results of
operations.
8. LEASES
The Company leases certain factory and office facilities under lease
agreements extending from three to twenty-five years. In addition to
factory and office facilities leased, the Company leases computer and
information processing equipment under lease agreements extending from
three to five years.
Future minimum lease payments for operating leases as of December 31,
1994 are as follows:
OPERATING
LEASES
---------
Years ending December 31:
1995 $ 5,018
1996 2,696
1997 1,639
1998 763
1999 534
Later years 3,729
--------
Total minimum lease payments $14,379
========
Rental expense under operating leases was $3.6 million for the
thirty-two week period ended August 11, 1995.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
CASH, CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE. The
carrying amounts approximate fair value because of the short maturity of
these instruments.
54
<PAGE>
9. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FOREIGN CURRENCY EXCHANGE CONTRACTS. The fair value of foreign currency
exchange contracts is obtained from dealer quotes. These values represent
the estimated amount the Company would receive or pay to terminate
agreements taking into consideration current interest rates, the credit
worthiness of the counterparties and current foreign currency exchange
rates. The fair value of such contracts was not significant at December 31,
1994.
10. SUPPLEMENTAL COMBINING FINANCIAL STATEMENTS AND SEGMENT INFORMATION
The following are the supplemental combining statements of income and
combining statements of cash flows for the thirty-two week period ended
August 11, 1995.
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
SUPPLEMENTAL COMBINING STATEMENT OF INCOME
32 WEEKS ENDED
AUGUST 11, 1995
DICTAPHONE DICTAPHONE COMBINING
U.S. NON-U.S. ADJUSTMENTS COMBINED
--------- ---------- ----------- ---------
Revenue from:
Sales and rentals $130,013 $ 23,275 $ (5,196) $148,092
Support services 45,074 8,937 --- 54,011
-------- -------- -------- --------
Total revenue 175,087 32,212 (5,196) 202,103
-------- -------- -------- --------
Costs and expenses:
Cost of sales, rentals
and support services 94,895 17,907 (5,164) 107,638
Selling and administrative 49,301 11,103 --- 60,404
Research and development 7,004 --- --- 7,004
Interest (income) net (24) (1,376) --- (1,400)
-------- -------- -------- --------
Total costs and expenses 151,176 27,634 (5,164) 173,646
-------- -------- -------- --------
Income before income taxes 23,911 4,578 (32) 28,457
Provision (benefit)for
income taxes 9,921 1,514 (37) 11,398
--------- --------- --------- -------
Net income $ 13,990 $ 3,064 $ 5 $17,059
========= ========= ========= =======
55
<PAGE>
10. SUPPLEMENTAL COMBINING FINANCIAL STATEMENTS AND SEGMENT INFORMATION
(CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOW
32 WEEKS ENDED
AUGUST 11, 1995
DICTAPHONE DICTAPHONE COMBINING
U.S. NON-U.S. ADJUSTMENTS COMBINED
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 13,990 $ 3,064 $ 5 $17,059
Adjustments to reconcile net
income to cash provided by
operating activities:
Depreciation and amortization 4,069 862 --- 4,931
Decrease in deferred income taxes --- --- --- ---
Change in assets and liabilities:
Accounts receivable (1,750) 303 143 (1,304)
Inventories (8,767) 1,545 32 (7,190)
Other current assets (9,431) (457) (57) (9,945)
Accounts payable and
accrued liabilities 1,531 648 (123) 2,056
Advance billings 2,577 142 --- 2,719
Other assets and other (4,016) (302) --- (4,318)
------- -------- -------- --------
Cash provided by operating activities (1,797) 5,805 --- 4,008
------- -------- -------- --------
Cash flows from investing activities:
Net investment in fixed assets (4,740) (798) --- (5,538)
-------- ------- ------- --------
Effect of exchange rate changes on cash --- 77 --- 77
-------- ------- -------- --------
Cash flow available to (financed by)
Pitney Bowes Inc. $(6,537) $ 5,084 $ --- $(1,453)
======= ======== ======== ========
</TABLE>
56
<PAGE>
SCHEDULE II
DICTAPHONE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- --------- --------- ---------- ---------
YEAR ENDED DECEMBER 31, 1997
- ----------------------------
Allowance for doubtful accounts $1,339 $ 72 $ 601 $ 810
YEAR ENDED DECEMBER 31, 1996
- ----------------------------
Allowance for doubtful accounts 1,462 1,599 1,722 1,339
20 WEEKS ENDED DECEMBER 31, 1995
- --------------------------------
Allowance for doubtful accounts 1,095 785 418 1,462
32 WEEKS ENDED AUGUST 11, 1995
- ------------------------------
Allowance for doubtful accounts 1,049 618 572 1,095
57
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
persons who are members of the Board of Directors or were executive officers of
the Company as of March 15, 1998.
NAME AGE POSITION
- ---- --- --------
John H. Duerden......... 57 Chairman, Chief Executive Officer and
President
Albert J. Fitzgibbons, III 52 Director
Emil F. Jachmann........ 51 Director
Stephen M. McLean....... 40 Director
Alexis P. Michas........ 40 Director
Scott M. Shaw........... 35 Director
Peter P. Tong........... 56 Director
Tim Butler ............. 43 Senior Vice President and General
Manager, Integrated Voice Systems
Joseph Delaney.......... 52 Senior Vice President, Customer Service
Operations
Ronald A. Elwell........ 37 Senior Vice President and General
Manager, Communications Recording Systems
Daniel P. Hart.......... 39 Senior Vice President, General
Counsel and Secretary
Thomas C. Hodge......... 52 Senior Vice President, Manufacturing and
Logistics
Robert G. Schwager...... 44 Senior Vice President and General Manager,
Integrated Health Systems
Joseph D. Skrzypczak.... 42 Senior Vice President, Chief Financial
Officer and Director
Robert E. Trimper....... 59 Senior Vice President, International
Operations
The business experience of each of the directors and executive officers
during the past five years is as follows:
JOHN H. DUERDEN has served as Chairman, Chief Executive Officer and
President of the Company since August 1995. Mr. Duerden served as Joint
President and Chief Operations Officer of the Reebok Brands division of Reebok
International Limited, with responsibility for global sales, finance, operations
and production from October 1994 to February 1995. He was a Director of Reebok
International Limited from June 1991 until April 1995. Mr. Duerden was
previously President of Worldwide Operations for Reebok, from January 1994 to
September 1994 and, before that, President of the Reebok International
Operations group of the Reebok Brands division from October 1992 until January
1994. Prior to that, Mr. Duerden was President and Chief Executive Officer of
the Reebok Brands division from February 1990 to September 1992 and President of
Reebok International Operations from October 1988 to February 1990. Prior to
joining Reebok, Mr. Duerden was employed by Xerox Corporation for 20 years in a
variety of corporate and international management positions. In February 1997,
Mr. Duerden became a limited partner of Stonington Partners, L.P. ("SPLP"). Mr.
Duerden is a director of Sunglass Hut International, Inc.
58
<PAGE>
ALBERT J. FITZGIBBONS, III has served as a Director of the Company since
August 1995. Mr. Fitzgibbons is a Partner and a Director of Stonington Partners,
Inc. ("Stonington Partners"), a position that he has held since 1993 and a
Partner and a Director of Stonington Partners, Inc. II ("Stonington II"), a
position he has held since 1994. Mr. Fitzgibbons has also been a Director of
Merrill Lynch Capital Partners, Inc. ("MLCP"), a private investment firm
associated with Merrill Lynch & Co., since 1988. He was a Partner of MLCP from
1993 to 1994 and Executive Vice President of MLCP from 1988 to 1993. Mr.
Fitzgibbons was also a Managing Director of the Investment Banking Division of
Merrill Lynch & Co. from 1978 to July 1994. Mr. Fitzgibbons is also a Director
of Borg-Warner Security Corporation, Merisel, Inc., United Artists Theater
Circuit, Inc., U.S. Foodservice, Inc. and a privately held company.
EMIL F. JACHMANN has served as a Director of the Company since August 1995.
Mr. Jachmann is President and Chief Executive Officer of Zen Research Inc.,
which develops and markets high performance optical disc drive technology,
primarily advanced detection optics and chip sets. He has held these positions
since January 1995. Mr. Jachmann was President of EFJ Associates from June 1994
to January 1995. From June 1991 until June 1994, he was President of the
Shipping and Weighing Systems Division of Pitney Bowes. Mr. Jachmann was also
President of Dictaphone Canada Ltd. from June 1990 to June 1991. Mr. Jachmann
is a director of Paradyne, Inc. and several privately held companies.
STEPHEN M. MCLEAN has served as a Director of the Company since May 1996.
Mr. McLean is a Partner and a Director of Stonington Partners, a position that
he has held since 1993. Mr. McLean is also a Partner and a Director of
Stonington II, a position he has held since 1994. Mr. McLean has also been a
member of the Board of Directors of MLCP since 1987. He was a Partner of MLCP
from 1993 to July 1994 and a Senior Vice President of MLCP from 1987 to 1993.
Mr. McLean was also a Managing Director of the Investment Banking Division of
Merrill Lynch, Pierce, Fenner & Smith Incorporated from 1987 to 1994. Mr. McLean
is a Director of CMI Industries, Inc., Merisel, Inc., Packard BioScience
Company, Pathmark Stores, Inc. and Supermarkets General Holdings Corporation and
several privately held companies.
ALEXIS P. MICHAS has served as Director of the Company since August 1995.
Mr. Michas is the Managing Partner and a Director of Stonington Partners, a
position that he has held since 1993. Mr. Michas is also the Managing Partner
and a Director of Stonington II, a position he has held since 1994. Mr. Michas
has also been a Director of MLCP since 1989. he was a Partner of MLCP from 1993
to 1994 and Senior Vice President of MLCP from 1989 to 1993. Mr. Michas was also
a Managing Director of the Investment Banking Division of Merrill Lynch & Co.
from 1991 to July 1994 and a Director in the Investment Banking Division of
Merrill Lynch & Co. from 1990 to 1991. Mr. Michas is also a Director of Blue
Bird Corporation, Borg-Warner Automotive, Inc., Borg-Warner Security
Corporation, Goss Graphics Systems, Inc., Packard BioScience Company and several
privately held companies.
SCOTT M. SHAW has served as a Director of the Company since August 1995.
Mr. Shaw is a Principal of Stonington Partners, a position that he has held
since 1993. Mr. Shaw was an Associate of MLCP from 1991 to July 1994 and an
Analyst of MLCP from 1986 to 1989. Mr. Shaw was also a Vice President of the
Investment Banking Division of Merrill Lynch & Co. from January to July 1994, an
Associate of the Investment Banking Division of Merrill Lynch & Co. from 1991 to
1994, and an Analyst of the Investment Banking Division of Merrill Lynch & Co.
from 1986 to 1989. Mr. Shaw is also a Director of United Artists Theater
Circuit, Inc.
PETER P. TONG has served as a Director of the Company since February 1997.
Mr. Tong is a Private Investor. From January 1996 to May 1996, Mr. Tong served
as the Co-President of Marquette Electronics, Inc., a manufacturer of medical
equipment. From 1991 to 1996, he served as President, Chairman and Chief
Executive Officer of E for M Corporation. Mr. Tong is also a Director of
Marquette Electronics, Inc. and is also on the Boards of Directors of several
privately held companies.
TIM BUTLER has served as Senior Vice President and General Manager,
Integrated Voice Systems since July 1997. From 1986 to 1997, Mr. Butler served
as Managing Partner of the Merit Group, a private consulting firm.
59
<PAGE>
JOSEPH DELANEY has served as Senior Vice President, Customer Service
Operations since October 1997, and as Vice President, Customer Service
Operations from June to October 1997. From January to June 1997, Mr. Delaney
served as acting Vice President of Customer Service Operations. Mr. Delaney
joined Dictaphone Corporation in December 1968 as a service representative in
Detroit, Michigan. Since that time he has held various positions of
responsibility with Dictaphone. Mr. Delaney served as District Service Manager
in Detroit, Michigan from June 1976 to October 1990 and served as Regional
Service Director, Southern Region from November 1990 to January 1997.
RONALD A. ELWELL has served as Senior Vice President and General Manager,
Communications Recording Systems since October 1997 and as Vice President and
General Manager, Communications Recording Systems from August to October 1997.
From April 1996 to August 1997, he served as Vice President, Marketing and
Product Development for the Company and served as Vice President, Product
Development and Engineering for Dictaphone from January 1996 to April 1996. Mr.
Elwell joined Dictaphone Corporation in December 1983. Since that time he has
held various positions of responsibility with Dictaphone. Mr. Elwell served as
District Manager in Harrisburg, Pennsylvania from 1988 to 1992 and served as
General Manager of Dictaphone Canada from 1992 to November 1995. From November
1995 to January 1996, he was a Vice president in the Company's Marketing
department.
DANIEL P. HART has served as Senior Vice President and General Counsel of
the Company since October 1997 and Vice President, General Counsel from November
1995 to October 1997. Mr. Hart is also responsible for the human resources
department and business development activities. Mr. Hart has served as Secretary
of the Company since November 1995. From 1993 to 1994, Mr. Hart served as
General Counsel of Brooke Group Ltd. and certain of its affiliates and from 1988
to 1993 served as Associate General Counsel of such companies. Mr. Hart was
consultant and private investor from 1994 to 1995.
THOMAS C. HODGE has served as Senior Vice President, Manufacturing and
Logistics since October 1997, and as Vice President, Operations Manufacturing
for the Company's facility in Melbourne, Florida from June 1989 to October 1997.
Prior to June 1989, he held various positions throughout the manufacturing
facility. Mr. Hodge joined Dictaphone Corporation in October 1978, as the
Production Control Manager.
ROBERT G. SCHWAGER has served as Senior Vice President and General
Manager, Integrated Health Systems since October 1997, and as Vice President and
General Manager, Integrated Health Systems from August to October 1997. From
October 1995 to August 1997, Mr. Schwager served as Vice President, Sales
Operations, North America, and served as Vice President, Sales for
Communications Recording Systems from February 1994 to October 1995. Mr.
Schwager joined Dictaphone Corporation in 1978 as a Sales Representative in the
Milwaukee District Office. He progressed through various sales management
positions to that of Regional Sales Vice President in 1988. In 1989, Mr.
Schwager joined the Company's headquarters staff as the Vice President,
Marketing. Mr. Schwager was also responsible for the Company's international
operations from September 1992 to March 1996.
JOSEPH D. SKRZYPCZAK has been a Director of the Company since August 1995.
Mr. Skrzypczak has served as Senior Vice President and Chief Financial Officer
for Dictaphone Corporation since October 1997 and served as Vice President and
Chief Financial Officer from May 1994 to October 1997. While serving in such
capacity at Pitney Bowes, his responsibilities covered Pitney Bowes Office
Systems, which included the Company, Copier Systems, and Facsimile Systems, in
which capacity he was directly responsible for all financial and administrative
activities of the Company. In May 1989, Mr. Skrzypczak was appointed Vice
President, Finance, Facsimile Systems, from which time his role expanded to
include finance responsibilities for Copier Systems and Dictaphone. Mr.
Skrzypczak joined Pitney Bowes in 1981 and held various management positions.
Prior to joining Pitney Bowes, Mr. Skrzypczak worked for Price Waterhouse. He is
a certified public accountant.
ROBERT E. TRIMPER has been the Company's Senior Vice President,
International Operations since October 1997, and served as Vice President,
International Operations from March 1996 to October 1997. From 1991 to 1996, Mr.
Trimper served as President of Middle East and Africa operations for Xerox
Corporation. Mr. Trimper served in various other management capacities within
Xerox Corporation prior to 1991.
60
<PAGE>
Messrs. Fitzgibbons, Michas and Shaw serve as members of the Audit
Committee and the Compensation Committee (the "Compensation Committee"). Each of
Messrs. Fitzgibbons, McLean, Michas and Shaw is an employee of Stonington
Partners and serves on the Board of Directors of the Company as a representative
of Stonington.
The Company's directors are elected to serve until their successors have
been elected and qualified. Other than Mr. Jachmann and Mr. Tong who earned a
$25,000 fee in 1997, no member of the Board received any annual retainer or
meeting fees. All members of the Board of Directors are reimbursed for
out-of-pocket expenses incurred in connection with meeting attendance. Each
officer of the Company serves at the pleasure of the Board of Directors, subject
the terms of any existing employment agreement.
There are no family relationships among any of the directors or executive
officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to each person who
served as the Company's President and Chief Executive Officer during 1997 and
the four other most highly compensated executive officers of the Company, whose
aggregate cash and cash equivalent compensation exceeded $100,000 (the "named
executives") during 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------ -------- ---------
OTHER SECURITIES LONG-TERM
NAME AND ANNUAL UNDERLYING INCENTIVE PLAN ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION(1)($) OPTIONS(#) PAYOUTS($) COMPENSATION($)
- ------------------ ---- --------- ------- ----------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
John H. Duerden 1997 $985,981 $497,500 $ 95,713 325,000 --- $172,540(4)
Chairman, President 1996 660,000 660,000 108,407 --- --- 142,024
and Chief Executive 1995 373,154 327,250(3) 100,390 210,000 --- 33
Officer(2)
Robert Trimper 1997 251,102 126,500 --- 5,000 --- 2,902(4)
Senior VP, International 1996 188,666 141,918(6) --- 30,000 --- 334
Operations(5)
Joseph D. Skrzypczak, 1997 239,171 137,500 12,455 --- --- 17,047(4)
Senior VP, Chief 1996 167,607 140,791 11,828 --- --- 15,365
Financial Officer 1995 149,317 118,864(3) 20,873 45,000(7) --- 26,080
Robert G. Schwager, 1997 199,796 77,500 --- --- --- 837(4)
Senior VP & General 1996 184,377 106,933 --- --- --- 100
Manager, Integrated 1995 168,486 106,811(3) 1,940 45,000(7) --- 100
Health Systems
Ronald A. Elwell, 1997 191,333 77,500 --- 15,000 --- 2,970(4)
Senior VP & General 1996 151,389 77,760 88,501 --- --- 1,229
Manager, Communica- 1995 80,225 55,281(3) 34,573 30,000 --- 94
tions Recording Systems
</TABLE>
61
<PAGE>
- ---------------------------
(1) The amounts reported in this column for 1997 and 1996 for each of
Messrs. Duerden and Skrzypczak and for 1995 for Messrs. Skrzypczak,
Schwager and Elwell reflect tax gross ups made by the Company. The
amounts reported in this column for Mr. Elwell in 1996 includes
$22,916 in relocation expenses and $65,585 of tax gross-up. The
amounts reported in this column for Mr. Duerden in 1995 includes
$80,084 in relocation expenses and $20,306 of tax gross ups. The
aggregate value of the perquisites and other personal benefits
received by each of Messrs. Duerden, Trimper, Skrzypczak and Schwager
in 1997 and 1996, for Mr. Elwell in 1997, and each of Messrs.
Skrzypczak, Schwager and Elwell in 1995 have not been reflected
because the amount was below the Securities and Exchange Commission's
(the "Commission") threshold for disclosure (i.e., the lesser of
$50,000 or 10% of the total of annual salary and bonus for such
officer).
(2) Mr. Duerden became Chairman, Chief Executive Officer and President
of the Company on August 11, 1995.
(3) Includes bonus amounts paid by Pitney Bowes in the following amount:
Mr. Duerden -- $0; Mr. Skrzypczak -- $49,500; Mr. Schwager --
$85,300; and Mr. Elwell -- $0.
(4) The compensation reflected in this column for 1997 is comprised of
Company contributions to the Company's Deferred Savings Plan,
supplemental contributions under supplemental benefits arrangements
and Company paid life insurance premiums. Specifically, these amounts
for fiscal 1997 were $0, $121,226 and $51,314 for Mr. Duerden; $858,
$1,267 and $777 for Mr. Trimper; $3,588, $13,359 and $100 for Mr.
Skrzypczak; $737, $0 and $100 for Mr. Schwager; and $2,870, $0 and
$100 for Mr. Elwell.
(5) Mr. Trimper became an executive officer of the Company in March 1996.
(6) Includes a special one-time sign on bonus in the amount of $50,000.
(7) The number of options granted in 1995 varies from the numbers
presented in the Company's Annual Report on Form 10-K for 1995 as a
result of the forfeiture after March 31, 1996 of certain of the
options which had been granted to the name executives under the
Pitney Bowes Stock Option Plan.
STOCK OPTION GRANTS
The following table sets forth information regarding grants of options to
purchase Common Stock during the fiscal year ended December 31, 1997 to each of
the named executives. No stock appreciation rights were granted during 1997.
<TABLE>
<CAPTION>
OPTION GRANTS IN 1997
INDIVIDUAL GRANTS
-----------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (3)
OPTIONS EMPLOYEES IN PRICE ($/ EXPIRATION ---------------------------
GRANTED(#) 1997(1) SHARE)(2) DATE (5%) (10%)
----------- ------------ --------- ---------- -------- --------
NAME
- -----
<S> <C> <C> <C> <C> <C> <C>
John Duerden.................. 325,000(4) 59% $10.00 08/01/07 $5,293,908 $8,429,663
Robert Trimper................ 5,000(4) 1 10.00 08/11/05 81,445 129,687
Joseph D. Skrzypczak.......... --- --- --- --- --- ---
Robert G. Schwager............ --- --- --- --- --- ---
Ronald A. Elwell.............. 15,000(4) 3 10.00 08/11/05 244,334 389,061
</TABLE>
62
<PAGE>
- --------------------------------
(1) The Company granted options to purchase a total of 551,500 shares of
Common Stock in 1997.
(2) Each of the Company's stock options were granted at the fair market value
on the date of grant. The fair market value of the Common Stock on
December 31, 1997 was $10.00 (as determined by the Company's Board of
Directors).
(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on
the Common Stock over the term of the options. These assumptions are based
on rules promulgated by the Commission and do not reflect the Company's
estimate of future stock price appreciation. Actual gains, if any, on the
stock option exercises and common stock holdings are dependent on the
timing of such exercise and the future performance of the underlying
common stock. There can be no assurance that the rates of appreciation
assumed in this table can be achieved or that the amounts reflected will
be received by the option holder.
(4) For Mr. Duerden, the options granted will vest as to one-third on August
1, 1998 and as to an additional one-third on each anniversary thereafter;
and for Messrs. Trimper and Elwell, one-half of the options granted vest
automatically over a five year period and, of the other half, 6% were
retroactively vested on April 15, 1996, 0% were retroactively vested on
April 15, 1997, and the remaining will become eligible for vesting as to
an additional 20% on each of April 15, 1998, 1999 and 2000, with the
remaining 10% on April 15, 2001, if the Company attains certain
predetermined financial performance goals.
OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table sets forth information regarding the exercise of stock
options during fiscal 1997 and the number and year end value of unexercised
options held at December 31, 1997 by each of the named executives. No stock
appreciation rights were exercised by the named executives during fiscal 1997.
AGGREGATE OPTION EXERCISES IN FISCAL 1997
AND FISCAL 1997 OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY(1)
UNDERLYING UNEXERCISED (OPTIONS)
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------- ------------ ------------------------------ -------------------------
NAME
- ----
<S> <C> <C> <C> <C>
John H. Duerden......... --- --- 48,300/486,700(2) $0/$0(4)
Robert E. Trimper....... --- --- 8,050/26,950(2) 0/0(4)
Joseph D. Skrzypczak.... --- --- 10,350/34,650(2) 0/0(4)
4,000 $66,600 0/0(3) 0/0(5)
Robert G. Schwager...... --- --- 10,350/34,650(2) 0/0(4)
--- --- 7,900/0(3) 214,197/0(5)
Ronald A. Elwell........ --- --- 10,350/34,650(2) 0/0(4)
1,832 22,320 468/0(3) 11,759/0(5)
</TABLE>
63
<PAGE>
- -------------------------------
(1) Options are "in-the-money" if the fair market value of the underlying
securities exceeds the exercise price of the options.
(2) Represents options granted under the Company's Management Stock Option
Plan.
(3) Represents options granted under the Pitney Bowes Stock Option Plan during
the period 1985 through 1996. The numbers have been adjusted to give
effect to the 1986, 1992 and 1998 two-for-one stock splits of Pitney Bowes
stock.
(4) The amounts set forth represent the difference between $10.00 per share,
the fair market value of the Common Stock issuable upon exercise of
options at December 31, 1997 (as determined by the Board of Directors),
and the exercise price of the option, multiplied by the applicable number
of options.
(5) The amounts set forth represent the difference between $44.97 per share,
the fair market value of Pitney Bowes common stock issuable upon exercise
of options at December 31, 1997 and the exercise price of the Pitney Bowes
option, multiplied by the applicable number of options.
PENSION PLANS
The Company currently maintains a non-contributory pension plan for all
employees (the "Pension Plan"). As of December 31, 1997, the estimated pension
benefits payable to the named executives are as set forth below. The Pension
Plan provides monthly benefits at age 65 equal to the sum of (i) for service
before January 1, 1988, 0.75% of the participant's average annual earnings from
1983 through 1987 up to $18,000 plus 1.25% of the participant's average annual
earnings from 1983 to 1987 above $18,000 multiplied by the participant's years
of credited service before January 1, 1988 and (ii) for each year of service
after January 1, 1988, 1% of the participant's annual earnings for each year up
to the Social Security Wage Base (as defined) for that year plus 1.5% of annual
earnings above the Social Security Wage Base for that year. Annual earnings
includes overtime pay, incentive pay and bonuses, but excludes reimbursements of
other expense allowances, fringe benefits or moving expenses. Employees' pension
rights vest after five years of service. Benefits are also available under the
Pension Plan upon early or deferred retirement. The projected annual benefit
under the qualified pension plan at age 65 assuming no future increases in pay,
the social security wage base and Internal Revenue Code (the "Code") Section
401(a)(17) limits and with no provision for the Supplemental Executive
Retirement Plan ("SERP") for the named executives is as follows: Mr. Duerden -
$19,225; Mr. Trimper - $0; Mr. Skrzypczak - $54,544; Mr. Schwager - $73,001; and
Mr. Elwell - $71,495. The projected annual benefit under the qualified pension
plan at age 65 assuming a 3% future increase in pay, the Social Security Wage
Base and Code Section 401(a)(17) limits and with no provision for the SERP for
the named executives is as follows: Mr. Duerden - $23,585; Mr. Trimper - $0; Mr.
Skrzypczak - $78,210; Mr. Schwager - $91,998; and Mr. Elwell - $105,450.
The following table sets forth the estimated annual benefits, based on the
indicated credited years of service and the indicated average compensation used
in calculating benefits, assuming a normal retirement at age 65, no future
increases in pay, the Social Security Wage Base and Code Section 401(a)(17)
limits and with no provision for the SERP implemented by the Company.
RETIREMENT PLAN TABLE
YEARS OF SERVICE
---------------------------------------------
AVERAGE ANNUAL COMPENSATION 15 20 25 30 35
- --------------------------- ------ ------ ------ ------ ------
$130,000....................... $24,345 $32,460 $40,575 $48,690 $56,805
160,000....................... 31,095 41,460 51,825 62,190 72,555
64
<PAGE>
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company adopted the SERP for certain executive officers during the
first quarter of 1997 with benefits determined on a retroactive basis as of
January 1, 1996. Benefits under the SERP accrue without regard to limitations
imposed by Code Sections 401(a)(17) and 415 and are offset by any benefit
accrued under the Pension Plan. Participants rights vest after five years of
service.
EMPLOYMENT AND CONSULTING AGREEMENTS
On August 9, 1995, the Company entered into an employment agreement with
John Duerden pursuant to which Mr. Duerden agreed to serve as Chairman,
President and Chief Executive Officer of the Company for an initial employment
term of two years (which term is automatically extended for additional two-year
terms unless affirmatively terminated by either the Company or Mr. Duerden).
Pursuant to an amendment to Mr. Duerden's employment agreement, dated January 1,
1997 (as amended, the "Employment Agreement"), effective as of such date his
annual base salary was increased to $995,000. In addition, Mr. Duerden is
eligible to receive an annual cash bonus ranging from $497,500 to $995,000 based
upon the attainment of certain personal and budgeted performance objectives for
the Company as determined by the Board of Directors.
Mr. Duerden's Employment Agreement also provides that if he terminates his
employment without Good Cause (as defined therein) he will not, for two years
either (i) directly or indirectly, in any capacity, engage or participate in, or
become employed by or under advisory or consulting or other services in
connection with any Prohibited Business (as hereinafter defined) or (ii) make
any financial investment, whether in the form of equity or debt, or own any
interest, directly or indirectly, in any Prohibited Business. Notwithstanding
the foregoing, Mr. Duerden is not restricted from making any investment in any
company whose stock is listed on an American securities exchange or actively
traded in the over-the-counter market and has sales in excess of $500 million;
provided that (i) such investment does not give Mr. Duerden the right or ability
to control or influence the policy decisions of any Prohibited Business, and
(ii) such investment does not create a conflict of interest between Mr.
Duerden's duties under the Employment Agreement and his interest in such
investment. For purposes of the Employment Agreement "Prohibited Business" means
any dictation product or communications recording systems business located
within, or providing service to any area located within, any state or other
jurisdiction to which the Company (or any of its subsidiaries) provides
dictation products or communications recording systems services, or located
within, or providing service to any area located within, any other area within
the Untied States.
Pursuant to the Employment Agreement, if Mr. Duerden is terminated by the
Company without Cause or if he resigns for Good Reason (as defined therein), Mr.
Duerden is entitled to receive a lump sum payment equal to two times his base
salary. Mr. Duerden is not entitled to receive severance in connection with a
termination for Cause or resignation for other than Good Reason. Upon a
termination of employment due to death or Disability (as defined therein), the
Company is required to pay Mr. Duerden or his estate, as the case may be, an
amount equal to the sum of the accrued annual base salary as of the date of
death or Disability and the accrued unpaid annual bonus, if any, for the fiscal
year prior to the date of death or Disability and a pro-rata portion of the
annual bonus accrued to the date of such death or Disability.
Mr. Duerden's Employment Agreement also includes a provision requiring the
Company to establish an annual deferred annuity bonus arrangement (the "Deferred
Annuity Bonus Arrangement") on his behalf. The Company finalized the Deferred
Annuity Bonus Arrangement in February 1997. The intended annual benefit to Mr.
Duerden under the terms of the Deferred Annuity Bonus Arrangement is an amount
which is estimated to be equal to two-thirds of his average base salary over the
final three years of his employment (reduced by amounts receivable by him from
certain other pensions, profit sharing accounts and Social Security). Benefits
under the Deferred Annuity Bonus Arrangement are payable to Mr. Duerden annually
and are to be utilized by him for the purchase of an annuity contract chosen and
owned by him. As the owner of the annuity contract, Mr. Duerden has the sole
power to direct the investment funds held. The actual benefits under the annuity
contract are dependent upon Mr. Duerden's investment decision. Mr. Duerden's
entitlement to benefits under the Deferred Annuity Bonus Arrangement vest in
increments of one-twelfth for each full year of employment from his date of
hire.
65
<PAGE>
As part of his employment arrangement, Mr. Duerden agreed to purchase
70,000 shares of the Company's Common Stock. Mr. Duerden purchased such shares
on August 11, 1995 with funds provided by the Company pursuant to an
interest-bearing non-recourse loan in the amount of $350,000. Mr. Duerden also
received 210,000 options under the Plan (as hereinafter defined). See
"Management Stock Option Plan". The 1995 options granted to, and Common Stock
purchased by, Mr. Duerden are subject to the same conditions as apply to other
Management Investors (as hereinafter defined), as described in "Stockholders
Agreement" (as hereinafter defined). Pursuant to the January 1, 1997 amendment
to the Employment Agreement, the Company granted Mr. Duerden an additional
325,000 stock options which options were granted on August 1, 1997 and which are
to vest in one-third increments on the first three anniversaries of the date of
grant. These new options, which have an exercise price of $10.00 per share, are
subject to the Plan.
The Company has entered into a letter employment agreement with each of
Messrs. Skrzypczak, Trimper, Schwager and Elwell. The agreements have no fixed
term of employment. In the event of a termination (including in the case of Mr.
Skrzypczak, a voluntary resignation any time after January 1, 1998) for any
reason other than for Cause (as defined), Mr. Skrzypczak is entitled to receive
severance in an amount equal to two years' base salary, payable in a lump sum,
and Mr. Trimper is entitled to receive severance in an amount equal to up to two
years' base salary, payable in accordance with the Company's existing payroll
practices except in the event that it is determined that severance will not
continue beyond twelve months in which event severance will be paid in a lump
sum. In addition, the Company's past practice and policy has been that, if a
Senior Vice President's employment is terminated without Cause, such officer is
also entitled to receive any earned and unpaid annual bonus amounts. Upon an
involuntary termination of employment by the Company for any reason other than
for Cause or for Substantial Underperformance (as defined), Mr. Schwager and Mr.
Elwell are entitled to receive salary continuation for a minimum of one year
after such termination of employment. After the conclusion of the first year of
salary continuation, if Messrs. Schwager or Elwell have not secured other
employment, the Company has agreed to extend, for a maximum of 12 additional
months, such salary continuation on a month-by-month basis as long as the
respective officer, using reasonable efforts, has not secured other employment.
In addition, Mr. Skrzypczak's bonus for 1998 has been guaranteed to be not less
than fifty percent (50%) of his base salary.
Each of Messrs. Skrzypczak, Trimper, Schwager and Elwell are also entitled
to receive outplacement services and are entitled to participate in medical,
dental and life insurance plans, under the same terms and conditions as when
they were employed by the Company, until the earlier of the commencement of
employment with a subsequent employer or the twelve month anniversary of the
date of termination of employment. Each of Messrs. Skrzypczak, Trimper, Schwager
and Elwell are also entitled to an additional six-month period of medical
insurance coverage as required under Section 498B of the Code.
The Company has entered into a supplemental compensation agreement with
Mr. Skrzypczak. The agreement provides benefits under a supplemental executive
retirement arrangement without regard to any limitations under Code Sections
401(a)(17) and 415 and will be reduced by amounts receivable by Mr. Skrzypczak
from certain other pensions. Mr. Skrzypczak is 100% vested in his benefits under
this arrangement.
In November 1995, the Company entered into a consulting agreement with Mr.
Jachmann, a director of the Company. Pursuant to the terms of the agreement, Mr.
Jachmann agreed to act as a consultant to the Company for an original term of
one year, August 11, 1995 through August 11, 1996. Although a new consulting
agreement has not been executed, the Company has continued to utilize Mr.
Jachmann's services on a month-by-month basis. In consideration for his
consulting services, Mr. Jachmann receives $3,000 per day. During 1997, Mr.
Jachmann received no income for consulting services. Mr. Jachmann is also
entitled to receive $25,000 for services as a Director.
In April 1997, the Company entered into a consulting agreement with Mr.
Tong, a Director of the Company. In consideration for his consulting services,
Mr. Tong receives $1,500 per day. During 1997, Mr. Tong was paid $6,524 for
consulting services. Mr. Tong is also entitled to receive $25,000 for services
as a Director.
66
<PAGE>
MANAGEMENT STOCK OPTION PLAN
On August 11, 1995, the Company adopted the Management Stock Option Plan,
which was amended on April 27, 1996 and on August 1, 1997 (collectively, the
"Plan"), pursuant to which officers, key employees and non-employee directors of
the Company (the "Participants") may be granted options to purchase shares of
Common Stock. The Compensation Committee of the Board of Directors of the
Company (the "Committee") has the discretion to select those to whom options are
granted (from among those eligible) and to determine the exercise price, the
duration and other terms and conditions of the options. The Plan also allows the
Committee to determine whether options granted are to be "Service Options" (as
hereinafter defined). The Committee has the authority to interpret and construe
the Plan and any interpretation or construction of the provisions of the Plan or
of any options granted under the Plan by the Committee are final and conclusive.
The Plan provides that Service Options will vest automatically over a
five-year period (20% of the options vesting each year) and the Performance
Options will vest as to specified percentages over a five-year period based on
predetermined financial performance goals. As to all outstanding Performance
Options, 10% were eligible for vesting on April 15, 1996, 20% were eligible for
vesting on April 15, 1997 and the remaining options become eligible for vesting
as to an additional 20% on each of April 15, 1998, 1999 and 2000, with the
remaining 10% becoming eligible for vesting on April 15, 2001. For all
subsequent Performance Option grants, 20% are eligible for vesting on each April
15, based on the Company's prior year performance, in any case, no later than
August 11, 2005, provided that the applicable Participant continues to be
employed or continues as a member of the Board. Based on the Company's 1995
performance, the Company's Board of Directors determined that 60% of the
Performance Options eligible for vesting on April 15, 1996 would vest. Based on
the Company's 1996 performance, the Company's Board of Directors determined that
0% of the Performance Options eligible for vesting on April 15, 1997 would vest.
Performance options which are not vested on each of the April 15 vesting dates
remain eligible for future vesting by the Board if the Company reaches certain
enterprise values. In the event of a Sale or an IPO (as defined therein) of the
Company prior to August 11, 2000, all outstanding Service and Performance
Options will become immediately vested and exercisable prior to the effective
date of such Sale or IPO and appropriate provisions will be required to be made
by the Company to permit the holders of options to realize the value of his or
her options in connection with such Sale or IPO to the same extent as if he or
she had exercised such options in full immediately prior to the effective date
of such Sale or IPO and participated therein.
The terms and conditions of an option grant are set forth in a related
option agreement (the "Option Agreement"). Options granted under the Plan will
terminate upon the earliest to occur of (a) the tenth anniversary of the date of
the Option Agreement; (b) the date on which the Company acquires any shares of
Common Stock or options held by the Participant in connection with the exercise
of a Put or Call Right (as defined in the Stockholders Agreement); (c) the
six-month anniversary of the date of death of the Participant; (d) unless
otherwise provided in an agreement between the Participant and the Company, the
thirty-day anniversary of the date of the Participant's Retirement or Disability
(as defined therein); and (e) immediately upon a Participant's termination of
employment or directorship other than due to death, Retirement or Disability;
provided that the term of the option may be extended in the event of a
termination of an option under (c), (d) or (e) above if the Participant
exercises a Put Right prior to the time the option would otherwise terminate
under (c), (d) or (e) above and a Restriction (as defined in the Stockholders
Agreement) prevents the Company from purchasing the options pursuant to the Put
Right. Payment of the option exercise price may be made in cash or Common Stock
which has been held by the Participant for more than six months. The Board or
Compensation Committee may also, in its sole discretion, cancel the vested
portion of an option or options held by a Participant whose employment or
directorship has terminated in exchange for a cash payment equal to the excess
of the Fair Value Price (as defined in the Plan) of the option over the option
exercise price, multiplied by the number of shares of Common Stock subject to
such cancelled options, or may cancel any outstanding options in exchange for a
cash payment to a Participant equal to the excess of the Fair Value Price (as
defined in the Plan) of the option over the option exercise price, multiplied by
the number of shares of Common Stock subject to such cancelled options, or may
cancel any outstanding options in exchange for a cash payment to a Participant
equal to the excess of the fair market value of the consideration received for
Stonington Shares by the Stonington Investor (each as defined in the
Stockholders Agreement) in any sale of all of the then issued and outstanding
Stonington Shares over the exercise price of the option multiplied by the number
of shares of Common Stock subject to such cancelled options.
67
<PAGE>
The maximum number of shares of Common Stock that are available for
options under the Plan is currently 1,200,000 shares. If options granted under
the Plan expire or terminate without having been exercised in full or cancelled
in exchange for a cash or other payment, the shares covered by such option will
again be available for grant under the Plan. In the event of the declaration of
a stock dividend, or a reorganization, merger, consolidation, acquisition,
disposition, separation, recapitalization, stock split, split-up, spin-off,
combination or exchange of any shares of Common Stock or like event, the number
or character of the shares subject to the option or the exercise price of any
option may be appropriately adjusted as deemed appropriate by the Committee.
The Plan terminates upon, and no options may be granted after, August 11,
2005, unless the Plan has sooner terminated due to grant and full exercise or
cancellation of options covering all the shares available for grant under the
Plan. The Board may at any time amend, suspend or discontinue the Plan;
provided, however, that the Board may not alter, amend, discontinue or revoke or
otherwise impair any outstanding options granted under the Plan and which remain
unexercised in a manner adverse to the holders of the options, except if the
written consent of such holder is obtained.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 15, 1998, by (i) each person known to
the Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each named executive, and (iv)
all executive officers and directors of the Company, as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENTAGE
OF BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
- ------------------- ----------------- ----------
<S> <C> <C>
Stonington Capital Appreciation 1994 Fund, L.P.(2)................. 12,803,000 97.7%
767 Fifth Avenue
New York, New York 10153
John H. Duerden(3)................................................. 118,300 *
Robert E. Trimper(3)............................................... 18,050 *
Joseph D. Skrzypczak(3)............................................ 25,350 *
Robert G. Schwager(3).............................................. 25,350 *
Ronald A. Elwell(3)................................................ 20,350 *
Albert J. Fitzgibbons, III(4)...................................... 12,803,000 97.7%
Emil F. Jachmann(3)................................................ 10,000 *
Alexis P. Michas(4)................................................ 12,803,000 97.7%
Stephen M. McLean(4)............................................... 12,803,000 97.7%
Peter P. Tong(3)................................................... 10,000 *
Scott M. Shaw...................................................... --- ---
Directors and executive officers as a group ((15) persons)(4)(5)... 13,110,470 100.0%
</TABLE>
- ----------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
(1) Beneficial ownership is determined in accordance with the rules and
regulations of the Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options and warrants held by
that person that are currently exercisable or exercisable within 60 days
of March 15, 1998 are deemed outstanding. Such shares, however, are not
deemed outstanding for the purposes of computing the percentage of any
other person. Except as indicated in the footnotes to this table, the
stockholders named in the table have sole voting and investment power with
respect to the shares set forth opposite such stockholder's name.
68
<PAGE>
(2) Stonington is the record holder of 12,653,000 shares, or 97.7%, of Common
Stock. Stonington also controls, but disclaims beneficial ownership of, an
additional 150,000 shares purchased by an institutional investor, pursuant
to the Stockholder Agreement. Stonington is a Delaware limited partnership
whose limited partners consist of certain institutional investors, formed
to invest in corporate acquisitions organized by Stonington Partners.
SPLP, a Delaware limited partnership, is the general partner of Stonington
with a 1% economic interest in Stonington. Except for such economic
interest, SPLP disclaims beneficial ownership of the shares set forth
above. Stonington II, a Delaware corporation, is the general partner of
SPLP with a 1% economic interest in SPLP. Except for such economic
interest, Stonington II disclaims beneficial ownership of the shares set
forth above. Stonington Partners, a Delaware corporation, is the
management company for Stonington with a 7.4% interest in SPLP. Except for
such economic interest, Stonington Partners disclaims beneficial ownership
of the shares set forth above. The limited partners of SPLP are certain
current and former employees of Stonington Partners, entities controlled
by certain employees of Stonington and individuals with special
relationships to portfolio companies of Stonington.
Pursuant to a management agreement with Stonington, Stonington Partners
has full discretionary authority with respect to the investments of
Stonington, including the authority to make and dispose of such
investments. Stonington Partners disclaims beneficial ownership of the
shares set forth above. The address of each of the entities and
individuals listed in this footnote is c/o Stonington Partners, Inc., 757
Fifth Avenue, New York, New York 10153.
(3) Includes shares of Common Stock which the directors and executive officers
have the right to acquire through the exercise of options within 60 days
of March 15, 1998, as follows: Mr. Duerden - 48,300 shares; Mr. Trimper -
8,050 shares; Mr. Skrzypczak - 10,350 shares; Mr. Schwager - 10,350
shares; Mr. Elwell - 10,350 shares; Mr. Jachmann - 10,000 shares; and
Mr. Tong - 10,000 shares. Mr. Duerden is a 3.1% limited partner of SPLP.
(4) The shares indicated as owned beneficially by Messrs. Fitzgibbons, Michas
and McLean are owned or controlled by Stonington and are included because
of their ownership of stock as status as directors of Stonington Partners
and Stonington II. Messrs. Fitzgibbons, Michas and McLean disclaim
beneficial ownership of such shares.
(5) Includes 161,470 shares of Common Stock subject to options granted under
the Plan which are currently exercisable or vest within 60 days of March
15, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT INVESTMENT AND MANAGEMENT LOANS
In connection with the Acquisition, the Company sold 197,000 shares of
Common Stock to certain key members of the Company's Management, including
Messrs. Duerden, Skrzypczak, and Schwager for $1,970,000 (the "Management
Placement"). The Company financed $1,273,000 of the Management Placement with
non-recourse loans bearing interest at a rate equal to the Adjusted Eurodollar
Rate (as defined) plus 2.75% in effect for the Revolving Credit Facility under
the Credit Agreement. Interest is due annually starting in August 1998. Unless
prepaid, all principal, accrued and unpaid interest is due and payable on August
7, 2005. The obligations under the management notes are secured by a pledge of
the proportionate number of shares of Common Stock pursuant to the Stockholders
Agreement. The name of each executive officer of the Company who participated in
the Management Placement whose indebtedness to the Company exceeds $60,000 is
listed below: Mr. Duerden -- $350,000; Mr. Skrzypczak -- $95,600; and Mr.
Schwager -- $140,000.
In connection with Mr. Trimper's employment arrangement, the Company sold
Mr. Trimper 10,000 shares of Common Stock pursuant to the Management Placement.
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STOCKHOLDERS AGREEMENT
The Company, Stonington, each of the institutional investors who purchased
$15 million of the Company's 14% Pay-in-Kind Perpetual Preferred Stock
("Pay-in-Kind Preferred Stock"), together with warrants to purchase 350,000
shares of Common Stock (the "Warrants") or $1.5 million of the Company's Common
Stock (the "Equity Private Placement"), and each of Messrs. Duerden, Skrzypczak,
Trimper, Schwager and Elwell (each a "Stockholder") entered into a stockholder
agreement (the "Stockholders Agreement"), which contains among other terms and
conditions, provisions relating to voting rights, certain restrictions with
respect to the transfer of Common Stock, Pay-in-Kind Preferred Stock and
Warrants by certain parties thereunder, certain rights related to puts and calls
and certain registration rights granted by the Company with respect to shares of
Common Stock.
Pursuant to the terms of the Stockholders Agreement, Stonington controls
the votes of the Common Stock purchased in the Equity Private Placements. Under
the Stockholders Agreement, Stonington also has the right to designate at any
time and from time to time at least three Directors of the Company and has the
right to remove such designees at any time and from time to time and each of the
Stockholders have agreed to vote in favor of such designation or removal of such
Directors. The Company currently has eight Board members.
Pursuant to the terms of the Stockholders Agreement, in the event that
Stonington proposes to sell securities which, in the aggregate, represent 30% or
more of the Common Stock on a fully diluted basis to a third party which is not,
and following such sale will not be, an affiliate of Stonington, the
Institutional Investors (as defined in the Stockholders Agreement) and the
Management Investors (as defined in the Stockholders Agreement) will have the
right to elect to participate in such sale with respect to a certain number of
shares of Common Stock. In the event that Stonington proposes to sell securities
which, in the aggregate, represent 30% or more of the Common Stock on a fully
diluted basis to a third party which is not, and following such sale will not
be, an affiliate of Stonington, Stonington has the right to require each
Management Investor, Institutional Investor and such other stockholders who have
agreed to be bound to the Stockholders Agreement to participate in such sale
with respect to a certain number of shares of Common Stock.
Management Investors are not permitted to sell or transfer Common Stock,
other than to Permitted Transferees (as defined in the Stockholders Agreement)
(i.e., family members and, upon the death of a Management Investor, to his or
her estate or executors), prior to the occurrence of the earlier of August 11,
2000 and an IPO (as defined in the Stockholders Agreement). Following an IPO, a
Management Investor may transfer shares in accordance with Rule 144 of the
Securities Act of 1933, as amended (the "Securities Act"), or pledge shares to a
financial institution, subject to applicable Securities Act restrictions. On or
after August 11, 2000, if an IPO has not occurred, Management Investors are
permitted to sell Common Stock to third parties after first giving the Company
and the other Management Investors right of first refusal for the same number of
shares of Common Stock at the same price.
Institutional Investors are permitted to sell or transfer Common Stock,
other than to an Affiliate (as defined in the Stockholders Agreement), prior to
the occurrence of an IPO. Following an IPO, the Institutional Investors will,
with certain limited exceptions, generally be permitted to sell or transfer
Common Stock subject to applicable Securities Act restrictions. The Pay-in-Kind
Preferred Stock and Warrants are subject to transfer restrictions as set forth
in the Stockholders Agreement.
Prior to an IPO, the Company will have the right to require a Management
Investor to sell his or her shares of Common Stock and Options upon a
termination of employment for any reason. Such right will be exercisable within
a period of one year after the date of termination of employment (or within a
period of six months in the event of a termination of employment due to death)
at a price per share equal to the higher of Fair Value Price (as defined in the
Stockholders Agreement) or the original per share purchase price of a share of
Common Stock and at a price per Option equal to the difference between the Fair
Value Price or the original per share purchase price of the shares of Common
Stock covered by such Option and the exercise price of the shares of Common
Stock covered by such Option, multiplied by the number of shares of Common Stock
covered by the Option. Prior to an IPO, the Management Investor will have the
right to require the Company to purchase his or her shares of Common Stock or
Options upon termination of employment due to death, Disability, Retirement or
Involuntary Termination (as defined therein).
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<PAGE>
Such a right will be exercisable within a period of 180 days after the date of
termination of employment due to death, Disability, Retirement or Involuntary
Termination (a) at a price per share of Common Stock equal to the Fair Value
Price of a share of Common Stock; provided, however, that upon a termination of
employment due to death, Disability or Retirement, the purchase price per share
will be equal to the greater of (x) the Fair Value Price and (y) the original
purchase price plus interest at the Adjusted Eurodollar Rate plus 2.75%, minus
the Applicable Pricing Discount (as defined in the Credit Agreement) as of the
date of such death, Disability or Retirement) (in either case, the "Put Price");
and (b) at a price per Option equal to the difference between the Put Price of
the shares of Common Stock covered by such Option and the exercise price of the
shares of Common Stock covered by such Option, multiplied by the number of
shares of Common Stock covered by the Option.
Stockholders are, subject to certain limitations, entitled to register
shares of Common Stock in connection with a registration statement prepared by
the Company to register Common Stock. Stonington has the right to require the
Company to take such steps as necessary to register all or part of the Common
Stock held by Stonington under the Securities Act pursuant to the provisions of
the Stockholders Agreement. The Stockholders Agreement contains customary terms
and provisions with respect to, among other things, registration procedures and
certain rights to indemnification granted by parties thereunder in connection
with the registration of Common Stock subject to such agreement.
71
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The financial statements are included in Part II, Item 8 of this
Report.
2. FINANCIAL STATEMENT SCHEDULES AND SUPPLEMENTARY INFORMATION REQUIRED
TO BE SUBMITTED
Schedule II "Valuation and Qualifying Accounts" is included in Part
II, Item 8 of this Report.
(B) Reports on Form 8-K.
On November 21, 1997, the Company filed a Current Report on Form 8-K,
reporting under Item 5 thereof, the amendment of the Company's senior Bank
Credit Agreement, dated as of August 7, 1995, as amended, to permit the
Company to issue a new Tranche C Term Loan, the proceeds of which were
used to extinguish outstanding amounts under the Tranche A Term Loan and
to prepay certain required principal payments on the outstanding amounts
under the Tranche B Term Loan; and to revise certain of the financial
covenants. In addition, the Company sold additional shares of Common
Stock to certain of its existing stockholders. The proceeds from the sale
of the shares were used to repay amounts outstanding under the Company's
Revolving Credit Facility as well as fees associated with the issuance of
the Tranche C Term Loan.
(C) Index to Exhibits.
The following is a list of all Exhibits filed as part of this Report:
EXHIBITS DESCRIPTION
- ----------- ------------
2.1 -- Stock and Asset Purchase Agreement, dated as of April 25, 1995,
between Pitney Bowes Inc. and Dictaphone Acquisition Inc. (filed
as Exhibit 2.1 to the Company's Registration Statement on Form
S-1, File No. 33-93464, filed on June 14, 1995).
2.2 -- Amendment to Stock and Asset Purchase Agreement, dated August 11,
1995, between Pitney Bowes Inc. and Dictaphone Acquisition Inc.
(filed as Exhibit 2.2 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995).
2.3 -- Asset Purchase Agreement, dated August 11, 1995, between
Dictaphone Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc.
(filed as Exhibit 2.3 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995).
2.4 -- Stock Purchase Agreement, dated August 11, 1995, between Pitney
Bowes Deutschland GmbH and Dictaphone Acquisition Inc. (filed as
Exhibit 2.4 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1995, filed on September 21, 1995).
2.5 -- Stock Purchase Agreement, dated August 11, 1995, between Walnut
Street Corp. and Dictaphone Acquisition Inc. (filed as Exhibit 2.5
to the Company's Form 10-Q for the fiscal quarter ended June 30,
1995, filed on September 21, 1995).
2.6 -- Stock Purchase Agreement, dated August 11, 1995, between Pitney
Bowes Holdings Ltd. and Dictaphone U.K. Acquisition Limited (filed
as Exhibit 2.6 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1995, filed on September 21, 1995).
2.7 -- General Conveyance Agreement, dated August 11, 1995, between
Dictaphone Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc.
(filed as Exhibit 2.7 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995).
2.8 -- Assumption of Liabilities Agreement, dated August 11, 1995,
between Dictaphone Canada Ltd./Ltee and Dictaphone Canada
Acquisition Inc. (filed as Exhibit 2.8 to the Company's Form 10-Q
for the fiscal quarter ended June 30, 1995, filed on September 21,
1995).
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<PAGE>
EXHIBITS DESCRIPTION
-------- -----------
2.9 -- Merger Agreement between Dictaphone U.S. Acquisition Inc. and
Dictaphone Corporation, dated August 11, 1995 (filed as Exhibit 2.9
to the Company's Form 10-Q for the fiscal quarter ended June 30,
1995, filed on September 21, 1995).
*2.10 -- Agreement and Plan of Merger between Dictaphone Corporation and
Dictaphone Corporation (U.S.), dated January 28, 1998.
*2.11 -- Certificate of Ownership and Merger Merging Dictaphone Corporation
with and into Dictaphone Corporation (U.S.).
*3(i) -- Certificate of Incorporation of Dictaphone Corporation.
3(ii) -- By-Laws of the Company, adopted April 20, 1995 (filed as Exhibit
3.3 to the Company's Form 10-Q for the fiscal quarter ended June
30, 1995, filed on September 21, 1995).
4.1 -- Indenture, dated as of August 11, 1995, among the Company,
Dictaphone Corporation (U.S.) and Shawmut Bank Connecticut,
National Association, Trustee, relating to the 11-3/4% Senior
Subordinated Notes Due 2005 of the Company (filed as Exhibit 4.1 to
the Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
filed on September 21, 1995).
4.2 -- Bank Credit Agreement, dated as of August 7, 1995 among the
Company, Dictaphone Corporation (U.S.) and the Lenders party
thereto (filed as Exhibit 4.2 to the Company's Form 10-Q for the
fiscal quarter ended June 30, 1995, filed on September 21, 1995).
4.3 -- First Amendment to Credit Agreement, dated as of June 28, 1996,
among the Company, Dictaphone Corporation (U.S.) and the Lenders
party thereto (filed as Exhibit 10.13 to the Company's Current
Report on Form 8-K, filed on July 18, 1996).
4.4 -- Second Amendment to Credit Agreement, dated as of June 27, 1997,
among the Company, Dictaphone Corporation (U.S.) and the Lenders
party thereto (filed as Exhibit 10.15 to the Company's Current
Report on Form 8-K, filed on July 8, 1997).
4.5 -- Third Amendment (Technical Correction) to Credit Agreement, dated
as of July 21, 1997, by and among Dictaphone Corporation U.S. and
the Lenders party thereto (filed as Exhibit 10.19 to the
Company's Form 10-Q for the fiscal quarter ended June 30, 1997,
filed on August 14, 1997).
4.6 -- Fourth Amendment to Credit Agreement, dated as of November 14,
1997, by and among Dictaphone Corporation (U.S.) and the Lenders
party thereto (filed as Exhibit 10.20 to the Company's Current
Report on Form 8-K, filed on November 21, 1997).
4.7 -- Credit Agreement, dated as of November 14, 1997, by and among
Dictaphone Corporation and the Lenders a party thereto (including
exhibits and schedules) (filed as Exhibit 10.21 to the Company's
Current Report on Form 8-K, filed on November 21, 1997).
10.1 -- Subscription Agreements for the Equity Private Placements,
dated as of August 7, 1995 (filed as Exhibit 10.1 to the Company's
Form 10-Q for the fiscal quarter ended June 30, 1995, filed on
September 21, 1995).
10.2 -- Subscription Agreement for Management Private Placement, dated
as of August 7, 1995 (filed as Exhibit 10.2 to the Company's Form
10-Q for the fiscal quarter ended June 30, 1995, filed on September
21, 1995).
10.3 -- Stockholders Agreement, dated as of August 11, 1995 (filed as
Exhibit 10.3 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1995, filed on September 21, 1995).
10.4 -- Employment contract of John H. Duerden, dated as of August 9, 1995
(filed as Exhibit 10.4 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995). +
10.5 -- Amendment to employment contract of John H. Duerden, dated
January 1, 1997 (filed as Exhibit 10.5 to the Company's Form 10-K
for the year ended December 31, 1996, filed on March 31, 1997). +
10.6 -- Employment contract of Joseph D. Skrzypczak, dated July 21, 1995,
(filed as Exhibit 10.6 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995). +
10.7 -- Employment contract of Robert G. Schwager, dated June 19, 1995
(filed as Exhibit 10.7 to the Company's Registration Statement on
Form S-1, File No. 33-93464, filed on June 14, 1995). +
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<PAGE>
EXHIBITS DESCRIPTION
-------- ------------
10.8 -- Management Stock Option Plan of the Company (filed as Exhibit 10.9
to the Company's Form 10-Q for the fiscal quarter ended June 30,
1995, filed on September 21, 1995) and Amendment No. 1 to the
Management Stock Option Plan, dated as of April 27, 1996 (filed as
Exhibit 10.13 to the Company's Form 10-Q for the fiscal quarter
ended March 31, 1996, filed on May 15, 1996.) +
10.9 -- Supply Agreement, dated August 11, 1995, between the Company and
Pitney Bowes Inc. (filed as Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995, File No. 33-93464, filed on March 29, 1996).
10.10 -- Leasing Agreement, dated August 10, 1995, between Dictaphone
Corporation (U.S.) and Pitney Bowes Credit Corporation (filed as
Exhibit 10.11 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, File No. 33-93464, filed on
March 29, 1996).
10.11 -- Consulting Agreement, dated November 17, 1995, between the Company
and Emil F. Jachmann (filed as Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995, File No. 33-93464, filed on March 29, 1996). +
10.12 -- Employment contract of Robert Trimper, dated January 24, 1996
(filed as Exhibit 10.13 to the Company's Form 10-K for the fiscal
year ended December 31, 1996, filed on March 31, 1997). +
10.13 -- Form of Letter Agreement amending the Subscription Agreement
for the Management Private Placement, dated as of August 7, 1995,
and the Stockholders Agreement, dated as of August 11, 1995 (filed
as Exhibit 10.14 to the Company's Form 10-Q for the fiscal quarter
ended March 31, 1996, filed on May 15, 1996). +
10.14 -- Letter Agreement, dated April 11, 1997, between the Company and
Peter Tong (filed as Exhibit 10.16 to the Company's Form 10-Q for
the fiscal quarter ended June 30, 1997, filed on August 14,
1997).+
*10.15 -- Stock Option Agreement, dated August 1, 1997, between the
Company and John H. Duerden.+
10.16 -- Letter Agreement, dated July 9, 1997, between Dictaphone
Corporation and Mr. Joseph D. Skrzypczak (filed as Exhibit 10.17 to
the Company's Form 10-Q for the fiscal quarter ended June 30, 1997,
filed on August 14, 1997).+
10.17 -- Amendment No. 2 to the Dictaphone Management Stock Option Plan
(filed as Exhibit 10.18 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1997, filed on August 14, 1997).+
*10.18 -- Letter Agreement between the Company and Ronald Elwell, dated
November 8, 1996.+
21.1 -- List of subsidiaries of the Company (filed as Exhibit 21 to the
Company's Registration Statement on Form S-1, File No. 33-93464,
filed on June 14, 1995).
24 -- Powers of Attorney (included on the signature page hereof).
*27 -- Financial Data Schedule.
- ------------------------------
* Filed herewith.
+ Management contract of compensatory arrangement.
74
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Stratford, State of Connecticut, on this 26th day of March, 1998.
DICTAPHONE CORPORATION
By: /S/ JOHN H. DUERDEN
------------------------------------
John H. Duerden
Chairman, Chief Executive Officer
and President
KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Scott M. Shaw and Joseph D. Skrzypczak
his true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or their or his substitutes
or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 26th day of March, 1998.
SIGNATURE TITLE(S)
--------- ---------
/S/ JOHN H. DUERDEN Chairman, Chief Executive Officer and
- -------------------------------------- President(Principal Executive Officer)
John H. Duerden
Senior Vice President, Chief Financial
/S/ JOSEPH D. SKRZYPCZAK Officer and Director (Principal
- --------------------------------------- Financial and Accounting Officer)
Joseph D. Skrzypczak
/S/ ALBERT J. FITZGIBBONS, III Director
- ---------------------------------------
Albert J. Fitzgibbons, III
/S/ EMIL F. JACHMANN Director
- ---------------------------------------
Emil F. Jachmann
/S/ STEPHEN M. MCLEAN Director
- ---------------------------------------
Stephen M. McLean
/S/ ALEXIS P. MICHAS Director
- ---------------------------------------
Alexis P. Michas
/S/ SCOTT M. SHAW Director
- ---------------------------------------
Scott M. Shaw
Director
- ---------------------------------------
Peter P. Tong
75
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBITS DESCRIPTION NUMBERED PAGE
- -------- ----------- -------------
<S> <C> <C>
2.1 -- Stock and Asset Purchase Agreement, dated as of April 25, 1995,
between Pitney Bowes Inc. and Dictaphone Acquisition Inc. (filed
as Exhibit 2.1 to the Company's Registration Statement on Form
S-1, File No. 33-93464, filed on June 14, 1995).
2.2 -- Amendment to Stock and Asset Purchase Agreement, dated August 11,
1995, between Pitney Bowes Inc. and Dictaphone Acquisition Inc.
(filed as Exhibit 2.2 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995).
2.3 -- Asset Purchase Agreement, dated August 11, 1995, between
Dictaphone Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc.
(filed as Exhibit 2.3 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995).
2.4 -- Stock Purchase Agreement, dated August 11, 1995, between Pitney
Bowes Deutschland GmbH and Dictaphone Acquisition Inc. (filed as
Exhibit 2.4 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1995, filed on September 21, 1995).
2.5 -- Stock Purchase Agreement, dated August 11, 1995, between Walnut
Street Corp. and Dictaphone Acquisition Inc. (filed as Exhibit 2.5
to the Company's Form 10-Q for the fiscal quarter ended June 30,
1995, filed on September 21, 1995).
2.6 -- Stock Purchase Agreement, dated August 11, 1995, between Pitney
Bowes Holdings Ltd. and Dictaphone U.K. Acquisition Limited (filed
as Exhibit 2.6 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1995, filed on September 21, 1995).
2.7 -- General Conveyance Agreement, dated August 11, 1995, between
Dictaphone Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc.
(filed as Exhibit 2.7 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995).
2.8 -- Assumption of Liabilities Agreement, dated August 11, 1995,
between Dictaphone Canada Ltd./Ltee and Dictaphone Canada
Acquisition Inc. (filed as Exhibit 2.8 to the Company's Form 10-Q
for the fiscal quarter ended June 30, 1995, filed on September 21,
1995).
2.9 -- Merger Agreement between Dictaphone U.S. Acquisition Inc. and
Dictaphone Corporation, dated August 11, 1995 (filed as Exhibit 2.9
to the Company's Form 10-Q for the fiscal quarter ended June 30,
1995, filed on September 21, 1995).
*2.10 -- Agreement and Plan of Merger between Dictaphone Corporation and
Dictaphone Corporation (U.S.), dated January 28, 1998.
*2.11 -- Certificate of Ownership and Merger Merging Dictaphone Corporation
with and into Dictaphone Corporation (U.S.).
*3(i) -- Certificate of Incorporation of Dictaphone Corporation.
3(ii) -- By-Laws of the Company, adopted April 20, 1995 (filed as Exhibit
3.3 to the Company's Form 10-Q for the fiscal quarter ended June
30, 1995, filed on September 21, 1995).
4.1 -- Indenture, dated as of August 11, 1995, among the Company,
Dictaphone Corporation (U.S.) and Shawmut Bank Connecticut,
National Association, Trustee, relating to the 11-3/4% Senior
Subordinated Notes Due 2005 of the Company (filed as Exhibit 4.1 to
the Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
filed on September 21, 1995).
4.2 -- Bank Credit Agreement, dated as of August 7, 1995 among the
Company, Dictaphone Corporation (U.S.) and the Lenders party
thereto (filed as Exhibit 4.2 to the Company's Form 10-Q for the
fiscal quarter ended June 30, 1995, filed on September 21, 1995).
4.3 -- First Amendment to Credit Agreement, dated as of June 28, 1996,
among the Company, Dictaphone Corporation (U.S.) and the Lenders
party thereto (filed as Exhibit 10.13 to the Company's Current
Report on Form 8-K, filed on July 18, 1996).
4.4 -- Second Amendment to Credit Agreement, dated as of June 27, 1997,
among the Company, Dictaphone Corporation (U.S.) and the Lenders
party thereto (filed as Exhibit 10.15 to the Company's Current
Report on Form 8-K, filed on July 8, 1997).
4.5 -- Third Amendment (Technical Correction) to Credit Agreement, dated
as of July 21, 1997, by and among Dictaphone Corporation U.S. and
the Lenders party thereto (filed as Exhibit 10.19 to the
Company's Form 10-Q for the fiscal quarter ended June 30, 1997,
filed on August 14, 1997).
4.6 -- Fourth Amendment to Credit Agreement, dated as of November 14,
1997, by and among Dictaphone Corporation (U.S.) and the Lenders
party thereto (filed as Exhibit 10.20 to the Company's Current
Report on Form 8-K, filed on November 21, 1997).
4.7 -- Credit Agreement, dated as of November 14, 1997, by and among
Dictaphone Corporation and the Lenders a party thereto (including
exhibits and schedules) (filed as Exhibit 10.21 to the Company's
Current Report on Form 8-K, filed on November 21, 1997).
10.1 -- Subscription Agreements for the Equity Private Placements,
dated as of August 7, 1995 (filed as Exhibit 10.1 to the Company's
Form 10-Q for the fiscal quarter ended June 30, 1995, filed on
September 21, 1995).
10.2 -- Subscription Agreement for Management Private Placement, dated
as of August 7, 1995 (filed as Exhibit 10.2 to the Company's Form
10-Q for the fiscal quarter ended June 30, 1995, filed on September
21, 1995).
10.3 -- Stockholders Agreement, dated as of August 11, 1995 (filed as
Exhibit 10.3 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1995, filed on September 21, 1995).
10.4 -- Employment contract of John H. Duerden, dated as of August 9, 1995
(filed as Exhibit 10.4 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995). +
76
<PAGE>
EXHIBITS DESCRIPTION NUMBERED PAGE
- -------- ----------- -------------
<S> <C> <C>
10.5 -- Amendment to employment contract of John H. Duerden, dated
January 1, 1997 (filed as Exhibit 10.5 to the Company's Form 10-K
for the year ended December 31, 1996, filed on March 31, 1997). +
10.6 -- Employment contract of Joseph D. Skrzypczak, dated July 21, 1995,
(filed as Exhibit 10.6 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995). +
10.7 -- Employment contract of Robert G. Schwager, dated June 19, 1995
(filed as Exhibit 10.7 to the Company's Registration Statement on
Form S-1, File No. 33-93464, filed on June 14, 1995). +
10.8 -- Management Stock Option Plan of the Company (filed as Exhibit 10.9
to the Company's Form 10-Q for the fiscal quarter ended June 30,
1995, filed on September 21, 1995) and Amendment No. 1 to the
Management Stock Option Plan, dated as of April 27, 1996 (filed as
Exhibit 10.13 to the Company's Form 10-Q for the fiscal quarter
ended March 31, 1996, filed on May 15, 1996.) +
10.9 -- Supply Agreement, dated August 11, 1995, between the Company and
Pitney Bowes Inc. (filed as Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995, File No. 33-93464, filed on March 29, 1996).
10.10 -- Leasing Agreement, dated August 10, 1995, between Dictaphone
Corporation (U.S.) and Pitney Bowes Credit Corporation (filed as
Exhibit 10.11 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, File No. 33-93464, filed on
March 29, 1996).
10.11 -- Consulting Agreement, dated November 17, 1995, between the Company
and Emil F. Jachmann (filed as Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995, File No. 33-93464, filed on March 29, 1996). +
10.12 -- Employment contract of Robert Trimper, dated January 24, 1996
(filed as Exhibit 10.13 to the Company's Form 10-K for the fiscal
year ended December 31, 1996, filed on March 31, 1997). +
10.13 -- Form of Letter Agreement amending the Subscription Agreement
for the Management Private Placement, dated as of August 7, 1995,
and the Stockholders Agreement, dated as of August 11, 1995 (filed
as Exhibit 10.14 to the Company's Form 10-Q for the fiscal quarter
ended March 31, 1996, filed on May 15, 1996). +
10.14 -- Letter Agreement, dated April 11, 1997, between the Company and
Peter Tong (filed as Exhibit 10.16 to the Company's Form 10-Q for
the fiscal quarter ended June 30, 1997, filed on August 14,
1997).+
*10.15 -- Stock Option Agreement, dated August 1, 1997, between the
Company and John H. Duerden.+
10.16 -- Letter Agreement, dated July 9, 1997, between Dictaphone
Corporation and Mr. Joseph D. Skrzypczak (filed as Exhibit 10.17 to
the Company's Form 10-Q for the fiscal quarter ended June 30, 1997,
filed on August 14, 1997).+
10.17 -- Amendment No. 2 to the Dictaphone Management Stock Option Plan
(filed as Exhibit 10.18 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1997, filed on August 14, 1997).+
*10.18 -- Letter Agreement, between the Company and Ronald Elwell, dated
November 8, 1996.+
21.1 -- List of subsidiaries of the Company (filed as Exhibit 21 to the
Company's Registration Statement on Form S-1, File No. 33-93464,
filed on June 14, 1995).
24 -- Powers of Attorney (included on the signature page hereof).
*27 -- Financial Data Schedule.
- ------------------------------
* Filed herewith.
+ Management contract of compensatory arrangement.
77
</TABLE>
EXHIBIT 2.10
AGREEMENT AND PLAN OF MERGER, dated as of January 27, 1998
(this "Agreement") by and between Dictaphone Corporation, a Delaware corporation
(the "Parent Company"), and Dictaphone Corporation (U.S.), a Delaware
corporation and a wholly owned subsidiary of the Parent Company (the "Operating
Company").
WHEREAS, the Board of Directors of each of the Parent Company
and the Operating Company have determined that the Parent Company be merged with
and into the Operating Company (the "Merger"), on the terms and subject to the
conditions contained herein and in accordance with the General Corporation Law
of the State of Delaware (the "DGCL");
NOW, THEREFORE, in consideration of the mutual agreements
contained herein, and in order to set forth the terms and conditions of the
Merger and the mode of carrying the same into effect, each of the Parent Company
and the Operating Company hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1. THE MERGER. At the Effective Time (as defined in
Section 1.2), the Parent Company shall merge into the Operating Company, the
separate corporate existence of the Parent Company shall cease, and the
Operating Company shall continue as the surviving corporation (hereinafter
sometimes referred to as the "Surviving Corporation") which from the Effective
Time shall operate as the new parent/holding company.
SECTION 1.2. EFFECTIVE TIME OF THE MERGER. The Merger shall
become effective at midnight on January 31, 1998, if, prior to such time, a
Certificate of Ownership and Merger has been filed with the Secretary of State
of Delaware, in such form as is required by, and executed in accordance with,
the relevant provisions of the DGCL, following the requisite adoption of this
Agreement by the stockholders of the Parent Company, to the extent required by
the DGCL and the Restated Certificate of Incorporation of the Parent Company
(such time being the "Effective Time").
SECTION 1.3. EFFECT OF THE MERGER. At the Effective Time, the
effect of the Merger shall be as provided in the relevant provisions of the
DGCL. The Surviving Corporation shall continue to be governed by the laws of
Delaware. Without limiting the generality of the foregoing, and subject thereto,
at the Effective Time all property (real, personal and mixed), claims, rights,
intellectual property rights, privileges, powers, franchises and every other
interest of the Parent Company shall vest in the Surviving Corporation, and all
debts, obligations, restrictions, disabilities and duties of the Parent Company
shall become debts, obligations, restrictions, disabilities and duties of the
Surviving Corporation.
SECTION 1.4. CERTIFICATE OF INCORPORATION AND BY-LAWS. The
Certificate of Incorporation attached hereto as Exhibit A shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law or such Certificate of Incorporation. The name of the
Surviving Corporation shall be Dictaphone Corporation as set forth in such
Certificate of Incorporation. The By-laws of the Parent Company, as in effect on
the Effective Time, shall be the By-laws of the Surviving Corporation until
thereafter amended as provided by law, the Certificate of Incorporation of the
Surviving Corporation or such By-laws.
SECTION 1.5. DIRECTORS AND OFFICERS. The directors of the
Parent Company on the Effective Date, shall be the initial directors of the
Surviving Corporation, each to hold office in accordance with the Certificate of
Incorporation and By-laws of the Surviving Corporation, and the officers of the
Parent Company on the Effective Date shall be the initial officers of the
Surviving Corporation, in each case until their respective successors are duly
elected or appointed and qualified.
SECTION 1.6. CONVERSION OF SECURITIES. (a) Each issued and
outstanding share of Common Stock, par value $0.01 per share, of the Parent
Company ("Common Stock"), shall automatically, without further action by the
Surviving Corporation, be converted into one validly issued, fully paid and
nonassessable share of Common Stock, par value $0.01 per share, of the Surviving
Corporation; (b) each issued and outstanding Warrant to purchase shares of
Common Stock, with an expiration date of August 11, 2005, of the Parent Company,
shall automatically, without further action by the Surviving Corporation, be
converted into one Warrant to purchase shares of common stock of the Surviving
Corporation with the same rights, designations and preferences; and (c) each
issued and outstanding share of 14% Pay-in-Kind Perpetual Preferred Stock, par
value $0.01 per share of the Parent Company shall automatically, without further
action by the Surviving Corporation, be converted into one share of 14%
Pay-in-Kind Perpetual Preferred Stock of the Surviving Corporation.
SECTION 1.7. TREATMENT OF STOCK SUBSCRIPTIONS AND STOCK
OPTIONS. (a) At the Effective Time, the Surviving Corporation shall assume all
the duties and obligations of the Parent Company under (i) the Management
Subscription Agreement, dated as of August 7, 1995, by and among Dictaphone
Acquisition Inc. and certain management investors listed therein and (ii) the
Dictaphone Corporation Management Stock Option Plan, effective as of August 11,
1995 (the "Stock Option Plan").
(b) At the Effective Time, each option granted by the Parent
Company to purchase shares of Common Stock which is outstanding and unexercised
immediately prior thereto shall be assumed by the Surviving Corporation. Such
options shall cease to represent a right to acquire shares of Common Stock and
shall be converted automatically into an option to purchase shares of common
stock of the Surviving Corporation in accordance with the terms of the Stock
Option Plan.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE PARENT COMPANY
The Parent Company represents and warrants that (A) it is a
corporation duly incorporated, validly existing and in good standing under the
laws of Delaware, with all necessary corporate power and authority to enter into
and perform its obligations under this Agreement and (B) this Agreement has been
duly and validly authorized, executed and delivered by the Parent Company and is
binding on and enforceable against the Parent Company in accordance with its
terms.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE OPERATING COMPANY
The Operating Company represents and warrants that (A) it is a
corporation duly incorporated, validly existing and in good standing under the
laws of Delaware, with all necessary corporate power and authority to enter into
and perform its obligations under this Agreement and (B) this Agreement has been
duly and validly authorized, executed and delivered by the Operating Company and
is binding on and enforceable against the Operating Company in accordance with
its terms.
ARTICLE IV
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The parties hereto each agree that all representations and
warranties contained herein shall not survive the Effective Time.
ARTICLE V
GENERAL PROVISIONS
SECTION 5.1. GOVERNING LAW. This Agreement shall be governed
by, and construed in accordance with, the laws of Delaware applicable to
contracts executed in and performed in that State, without regard to principles
of conflicts of law thereof.
SECTION 5.2. COUNTERPARTS. This Agreement may be executed in
one or more counterparts (including by facsimile transmission), and by the
parties hereto in separate counterparts, each of which when executed shall be
deemed to be an original but all of which taken together shall constitute one
and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the date first above written by their respective
officers.
DICTAPHONE CORPORATION
By: /S/ DANIEL P. HART
______________________________________
Name: Daniel P. Hart
Title: Senior Vice President,
General Counsel and Secretary
DICTAPHONE CORPORATION (U.S.)
By: /S/ DANIEL P. HART
______________________________________
Name: Daniel P. Hart
Title: Senior Vice President,
General Counsel and Secretary
EXHIBIT 2.11
CERTIFICATE OF OWNERSHIP
AND MERGER
MERGING
DICTAPHONE CORPORATION
WITH AND INTO
DICTAPHONE CORPORATION (U.S.)
Dictaphone Corporation ("Parent Company"), a Delaware
corporation, HEREBY CERTIFIES AS FOLLOWS:
FIRST: That Parent Company was originally incorporated on
April 20, 1995, pursuant to the General Corporation Law of the State of Delaware
(the "DGCL").
SECOND: That Parent Company owns all the shares of
outstanding stock of Dictaphone Corporation (U.S.) ("Operating Company"), a
Delaware corporation and a wholly owned subsidiary of Parent Company.
THIRD: The Parent Company, by the following resolutions of its
Board of Directors, duly adopted by the unanimous written consent of the Board
of Directors, filed with the minutes of its Board of Directors, as of January
27, 1998, determined to merge with and into the Operating Company:
RESOLVED, that the Parent Company merge (the "Merger") with
and into the Operating Company;
RESOLVED, that the Merger shall become effective at midnight
on January 31, 1998, if, prior to such time, a Certificate of
Ownership and Merger has been filed with the Secretary of
State of Delaware, in such form as is required by, and
executed in accordance with, the relevant provisions of the
DGCL, following the requisite adoption of this Agreement by
the stockholders of the Parent Company, to the extent required
by the DGCL and the Restated Certificate of Incorporation of
the Parent Company (such time being the "Effective Time");
RESOLVED, that, at the Effective Time, the Parent Company
shall merge into the Operating Company, the separate corporate
existence of the Parent Company shall cease, and the Operating
Company shall continue as the surviving corporation
(hereinafter sometimes referred to as the "Surviving
Corporation") which from the Effective Time shall operate as
the new parent/holding company;
RESOLVED, that, at the Effective Time, the effect of the
Merger shall be as provided in the relevant provisions of the
DGCL. The Surviving Corporation shall continue to be governed
by the laws of Delaware. Without limiting the generality of
the foregoing, and subject thereto, at the Effective Time all
property (real, personal and mixed), claims, rights,
intellectual property rights, privileges, powers, franchises
and every other interest of the Parent Company shall vest in
the Surviving Corporation, and all debts, obligations,
restrictions, disabilities and duties of the Parent Company
shall become debts, obligations, restrictions, disabilities
and duties of the Surviving Corporation;
RESOLVED, that the Certificate of Incorporation attached
hereto as Exhibit A shall be the Certificate of Incorporation
of the Surviving Corporation until thereafter amended as
provided by law or such Certificate of Incorporation. The name
of the Surviving Corporation shall be Dictaphone Corporation
as set forth in such Certificate of Incorporation. The By-laws
of the Parent Company, as in effect on the Effective Time,
shall be the By-laws of the Surviving Corporation until
thereafter amended as provided by law, the Certificate of
Incorporation of the Surviving Corporation or such By-laws.
RESOLVED, that the directors of the Parent Company on the
Effective Date, shall be the initial directors of the
Surviving Corporation, each to hold office in accordance with
the Certificate of Incorporation and By-laws of the Surviving
Corporation, and the officers of the Parent Company on the
Effective Date shall be the initial officers of the Surviving
Corporation, in each case until their respective successors
are duly elected or appointed and qualified;
RESOLVED, that at the Effective Time, (a) each issued and
outstanding share of Common Stock, par value $0.01 per share,
of the Parent Company ("Common Stock"), shall automatically,
without further action by the Surviving Corporation, be
converted into one validly issued, fully paid and
nonassessable share of Common Stock, par value $0.01 per
share, of the Surviving Corporation; (b) each issued and
outstanding Warrant to purchase shares of Common Stock, with
an expiration date of August 11, 2005, of the Parent Company,
shall automatically, without further action by the Surviving
Corporation, be converted into one Warrant to purchase shares
of common stock of the Surviving Corporation with the same
rights, designations and preferences; and (c) each issued and
outstanding share of 14% Pay-in-Kind Perpetual Preferred
Stock, par value $0.01 per share of the Parent Company shall
automatically, without further action by the Surviving
Corporation, be converted into one share of 14% Pay-in-Kind
Perpetual Preferred Stock of the Surviving Corporation;
RESOLVED, that at the Effective Time, the Surviving
Corporation shall assume all the duties and obligations of the
Parent Company under (i) the Management Subscription
Agreement, dated as of August 7, 1995, by and among Dictaphone
Acquisition Inc. and certain management investors listed
therein and (ii) the Dictaphone Corporation Management Stock
Option Plan, effective as of August 11, 1995 (the "Stock
Option Plan").
RESOLVED, that at the Effective Time, each option granted by
the Parent Company to purchase shares of Common Stock which is
outstanding and unexercised immediately prior thereto shall be
assumed by the Surviving Corporation. Such options shall cease
to represent a right to acquire shares of Common Stock and
shall be converted automatically into an option to purchase
shares of common stock of the Surviving Corporation in
accordance with the terms of the Stock Option Plan.
RESOLVED, that the proper officers of the Parent Company be,
and each of them acting alone hereby is, authorized to take
all actions and to prepare, execute, deliver and file all
agreements, instruments, documents and certificates in the
name and on behalf of the Parent Company, and under its
corporate seal or otherwise, and to pay all such fees and
expenses as they, or any one of them, may deem necessary,
proper or advisable in order to effect the Merger.
FOURTH: The Merger has been approved by holders of at least a
majority of the outstanding stock of the Parent Company entitled to vote
thereon, acting by written consent and without prior notice in accordance with
Section 228 of the DGCL.
IN WITNESS WHEREOF, Parent Company has caused this Certificate
of Merger to be signed by John H. Duerden, its Chairman, Chief Executive Officer
and President, and attested by Daniel P. Hart, its Secretary, and Operating
Company has caused this Certificate of Merger to be signed by John H. Duerden,
its Chairman, Chief Executive Officer and President, and attested by Daniel P.
Hart, its Secretary, each as of this 27th day of January, 1998.
DICTAPHONE CORPORATION
By: /S/ JOHN H. DUERDEN
_____________________________________
Name: John H. Duerden
Title: Chairman, President and
Chief Executive Officer
ATTEST:
/S/ DANIEL P. HART
- ------------------------------
Name: Daniel P. Hart
Title: Secretary
DICTAPHONE CORPORATION (U.S.)
By: /S/ JOHN H. DUERDEN
_____________________________________
Name: John H. Duerden
Title: Chairman, President and
Chief Executive Officer
ATTEST:
/S/ DANIEL P. HART
- -------------------------------
Name: Daniel P. Hart
Title: Secretary
EXHIBIT 3(i)
CERTIFICATE OF INCORPORATION
OF
DICTAPHONE CORPORATION
ARTICLE I
NAME
The name of the corporation is DICTAPHONE CORPORATION (the"CORPORATION").
ARTICLE II
REGISTERED OFFICE AND REGISTERED AGENT
The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of the registered agent of the
Corporation at such address is The Corporation Trust Company.
ARTICLE III
CORPORATE PURPOSE
The nature of the business or purposes to be conducted or
promoted is:
(i) to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law.
ARTICLE IV
CAPITAL STOCK
The aggregate number of shares of capital stock (referred to
herein as "Shares") which the Corporation shall have authority to issue is
thirty million (30,000,000) Shares, of which twenty million (20,000,000) will be
common stock, par value $.01 per share (the "Common Stock"), and ten million
(10,000,000) will be series preferred stock, par value $.01 per share (the
"Series Preferred Stock"). The Series Preferred Stock may be issued, from time
to time, in one or more series as authorized by the Board of Directors. Prior to
issuance of a series, the Board of Directors by resolution shall designate it
from other series and classes of stock of the Corporation, shall specify the
number of shares to be included in the series, and shall fix the terms, rights,
restrictions and qualifications of the shares of a series, including any
preferences, voting powers, dividend rights and redemptions, sinking funds and
conversion rights. Subject to the express terms of the Series Preferred Stock
outstanding at the time, the Board of Directors may increase (but not above the
total number of authorized shares of the class) or decrease (but not below the
total number of shares thereof then outstanding) the number of shares of such
Series Preferred Stock.
14% PAY-IN-KIND PERPETUAL PREFERRED STOCK
1. DESIGNATION AMOUNT. The distinctive serial designation of
this series shall be "14% Pay-In-Kind Perpetual Preferred Stock"
("Pay-In-Kind Preferred Stock"). The number of authorized shares of
Pay-In-Kind Preferred Stock shall initially be 7,500,000, which number
may from time to time be increased by the Board of Directors. Shares of
Pay-In-Kind Preferred Stock redeemed or purchased by the Corporation
shall be cancelled and shall revert to authorized but unissued shares
of Preferred Stock undesignated as to series; PROVIDED, HOWEVER, that
no such issued and reacquired shares of such series shall be reissued
or sold as shares of Pay-In-Kind Preferred Stock unless reissued as a
stock dividend on outstanding shares of Pay-In-Kind Preferred Stock.
2. DEFINITIONS. For purposes of this Certificate of
Designation, the following terms shall have the meanings indicated:
"Accrued dividends" shall mean, with respect to any share of
any class or series of the Capital Stock of the Corporation, an amount
computed at the annual dividend rate for the class or series of which
the particular share is a part, from the date on which dividends on
such share are to accrued, less the aggregate amount of all dividends
theretofore paid thereon.
"Affiliate" shall mean, with respect to any specified Person,
any other Person, directly or indirectly, controlling or controlled by
or under direct or indirect common control with such specified Person.
For the purposes of this definition, "control" when used with respect
to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of
voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the
foregoing.
"Bank Credit Agreement" shall mean the senior secured
revolving credit and term loan facilities, dated as of August 7, 1995
among the Corporation, Dictaphone U.S., Bankers Trust Company,
NationsBank N.A. (Carolinas) and certain other parties thereto, as
amended, supplemented, replaced or otherwise modified from time to
time, including any agreement extending the maturity of, refinancing or
otherwise restructuring all or any portion of the indebtedness under
such facilities.
"Catch Up Dividends" shall mean the amount of dividends, if
any, at any time required to be paid on a share of Pay-In-Kind
Preferred Stock so that the amount of dividends paid on such share from
its issue date to the payment date shall equal the amount of dividends
which a holder of such share would have received on such share and on
all Pay-In-Kind Preferred Stock dividend shares traceable to such share
directly or by reason of Pay-In-Kind Preferred Stock dividends on such
Pay-In-Kind Preferred Stock dividend shares, had the Corporation made
timely payment of all Pay-In-Kind Preferred Stock dividends from such
issue date.
"Change of Control" shall mean (I) Stonington Capital
Appreciation 1994 Fund, L.P., a Delaware limited partnership, and its
Affiliates, shall cease to own beneficially and control (a) at least a
majority of the voting Common Stock on a fully diluted basis and (b) at
least a majority of the voting power of the Corporation entitled to
vote for the election of members of the board of directors of the
Corporation or (II) all or substantially all of the assets of the
Corporation and its Subsidiaries shall be sold, leased, transferred or
otherwise disposed of.
"Capital Stock" shall mean, with respect to any Person, any
and all shares, interests, rights to purchase, warrants, options,
participations or other equivalents of or interests in (however
designated) equity of such Person, including any preferred stock of
such Person, but excluding any debt securities convertible into such
equity.
"Closing Date" shall mean August 11, 1995.
"Dictaphone U.S." shall mean Dictaphone Corporation (U.S.), a
Delaware corporation.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Indenture" shall mean the Indenture between the Corporation
and Shawmut Bank Connecticut, National Association, Trustee, dated as
of August 1, 1995.
"Management Investors" shall mean the members of the
management of the Corporation and Dictaphone U.S. that shall have
invested in Common Stock on the Closing Date and any other employee or
non-employee director of the Corporation or Dictaphone U.S. who becomes
a party to the Stockholders Agreement.
"Person" shall mean any individual, corporation, partnership,
joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof
or any other entity.
"Public Equity Offering" shall mean one or a series of
offerings of Common Stock pursuant to one or more effective
registration statements under the Securities Act of 1933, as amended,
resulting in net proceeds to the Corporation of at least $50 million.
"Stockholders Agreement" shall mean the Stockholders Agreement
among the Corporation, the Management Investors and certain other
investors in Common Stock and in the Pay-in-Kind Preferred, dated as of
the Closing Date.
"Voting Stock" of a corporation shall mean all classes of
Capital Stock of such corporation then outstanding and normally
entitled to vote in the election of directors.
"Wholly Owned Subsidiary" shall mean a subsidiary all the
Capital Stock of which (other than directors' qualifying shares and
shares held by other Persons to the extent such shares are required by
applicable law to be held by a Person other than the Corporation or a
subsidiary) is owned by the Corporation or one or more Wholly Owned
Subsidiaries.
3. RANK. The Pay-In-Kind Preferred Stock shall, with respect
to dividend rights and rights on liquidation, winding up and
dissolution, rank senior to all classes and series of stock of the
Corporation now or hereafter authorized, issued or outstanding
(collectively, the "Junior Securities"), including, without limitation,
the Corporation's Common Stock, par value $0.01 per share ("Common
Stock"), and all other series of the Corporation's Preferred Stock. So
long as any shares of Pay-In-Kind Preferred Stock are outstanding, the
Corporation may not authorize or create, or issue, any class or series
of stock that ranks senior to ("Senior Securities") or pari passu with
("Parity Securities") the Pay-In-Kind Preferred Stock with respect to
either dividend rights or rights on liquidation, winding up and
dissolution, nor may the Corporation issue any additional shares of
Pay-In-Kind Preferred Stock (other than as a stock dividend on
outstanding shares of Pay-In-Kind Preferred Stock), without the
affirmative vote of the holders of at least two-thirds of the
outstanding shares of Pay-In-Kind Preferred Stock voting as a separate
class.
4. DIVIDENDS. (a) The holders of shares of Pay-In-Kind
Preferred Stock shall be entitled to receive, when, as and if declared
by the Board of Directors of the Corporation, out of funds legally
available therefor, any Catch Up Dividends plus dividends at the annual
rate per share of $1.40 per annum until July 31, 2006, and thereafter
the annual dividend rate will increase by 200 basis points every twelve
months, provided that under no circumstances shall the annual dividend
rate per share on the Pay-In-Kind Preferred Stock (exclusive of Catch
Up Dividends) exceed the greater of $2.40 per annum or $1.60 plus the
amount obtained by multiplying above the prime rate from time to time
of Bankers Trust Company times $10. Such dividends shall be cumulative
and shall be payable quarterly in arrears on December 31, March 31,
June 30 and September 30 (each of such dates being a "Dividend Payment
Date" and each period between such dates being a "Dividend Period"),
commencing September 30, 1995, to stockholders of record on the
respective date, not exceeding 50 days preceding such Dividend Payment
Date, as shall be fixed for this purpose by the Board of Directors in
advance of payment of each particular dividend. Any dividend payments
made with respect to shares of Pay-In-Kind Preferred Stock will be made
in additional fully paid and nonassessable shares of Pay-In-Kind
Preferred Stock valued at $10 per share, and the issuance of such
additional shares shall constitute full payment of such dividend. The
Corporation shall make such dividend payment on such Dividend Payment
Date in additional shares of Pay-In-Kind Preferred Stock to the extent
permitted by applicable law, regardless of the terms of any other
securities of the Corporation or any contract or other agreement to
which it may be a party. All dividends paid with respect to shares of
Pay-In-Kind Preferred Stock pursuant to this paragraph 4(a) shall be
paid pro rata to the holders entitled thereto. The Corporation will
issue, if necessary, fractions of a share of Pay-In-Kind Preferred
Stock as part of the payment of any dividend paid in additional shares
of Pay-In-Kind Preferred Stock. All shares of Pay-In-Kind Preferred
Stock which may be issued as a dividend with respect to the Pay-In-Kind
Preferred Stock will thereupon be duly authorized, validly issued,
fully paid and nonassessable and free of all liens and charges.
(b) Dividends on shares of Pay-In-Kind Preferred Stock issued
on the Closing Date shall be fully cumulative and shall accrue (whether
or not earned or declared) from the Closing Date; PROVIDED, HOWEVER,
that dividends on any share of Pay-In-Kind Preferred Stock issued as
dividends shall be fully cumulative and shall accrue (whether or not
earned or declared) from the applicable Dividend Payment Date.
Accumulated unpaid dividends for any past Dividend Periods may be
declared by the Board of Directors and paid on any date fixed by the
Board of Directors, whether or not a regular Dividend Payment Date, to
holders of record on the books of the Corporation on such record date
as may be fixed by the Board of Directors. Except for Catch Up
Dividends, Holders of Pay-In-Kind Preferred Stock will not be entitled
to any dividends in excess of full cumulative dividends. No interest or
sum of money in lieu of interest shall be payable in respect of any
accumulated unpaid dividends.
(c) So long as any shares of Pay-In-Kind Preferred Stock are
outstanding, the Corporation shall not (i) declare, pay or set apart
for payment any dividend on the Common Stock or any other shares of
Junior Securities, (ii) make any payment on account of, or set apart
for payment money for a sinking or other similar fund for, the
purchase, redemption, retirement or other acquisition for value of any
of, or redeem, purchase, retire or otherwise acquire for value any of,
the Junior Securities or any warrants, rights, calls or options
exercisable for or convertible into any of the Junior Securities or
(iii) make any distribution in respect of the Junior Securities or any
warrants, rights, calls or options exercisable for or convertible into
any of the Junior Securities, in any such case either directly or
indirectly, and whether in cash, obligations or shares of the
Corporation or other property (other than distributions or dividends of
a particular class or series of Junior Securities to holders of such
Junior Securities), and shall not permit any corporation or other
entity directly or indirectly controlled by the Corporation to
purchase, redeem or otherwise acquire for value any of the Junior
Securities or any warrants, rights, calls or options exercisable for or
convertible into any of the Junior Securities; provided, however, that
the Corporation may pay regular dividends on the Common Stock following
a Public Equity Offering; and PROVIDED, FURTHER, that the Corporation
may redeem or repurchase shares of Common Stock issued to Management
Investors, pursuant to the terms of the Stockholders Agreement, if such
Management Investor has been terminated from his position with the
Corporation or any of its subsidiaries due to death, Disability (as
defined in the Stockholders Agreement), Retirement (as defined in the
Stockholders Agreement) or Involuntary Termination (as defined in the
Stockholders Agreement).
5. LIQUIDATION PREFERENCE. (a) In the event of any voluntary
or involuntary liquidation, dissolution or winding up of the affairs of
the Corporation, then, before any distribution or payment shall be made
to the holders of any Junior Securities, including the Common Stock,
the holders of Pay-In-Kind Preferred Stock then outstanding shall be
entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders an amount in cash equal to $10 for
each share outstanding (which amount is hereinafter referred to as the
"liquidation preference"), together with an amount in cash equal to all
accrued and unpaid dividends thereon, including Catch Up Dividends, to
the date fixed for liquidation, dissolution or winding up. Except as
provided in the preceding sentence, holders of Pay-In-Kind Preferred
Stock shall not be entitled to any distribution in the event of any
liquidation, dissolution or winding up of the affairs of the
Corporation. If the assets of the Corporation are not sufficient to pay
in full the liquidation payments payable to the holders of outstanding
shares of Pay-In-Kind Preferred Stock, then the holders of all such
shares shall share ratably in any distribution of assets in accordance
with the amount which would be payable on such distribution if the
amounts to which the holders of outstanding shares of Pay-In-Kind
Preferred Stock are entitled were paid in full. After payment of the
full amount of the liquidation preference to which each holder is
entitled, such holders of shares of Pay-In-Kind Preferred Stock will
not be entitled to any further participation in any distribution of the
assets of the Corporation.
(b) For the purpose of this paragraph 5, neither the voluntary
sale, conveyance, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all of the
property or assets of the Corporation nor the consolidation or merger
of the Corporation with any other corporation shall be deemed to be a
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, unless such voluntary sale, conveyance, exchange or
transfer shall be in connection with a plan of liquidation, dissolution
or winding up of the Corporation.
6. REDEMPTION. (a) Subject to subparagraph (d) of this
paragraph 6, to the extent the Corporation shall have funds legally
available for such redemption, the Corporation, at the option of the
Board of Directors, may redeem, in whole or in part, the shares of
Pay-In-Kind Preferred Stock at the time outstanding, at any time or
from time to time, upon notice given as hereinafter specified, at
$10.50 per share together with all accrued and unpaid dividends,
including Catch Up Dividends, reducing on August 1, 1996 to $10.40 per
share plus all accrued and unpaid dividends, on August 1, 1997 to
$10.30 per share plus all accrued and unpaid dividends, on August 1,
1998 to $10.20 per share plus all accrued and unpaid dividends, on
August 1, 1999 to $10.10 per share plus all accrued and unpaid
dividends and on August 1, 2000 to $10 per share plus all accrued and
unpaid dividends.
(b) In the event of partial redemptions of Pay-In-Kind
Preferred Stock, the shares to be redeemed will be determined by lot or
pro rata, at the sole option of the Corporation; provided, however,
that the Board of Directors may redeem all shares held by any holders
of a number of shares not to exceed 100 as may be specified by the
Corporation. On and after a redemption date, unless the Corporation
defaults in the payment of the redemption price, dividends will cease
to accrue on shares of Pay-In-Kind Preferred Stock called for
redemption and all rights of holders of such shares will terminate
except for the right to receive the redemption price and accrued and
unpaid dividends thereon to the redemption date.
(c) Upon (i) the public offering of securities of the
Corporation any of the net proceeds of which are not used to pay down
any debt obligations of the Corporation that are senior to the
Pay-In-Kind Preferred Stock or are used by the Corporation for an
acquisition or (ii) the registration of Common Stock in a secondary
offering, each holder of record of shares of Pay-In-Kind Preferred
Stock will have the right to require that the Corporation redeem such
holder's shares at a redemption price in cash equal to $10 per share
plus all accrued and unpaid dividends, including Catch Up Dividends, to
the date fixed for redemption.
In the case of an offering of the type described in
clause (i) or (ii), the Corporation shall provide each holder of
Pay-In-Kind Preferred Stock notice in writing of such offering no later
than 10 days after the filing of the initial registration statement
related to such offering. Such notice shall provide a brief description
of such registration statement and of such holder's rights under this
subparagraph (c), and shall include a copy of this paragraph 6. Each
holder, in order to exercise its rights pursuant to this subparagraph
(c), shall, within twenty days of the date of the notice of the
Corporation described in the first sentence of this paragraph, provide
notice of its election to exercise such rights and shall specify the
number of shares of Pay-In-Kind Preferred Stock with respect to which
it elects to exercise such rights. The Corporation shall redeem such
shares on a date no later than the 30th day succeeding the closing of
an offering pursuant to clause (i) or (ii), as the case may be, and
shall provide notice thereof in accordance with the provisions of
paragraph 6(f).
(d) Shares of Pay-In-Kind Preferred Stock which have been
issued and reacquired in any manner, including shares purchased or
redeemed, shall (upon compliance with any applicable provisions of the
laws of the State of Delaware) have the status of authorized and
unissued shares of the class of Preferred Stock undesignated as to
series and may be redesignated and reissued as part of any series of
Preferred Stock; provided, however, that no such issued and reacquired
shares of Pay-In-Kind Preferred Stock shall be reissued or sold as
Pay-In-Kind Preferred Stock, unless reissued as a stock dividend on
outstanding shares of Pay-In-Kind Preferred Stock.
(e) Notwithstanding the foregoing provisions of paragraph 6(a)
hereof, unless the full cumulative dividends, including Catch Up
Dividends, on all outstanding shares of Pay-in-Kind Preferred Stock
shall have been paid or contemporaneously are declared and paid for all
past dividend periods, none of the shares of Pay-In-Kind Preferred
Stock shall be redeemed pursuant to paragraph 6(a) hereof unless all
outstanding shares of Pay-In-Kind Preferred Stock are simultaneously
redeemed.
(f) Notice of every redemption of shares of Pay-In-Kind
Preferred Stock shall be mailed by first class mail, postage prepaid,
and mailed not less than 30 days nor more than 60 days prior to the
redemption date addressed to the holders of record of the shares to be
redeemed at their respective last addresses as they shall appear on the
books of the Corporation; provided, however, that no failure to give
such notice or any defect therein or in the mailing thereof shall
affect the validity of the proceeding for the redemption of any shares
so to be redeemed except as to the holder to whom the Corporation has
failed to give such notice or except as to the holder to whom notice
was defective. Each such notice shall state: (i) the redemption date;
(ii) the total number of shares of Pay-In-Kind Preferred Stock to be
redeemed and, if less than all the shares held by such holder are to be
redeemed, the number of the shares of such holder to be redeemed; (iii)
the redemption price; (iv) the place or places where certificates for
such shares are to be surrendered for payment of the redemption price;
and (v) that dividends on the shares to be redeemed will cease to
accrue on such redemption date.
(g) Notice having been mailed as aforesaid and provided that
on or before the redemption date specified in such notice all funds
necessary for such redemption shall have been set aside by the
Corporation, separate and apart from its other funds, in trust for the
pro rata benefit of the holders of the shares so called for redemption
so as to be and to continue to be available therefor, then, from and
after the redemption date, dividends on the shares of Pay-In-Kind
Preferred Stock so called for redemption shall cease to accrue, and
said shares shall no longer be deemed to be outstanding and shall not
have the status of shares of Pay-In-Kind Preferred Stock, and all
rights of the holders thereof as stockholders of the Corporation
(except the right to receive from the Corporation the redemption price
and all dividends accrued and unpaid to the date fixed for redemption)
shall cease. Upon surrender in accordance with said notice of the
certificates for any shares so redeemed (properly endorsed or assigned
for transfer, if the Board of Directors shall so require and the notice
shall so state), such shares shall be redeemed by the Corporation at
the redemption price aforesaid. In case fewer than all the shares
represented by any such certificate are redeemed, a new certificate or
certificates shall be issued representing the unredeemed shares without
cost to the holder thereof.
(h) If such notice of redemption shall have been duly given
and if, prior to the redemption date, the Corporation shall have
irrevocably deposited the funds by the Corporation with a bank or trust
company in trust for the pro rata benefit of the holders of the shares
called for redemption, then, notwithstanding that any certificate for
shares so called for redemption shall not have been surrendered for
cancellation, from and after the time of such deposit, holders of the
shares of Pay-In-Kind Preferred Stock called for redemption shall cease
to be stockholders with respect to such shares and thereafter such
shares shall no longer be transferable on the books of the Corporation
and such holders shall have no interest in or claim against the
Corporation with respect to such shares (including dividends thereon
accrued after such redemption date) except the right to receive payment
of the redemption price (including all dividends accrued and unpaid to
the date fixed for redemption) upon surrender of their certificates.
Any funds deposited and unclaimed at the end of one year and eleven
months from the date fixed for redemption shall be repaid to the
Corporation upon its request, after which repayment the holders of
shares called for redemption shall look only to the Corporation for
payment of the redemption price. The aforesaid bank or trust company
shall be organized and in good standing under the laws of the United
States of America or of the State of New York, shall be doing business
in the Borough of Manhattan, The City of New York, shall have capital,
surplus and undivided profits aggregating at least $50,000,000
according to its last published statement of condition, and shall be
identified in the notice of redemption. Any interest accrued on such
funds shall be paid to the Corporation from time to time.
7. CHANGE OF CONTROL. (a) Upon the occurrence of a Change of
Control, each holder of record of the shares of Pay-In-Kind Preferred
Stock will have the right to require that the Corporation redeem such
holder's shares at a redemption price in cash equal to $10 per share
plus all accrued and unpaid dividends, including Catch Up Dividends, to
the date fixed for redemption.
(b) On and after a redemption date, unless the Corporation
defaults in the payment of the redemption price, dividends will cease
to accrue on shares of Pay-In-Kind Preferred Stock called for
redemption and all rights of holders of such shares will terminate
except for the right to receive the redemption price and accrued and
unpaid dividends, including Catch Up Dividends, thereon to the
redemption date.
(c) Shares of Pay-In-Kind Preferred Stock which have been
issued and reacquired or redeemed pursuant to paragraph 7(a) shall
(upon compliance with any applicable provisions of the laws of the
State of Delaware) have the status of authorized and unissued shares of
the class of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of the Preferred Stock;
provided, however, that no such issued and reacquired shares of
Pay-In-Kind Preferred Stock shall be reissued or sold as Pay-In-Kind
Preferred Stock, unless reissued as a stock dividend on outstanding
shares of Pay-In-Kind Preferred Stock.
(d) Following any Change of Control, notice shall be mailed by
first class mail, postage prepaid, and mailed within 30 days of such
Change of Control addressed to the holders of record of the shares at
their respective last addresses as they shall appear on the books of
the Corporation. Each such notice shall state: (i) that a Change of
Control has occurred and that such holder has the right to require the
Corporation to redeem such holder's shares at a redemption price in
cash equal to $10 per share, together with all accrued and unpaid
dividends, including Catch Up Dividends, to the date of redemption;
(ii) the circumstances and, to the extent available, relevant facts
regarding such Change of Control (including information with respect to
pro forma historical income, cash flow and capitalization of the
Corporation or other relevant entity after giving effect to such Change
of Control); (iii) the redemption date (which shall be not less than 30
days nor more than 60 days from the date such notice is mailed); (iv)
the place or places where certificates for such shares are to be
surrendered for payment of the redemption price; (v) that dividends on
the shares to be redeemed will cease to accrue on such redemption date;
and (vi) the instructions determined by the Corporation, consistent
with such provision, that a holder must follow in order to have its
shares redeemed.
(e) If the Corporation shall fail to discharge its obligation
to redeem shares of Pay-In-Kind Preferred Stock pursuant to paragraph
6(c) or 7(a) hereof (the "Mandatory Redemption Obligation"), the
Mandatory Redemption Obligation shall be discharged as soon as the
Corporation is able to discharge such Mandatory Redemption Obligation.
If and so long as any Mandatory Redemption Obligation with respect to
the Pay-In-Kind Preferred Stock shall not be fully discharged, the
Corporation shall not declare or pay any dividend or make any
distribution on, or, directly or indirectly, purchase, redeem or
satisfy any mandatory redemption sinking fund or other similar
obligations in respect of, Junior Securities (other than as a result of
a reclassification of Junior Securities, or the exchange or conversion
of one class or series of Junior Securities for or into another class
or series of Junior Securities, or other than through the use of the
proceeds of a substantially contemporaneous sale of other Junior
Securities) or any warrants, rights or options exercisable for or
convertible into any of the Junior Securities.
(f) The provisions of paragraphs 6(g) and 6(h) shall apply to
redemptions by the Corporation pursuant to paragraph 6(c) or 7(a).
8. VOTING RIGHTS. (a) Except as otherwise provided in this
paragraph 8 or as otherwise from time to time provided by law, the
holders of shares of Pay-In-Kind Preferred Stock shall have no voting
rights and all voting rights in the Corporation shall be vested
exclusively in the holders of the Common Stock of the Corporation. The
original holder of Pay-In-Kind Preferred Stock shall be entitled to one
observer at the Corporation's Board of Directors meetings, shall, upon
execution of a confidentiality agreement satisfactory to the
Corporation, be provided with a copy of all materials furnished to
members of the Board of Directors and its observer shall be entitled to
reimbursement of his or her travel expenses to such meetings, which
rights shall be transferable to a successor trustee or similar
successor and to a Person acquiring a majority of the original holder's
Pay-In-Kind Preferred Stock.
(b) (i) If and whenever six full quarterly dividends (whether
or not consecutive) payable on shares of Pay-In-Kind Preferred Stock
shall be in arrears in whole or in part (whether or not earned or
declared) or if the Corporation shall have failed to fulfill any
redemption obligation with respect to the Pay-In-Kind Preferred Stock
and such failure shall continue for a period of 30 days, in addition to
any other legal or equitable remedy available to any Holder, the number
of directors then constituting the Board of Directors of the
Corporation shall be increased by two directors and the holders of all
then outstanding shares of Pay-In-Kind Preferred Stock, voting
separately as a class, shall be entitled to elect such additional
directors at any annual meeting of stockholders or special meeting held
in place thereof, or at a special meeting of the holders of such shares
of Pay-In-Kind Preferred Stock called as hereinafter provided.
(ii) Whenever such voting right shall have vested, such right
may be exercised initially either at a special meeting of the holders
of Pay-In-Kind Preferred Stock, called as hereinafter provided, or at
any annual meeting of stockholders held for the purpose of electing
directors, and thereafter at such annual meeting or by the written
consent of the holders of Pay-In-Kind Preferred Stock pursuant to
Section 228 of the Delaware General Corporation Law. Such voting right
shall continue until such time as (A) all dividends accumulated on
Pay-In-Kind Preferred Stock shall have been paid in full and (B) the
Corporation has fulfilled all redemption obligations to the extent such
obligations have matured, at which time such voting right of the
holders of Pay-In-Kind Preferred Stock shall terminate, subject to
retesting in the event of each and every subsequent failure of the
Corporation for the requisite period of time fully to pay dividends or
to discharge its redemption obligations, as described above.
(iii) At any time after such voting power shall have been so
vested in shares of Pay-In-Kind Preferred Stock and such right shall
not already have been initially exercised, a proper officer of the
Corporation may, and upon the written request of any holder of shares
of Pay-In-Kind Preferred Stock (addressed to the Secretary at the
principal office of the Corporation) shall, call a special meeting of
the holders of shares of Pay-In-Kind Preferred Stock for the election
of the two directors to be elected by them as herein provided, such
call to be made by notice similar to that provided in the by-laws of
the Corporation for a special meeting of the stockholders or as
required by law.
Such meeting shall be held at the earliest
practicable date upon the notice required for annual meetings of
stockholders at the place for holding annual meetings of stockholders
of the Corporation or, if none, at a place designated by the Secretary
of the Corporation. If such meeting shall not be called by the proper
officers of the Corporation within 30 days after the personal service
of such written request upon the Secretary of the Corporation, or
within 30 days after mailing the same within the United States by
registered mail, addressed to the Secretary of the Corporation at its
principal office (such mailing to be evidenced by the registry receipt
issued by the postal authorities), then the holders of record of 10% of
the shares of Pay-In-Kind Preferred Stock then outstanding may
designate in writing a holder of Pay-In-Kind Preferred Stock to call
such meeting at the expense of the Corporation, and such meeting may
be called by such person so designated upon the notice required for
annual meetings of stockholders and shall be held at the same place as
it elsewhere provided in this paragraph (8)(b)(iii) or at such other
place as is selected by such person so designated. Any holder of
Pay-In-Kind Preferred Stock which would be entitled to vote at any
such meeting shall have access to the stock books of the Corporation
for the purpose of causing a meeting of stockholders to be called
pursuant to the provisions of this paragraph. Notwithstanding the
provisions of this paragraph, however, no such special meeting shall
be called during a period within 90 days immediately preceding the
date fixed for the next annual meeting of stockholders.
(iv) At any meeting held for the purpose of electing directors
at which the holders of Pay-In-Kind Preferred Stock shall have the
right to elect directors as provided herein, the presence in person, or
by proxy of the holders of the lesser of (A) a majority of the then
outstanding shares of Pay-In-Kind Preferred Stock or (B) a percentage
of the then outstanding shares of Pay-In-Kind Preferred Stock, which
percentage is equal to the percentage of then outstanding shares of
Common Stock then required to constitute a quorum for the election of
directors by holders of Common Stock, shall be required and be
sufficient to constitute a quorum of such class for the election of
directors by such class. At any such meeting or adjournment thereof (x)
the absence of a quorum of the holders of Pay-In-Kind Preferred Stock
shall not prevent the election of directors other than those to be
elected by the holders of stock of such class and the absence of a
quorum or quorums of the holders of capital stock entitled to elect
such other directors shall not prevent the election of directors to be
elected by the holders of Pay-In-Kind Preferred Stock and (y) in the
absence of a quorum of the holders of any class of stock entitled to
vote for the election of directors, a majority of the holders present
in person or by proxy of such class shall have the power to adjourn the
meeting for the election of directors which the holders of such class
are entitled to elect, from time to time, without notice (except as
required by law) other than announcement at the meeting, until a quorum
shall be present.
(v) The term of office of all directors elected by the holders
of Pay-In-Kind Preferred Stock pursuant to paragraph (8)(b)(i) hereof
in office at any time when the aforesaid voting rights are vested in
the holders of Pay-In-Kind Preferred Stock shall terminate in one year
or upon the election of their successors at any meeting of stockholders
for the purpose of electing directors, if later. Upon any termination
of the aforesaid voting rights in accordance with paragraph (8)(b)(ii)
hereof, the term of office of all directors elected by the holders of
Pay-In-Kind Preferred Stock pursuant to paragraph (8)(b)(i) hereof then
in office thereupon shall terminate and upon such termination the
number of directors constituting the Board of Directors shall, without
further action, be reduced by two, subject always to the increase of
the number of directors pursuant to paragraph (8)(b)(i) hereof in case
of the future right of the holders of Pay-In-Kind Preferred Stock to
elect directors as provided herein.
(vi) In case of any vacancy occurring among the directors so
elected, the remaining director who shall have been so elected may
appoint a successor to hold office for the unexpired term of the
director whose place shall be vacant. If all directors so elected by
the holders of Pay-In-Kind Preferred Stock shall cease to serve as
directors before their terms shall expire, the holders of Pay-In-Kind
Preferred Stock then outstanding may, at a special meeting of the
holders called as provided above, elect successors to hold office for
the unexpired terms of the directors whose place shall be vacant.
(c) In addition to any vote or consent of shareholders
required by law or the Certificate of Incorporation, the consent of the
holders of at least 66-2/3% of the shares of Pay-In-Kind Preferred
Stock at the time outstanding, given in person or by proxy, either in
writing without a meeting or by vote at any meeting called for the
purpose, shall be necessary for effecting or validating:
(i) Any amendment, alteration or repeal of any of the
provisions of the Certificate of Incorporation, or of the by-laws of
the Corporation, which affects adversely the voting powers, rights or
preferences of the holders of shares of Pay-In-Kind Preferred Stock;
provided, however, that the amendment of the provisions of the
Certificate of Incorporation so as to authorize or create, or to
increase the authorized amount of, any of the Corporation's Junior
Securities, shall not be deemed to affect adversely the powers, rights
or preferences of the holders of shares of Pay-In-Kind Preferred Stock;
or
(ii) The authorization or creation of, or the increase in the
authorized amount of, any shares of any class or any security
convertible into any Senior Security or Parity Security; provided,
however, that no such consent of the holders of Pay-In-Kind Preferred
Stock shall be required if, at or prior to the time when such
amendment, alteration or repeal is to take effect or when the issuance
of any such Senior Security, Parity Security or convertible security is
to be made, as the case may be, provision is made for the redemption of
all shares of Pay-In-Kind Preferred Stock at the time outstanding;
(iii) The merger or consolidation of the Corporation into any
entity other than a corporation organized under the laws of a state of
the United States; or
(iv) The merger or consolidation of the Corporation in which
the Corporation is not the surviving entity, unless any arrearages in
dividends are either cured or preserved and the holders of Pay-In-Kind
Preferred Stock receive preferred stock in the surviving entity with
terms substantially identical to those of the Pay-In-Kind Preferred
Stock.
(d) Subject to paragraphs 3, 4 and 8(c) hereof, none of (i)
the creation, authorization or issuance of any shares of any Junior
Securities (provided that the terms of such Junior Securities are not
inconsistent, or in any way conflict, with the terms of the Pay-In-Kind
Preferred Stock) or the creation, authorization or issuance of any
obligation or security convertible into or evidencing the right to
purchase any Junior Securities, (ii) the creation of any indebtedness
of any kind of the Corporation (other than indebtedness convertible
into any Senior Security or Parity Security), nor (iii) the increase or
decrease in the amount of authorized capital stock of any class,
including the Preferred Stock, or any increase, decrease or change in
the par value of any such class other than the Preferred Stock, shall
be deemed to alter, change or affect adversely the powers, preferences
and special rights of shares of Pay-In-Kind Preferred Stock and may be
effected without the consent of the holders thereof.
ARTICLE V
DIRECTORS
(1) Elections of directors of the Corporation need not be
by written ballot, except and to the extent provided in the By-laws of the
Corporation.
(2) To the fullest extent permitted by the General Corporation
Law as it now exists and as it may hereafter be amended, no director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
(1) The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he or she is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if he
or she acted in good faith and in a manner he or she reasonably believed to be
in, or not opposed to, the best interests of the Corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his or
her conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or
its equivalent, shall not, of itself, create a presumption that the person
seeking indemnification did not act in good faith and in a manner which he or
she reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his or her conduct was unlawful.
(2) The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he or she is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if he
or she acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(3) To the extent that a director, officer, employee or agent
of the Corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in Sections (1) and (2) of this
Article VI, or in defense of any claim, issue or matter therein, he or she shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
(4) Any indemnification under Sections (1) and (2) of this
Article VI (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
or she has met the applicable standard of conduct set forth in such Sections (1)
and (2). Such determination shall be made (a) by the Board of Directors of the
Corporation by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or (b) if such a quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (c) by the
stockholders of the Corporation.
(5) Expenses (including attorneys' fees) incurred by an
officer or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that he or she is not entitled to be
indemnified by the Corporation authorized in this Article VI. Such expenses
(including attorneys' fees) incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the Board of Directors of the
Corporation deems appropriate.
(6) The indemnification and advancement of expenses provided
by, or granted pursuant to, the other sections of this Article VI shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any law, by-law, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office.
(7) The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of his
or her status as such, whether or not the Corporation would have the power to
indemnify such person against such liability under the provisions of Section 145
of the General Corporation Law.
(8) For purposes of this Article VI, references to "the
Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees or
agents so that any person who is or was a director, officer, employee or agent
of such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under the provisions of this Article VI with respect to the
resulting or surviving corporation as he or she would have with respect to such
constituent corporation if its separate existence had continued.
(9) For purposes of this Article VI, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves service by, such director,
officer, employee or agent with respect to any employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he or she reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article VI.
(10) The indemnification and advancement of expenses provided
by, or granted pursuant to, this Article VI shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
ARTICLE VII
BY-LAWS
The directors of the Corporation shall have the power to
adopt, amend or repeal by-laws.
ARTICLE VIII
AMENDMENT
The Corporation reserves the right to amend, alter, change or
repeal any provision of this Certificate of Incorporation, in the manner now or
hereafter prescribed by law, and all rights conferred on stockholders in this
Certificate of Incorporation are subject to this reservation.
IN WITNESS WHEREOF, DICTAPHONE CORPORATION has caused this
certificate to be signed by John H. Duerden, its Chairman, Chief Executive
Officer and President, and attested to by Daniel P. Hart, its Secretary, as of
the 27th day of January, 1998.
DICTAPHONE CORPORATION
By: /S/ JOHN H. DUERDEN
____________________________________
Name: John H. Duerden
Title: Chairman, Chief Executive
Officer and President
ATTEST
By: /S/ DANIEL P. HART
________________________________
Name: Daniel P. Hart
Title: Secretary
EXHIBIT 10.15
STOCK OPTION AGREEMENT dated as of August 1, 1997 between DICTAPHONE
CORPORATION, a Delaware corporation (the "Company"), and JOHN H. DUERDEN (the
"Participant").
WHEREAS, the Participant is currently President and Chief Executive Officer
of the Company and, pursuant to the Company's Management Stock Option Plan, as
amended (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 in its employ or the employ of 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, 325,000 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:
(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 the
Participant's ceasing to be an employee. 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 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 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
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 (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
Participant is employed by the Company or any of its subsidiaries (as
determined pursuant to Section 10 of the Plan) 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 on a cumulative basis in three
installments of 108,334, 108,333 and 108,333 Options on, respectively,
the first, second and third anniversaries of the Date of Grant;
provided that the Participant remains in the employ of the Company (as
determined pursuant to Section 10 of the Plan); and provided, further,
that in the event of a Sale (as defined in the Plan) or an IPO (as
defined in the Plan) of the Company (x) all outstanding unvested
Options held by the Participant shall become fully vested immediately
prior to the Effective Date of such Sale or IPO, and (y) appropriate
provisions shall be made by the Company to permit the Participant to
realize the value of his Options in connection with such Sale to the
same extent as if he had exercised in full immediately prior to the
effective date of such Sale and participated therein (which, with
respect to consideration other than cash, shall be determined in good
faith by the Board of Directors).
(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 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.
(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 written
statements satisfactory in form and content to the Company, that he intends to
hold the Option Shares so acquired by him 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 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 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/ JOHN H. DUERDEN
_________________________________________
Name: John H. Duerden
Address:
Option Price: $10.00
Date of Grant: August 1, 1997
EXHIBIT 10.18
November 8, 1996
Mr. Ronald Elwell
Vice President, Product Development & Marketing
Dictaphone Corporation
3191 Broadbridge Avenue
Stratford, CT 06497
Dear Ron:
This letter will set forth our agreement concerning your continued
employment with Dictaphone.
As I have expressed to you in person, I feel confident that we have the
management team to move forward and drive this business. Recognizing the
concerns as expressed by some of the management team relative to issues of
transition should this relationship not develop as I anticipate, this is to
confirm that Stonnington has agreed with my recommendation that, in lieu of the
normal severance policy, an "Executive Severance Arrangement" including a
severance pay period of up to two years salary will be offered to you in the
event that your employment is terminated by Dictaphone for any reason other than
cause. This severance will also be offered to you should your job be eliminated
or a substantial reduction in your responsibilities and compensation occur. In
your case, a restructuring of your responsibilities to eliminate the engineering
function from your direct management will not invoke this agreement.
A termination for cause will be defined as your termination resulting from
a severe breach of business ethics, a violation of stated company policy
which would otherwise result in your immediate termination, your continued
failure or refusal to perform any of the material duties or responsibilities
(other than failure due to a disability as defined in Dictaphone's disability
policies) reasonably required by Dictaphone hereunder, substantial
underperformance as defined below or any act by you which could cause personal
harm or embarrassment to the reputation of the organization were it to become
public.
Substantial underperformance will be defined as substantial
underperformance by you of your duties and responsibilities, except to the
extent that such substantial underperformance relates to duties and
responsibilities which had not been part of your job assignment prior to this
agreement and which substantial underperformance is not corrected by you within
45 days of your receipt of written notice from Dictaphone.
Under the terms of this "Executive Severance Arrangement" you will be
offered your salary at the time of separation for a period of up to two years,
payable on regular pay days. The first year of severance pay will be payable to
you in full, regardless of your employment status with any other company. At the
conclusion of the first twelve months, if you have not secured employment
elsewhere, the company will extend your severance pay on a month by month basis
for a maximum of twelve additional months. This extension, at the company's
discretion, will be dependent upon your reasonable efforts to secure employment
as judged by your documented job search activities. In addition, you will be
eligible for outplacement services at a nationally recognized outplacement firm
of the company's choosing for the severance period. Medical, dental and life
insurance will be extended to you at the rate that you would have paid as an
active employee under the terms and conditions of those plans for up to twelve
months or until you have secured employment elsewhere. You will be eligible for
COBRA continuation of applicable benefits for an additional six months for a
total coverage period of eighteen months.
In any event, the "Executive Severance Arrangement" will require you to
sign, as a condition of receiving severance hereunder, a severance agreement
including a release of the company from all liability for any acts or violations
relative to any administrative procedures and/or federal, state or local law(s)
covering the employment relationship. The release will also include a
non-compete, non-solicitation of employees, non-disclosure of confidential
information and an agreement to cooperate with the company on any legal and
otherwise reasonable business issue requiring your involvement for resolution.
In the case of your termination of employment due to substantial
underperformance, in lieu of this "Executive Severance Arrangement", you will be
entitled to receive your salary for up to one year (six months initial period
and six months at the company's discretion) under the same terms and conditions
as stated above.
Sincerely,
/S/ JOHN H. DUERDEN
John H. Duerden
/S/ RONALD ELWELL
- ------------------------------ ----------------
Ronald Elwell Date
Enclosure
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet of Dictaphone Corporation at December 31,
1997 and the condensed consolidated statement of operations for the year ended
December 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,277
<SECURITIES> 0
<RECEIVABLES> 72,749
<ALLOWANCES> 810
<INVENTORY> 48,779
<CURRENT-ASSETS> 142,670
<PP&E> 66,491
<DEPRECIATION> 31,160
<TOTAL-ASSETS> 470,060
<CURRENT-LIABILITIES> 91,436
<BONDS> 342,816
20,841
0
<COMMON> 130
<OTHER-SE> 4,290
<TOTAL-LIABILITY-AND-EQUITY> 470,060
<SALES> 245,758
<TOTAL-REVENUES> 340,042
<CGS> 194,432
<TOTAL-COSTS> 364,662
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,438
<INCOME-PRETAX> (69,282)
<INCOME-TAX> 1,060
<INCOME-CONTINUING> (68,222)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (68,222)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
