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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, 1998
|_| 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 06-0992637
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3191 Broadbridge Avenue, Stratford, CT 06614
(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, 1999 was $0.00.
As of March 24, 1999, there were 12,934,000 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
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PART I
ITEM 1. BUSINESS.................................................. 1
ITEM 2. PROPERTIES................................................ 7
ITEM 3. LEGAL PROCEEDINGS......................................... 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 9
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............................................... 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............... 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................... 50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........ 50
ITEM 11. EXECUTIVE COMPENSATION.................................... 53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K....................................... 63
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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. BECAUSE THE COMPANY WISHES TO TAKE ADVANTAGE
OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES AND LITIGATION REFORM
ACT OF 1995, READERS ARE CAUTIONED TO CONSIDER, AMONG OTHERS, THE RISK FACTORS
DESCRIBED IN ITEM 7 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS".
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, call
center monitoring systems and communications recording. The Company has two
operating segments, System Products and Services and Contract Manufacturing. The
System Products and Services segment consists of the sale and service of
system-related products to dictation and voice management and communications
recording system customers in selected vertical markets. The Contract
Manufacturing segment consists of the manufacturing operations of the Company
which provides outside electronics manufacturing services ("EMS") to original
equipment manufacturers ("OEMs") in the telecommunications, data management,
computer and electronics industries.
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 1998 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 ("Communications Recording Systems" or
"C.R.S."), sales of which represented 23% of the Company's 1998 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
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quality monitoring, productivity and training products used primarily by call
centers. Dictaphone's service business, revenue from which represented 32% of
the Company's 1998 total revenue, provides its customers with service hardware
and software support, expedited repairs and remote diagnostics. Many Dictaphone
customers, including those purchasing large systems, purchase Company service
contracts at the time of product purchase.
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. The Company
has recently introduced digital recording products to store and replay voice. In
1998, the Company introduced Walkabout(TM) Express, a portable digital recording
device designed specifically for mobile medical dictation, and Boomerang
2.0(TM), a Windows(R) 95-based voice messaging and dictation system that
incorporates the IBM Via Voice Transcription(TM) speech recognition software.
Many portable products are designed to be compatible with Dictaphone desktops in
terms of features and appearance.
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 the user to physically transport the 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
NT(R) 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.
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In 1998, Dictaphone introduced the Enterprise 125(TM) Voice System, a
Windows NT(R) operating system platform intended for use by smaller single-site
healthcare providers, which offers productivity advantages comparable to the
Company's larger Enterprise Express(TM) System. The Enterprise 125(TM) Voice
System replaces the Digital Express(R) 4000 and Digital Express(R) 2500 voice
processing systems which were introduced in 1993 and have a worldwide installed
base of over 2,000 systems.
From time to time the Company introduces products sourced from third
party developers. The Company's former Insight(TM), For the Record(TM), and
Synergy(TM) products are all examples of third party products re-marketed by the
Company. The Company has also contracted with third party developers of
continuous speech recognition software such as Philips and IBM, in order to
integrate 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 has increased as a percentage of
product sales revenue from all communications recording products from only 13%
in 1992 to virtually 100% in 1998. 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
Symphony CTI(TM) system, ProLog(TM), Guardian(TM), Sentinel(TM) and daVinci(TM)
models. In the first quarter of 1999, the Company introduced daVinci(TM), the
Company's next generation communications recording product. Later in 1999, the
Company expects to introduce daVinci QMS(TM), a quality monitoring system based
on industry-standard Windows NT(R) and Oracle(R) software which provides call
centers with customer-focused quality monitoring technology combined with
advanced customer service evaluation tools and training programs. 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.
Prolog(TM), which was introduced in 1993, was the Company's most powerful
C.R.S. product before the introduction of Symphony CTI(TM). The Company's
midsized Guardian(TM) model, introduced in 1994, has been designed to provide
many of the services provided by 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.
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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.
Dictaphone's emergency message repeater products include the Series
5700, 5900 and 6600. The vast majority of these units are installed in public
safety organizations, where they are used extensively for replaying emergency
telephone calls.
Dictaphone believes it has a number of significant opportunities in
marketing its products, including, for example, the continuing transition of the
user base 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 520 service representatives operating out of 155 offices in North
America. The United States service organization is supported by approximately
230 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 62 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" and "Software Maintenance Agreements",
which are long term warranties and support agreements 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 those purchasing large systems, purchase Dictaphone service
support 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.
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.
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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 500 suppliers,
although 80% of the annual dollar volume is procured from 60 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 1998, revenue from contract manufacturing was $47.1 million.
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.
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 85% 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 56%
of U.S. Communications Recording Systems revenue is derived from financial
services and insurance firms and governmental agencies.
Although approximately 88% 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 service and
sales offices throughout the United States also provides a system for the rapid
distribution and service of the Company's 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, on-line internet stores and mass marketers for the distribution of
certain of its desktop and portable products. Outside of North America, the
Company has shifted 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 90 day labor warranties. Upon purchase of a new
or previously owned Dictaphone product, a customer may purchase an "Assured
Performance Plan" and "Software Maintenance Agreements." See "-- Service". If a
Dictaphone customer decides not to purchase a service support agreement,
Dictaphone may repair its products at an hourly service rate, in addition to
parts.
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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 Fleetwood Financial ("Fleetwood"), Mellon First United Leasing
("First United"), BankVest Capital Corporation ("BankVest"), Pitney Bowes
Credit Corporation ("PBCC") 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,
test engineers and other engineers to develop software for its products as well
as to perform SMT printed circuit board designs and mechanical designs and to
work closely with its Melbourne, Florida factory and service operation to
implement these designs. The research and development organization also creates
application-specific integrated circuit designs.
The Company's research and development expenditures (including $6.2
million and $10.2 million of capitalized software costs in 1997 and 1998,
respectively) grew as a percentage of product sales and rental revenue from 7.2%
in 1997 to 8.7% in 1998. As of December 31, 1998, the Company's research and
development staff consisted of 155 personnel (including temporary employees).
INTELLECTUAL PROPERTY
The Company has approximately 85 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 105
U.S. trademarks, including the well known "Dictaphone(R)" registered trademark,
in use throughout the world.
COMPETITION
The markets in which the Company competes are highly competitive. The
Company competes with large and established national and multinational
companies, as well as smaller startup companies, in all of its operations.
Furthermore, as products sold in the Company's markets evolve toward software
and digital technology, new competitors with expertise in these areas are
entering the industry. Some of these competitors have, and new competitors may
have, greater resources than the Company.
In the dictation market, the Company faces systems product competition
from the Lanier division of Harris Corporation ("Lanier"), Digital Voice Inc.
("DVI"), Sudbury Systems, Inc. ("Sudbury") and a number of smaller competitors.
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, Eyretel, TEAC Corporation of America, Nice
Systems Ltd. (loggers and quality monitoring), Teknekron Infoswitch (quality
monitoring) Witness Systems, Inc. (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, especially in the call center marketplace.
EMPLOYEES
As of December 31, 1998, the Company had 2,355 employees worldwide, of
which 2,111 were based in the United States. As of December 31, 1998, 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, 2001, and January 15, 2001,
respectively. The Company believes its relations with employees are
satisfactory.
ITEM 2. PROPERTIES
The following is information concerning the major facilities
owned by the Company:
FACILITY PURPOSE SQUARE FOOTAGE
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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
The Company operates a manufacturing and service/distribution center
facility in Melbourne, Florida, in addition to its numerous sales and service
offices. The Company leases its executive offices located in Stratford,
Connecticut (138,000 square feet). In addition, the Company leases sales,
service and distribution offices in certain countries in which it has
operations, including 143 offices in the United States, 13 offices in Canada, 9
offices in the United Kingdom and an additional office in Germany. 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.
ITEM 3. LEGAL PROCEEDINGS
On February 14, 1995, Pitney Bowes, Inc. 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 damages
sought. The litigation is in the final stage of discovery. A trial date is
likely to be set in 1999. Pitney Bowes and the Company have not yet received
Sudbury's revised damages report nor has Sudbury's damages expert given
deposition testimony. Accordingly, at this time, the Company cannot make a
reasonable estimate of the amount of damages that will be sought by Sudbury.
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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. As these proceedings are at a
preliminary stage, 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 $11
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 contained in the
Acquisition Agreement, subject to certain limitations.
The Company is a defendant in a number of additional lawsuits and
administrative proceedings, none of which will, in the opinion of management,
have a material adverse effect on the Company's consolidated financial position
or results of operations.
The Company does not believe that the ultimate resolution of the
litigation, administrative proceedings and environmental matters described above
in the aggregate will have a material adverse effect on the Company's
consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1998.
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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,
1999, there were 9 holders of record of the Common Stock.
Under the terms of the Company's Credit Agreement, dated August 7,
1995, as modified by five amendments to Credit Agreement, dated June 28, 1996,
June 27, 1997, July 21, 1997, November 14, 1997 and December 31, 1998
(collectively, the "Credit Agreement"), with a syndicate of financial
institutions for whom Bankers Trust Company is the Administrative Agent and
NationsBank, N.A. (Carolinas) is the Documentation Agent, the Company is
restricted from paying dividends on its capital stock. In addition, under the
terms of an Indenture (the "Note Indenture") between the Company and State
Street Bank and Trust, relating to the Company's $200.0 million of 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 outstanding preferred stock and under then-existing
indebtedness and other factors deemed relevant by the Company's Board of
Directors.
In January 1999, the Company sold 2.0 million shares of its 12%
Convertible Pay-in-Kind Preferred Stock to Stonington Capital Appreciation 1994
Fund, L.P. ("Stonington"). This 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 this sale were used by the Company to repay
amounts outstanding under the Revolving Credit Facility (as defined below), and
for the semi-annual interest payment on the Notes.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is the selected consolidated financial data of
Dictaphone Corporation (Successor Company) at December 31, 1998, December 31,
1997 and December 31, 1996 and 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 Dictaphone Corporation (Predecessor Company) for the thirty
two week period ended August 11, 1995 and for the year ended December 31, 1994.
The selected financial data should be read in conjunction with "Item 7.
- -- Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes included elsewhere in this
Report.
The capital structure and accounting 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, 1998, 1997, 1996 and 1995, and for the years and twenty
week period then ended should not be compared to 1994.
9
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
--------------------------- ------------------------------------------------------------
YEAR 32 WEEKS 20 WEEKS YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, AUGUST 11, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA: (DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Total revenue $ 346.8 $ 202.1 $ 150.6 $ 332.5 $ 340.0 $ 332.3
Cost of sales, rentals and support
services 178.0 107.6 90.1 (c) 181.1 (c) 194.4(c) 188.7(c)
Selling and administrative 96.0 60.4 62.4 (d) 149.2 (d) 155.5(d) 139.9(d)
Research and development (net of
software capitalization) 12.3 7.0 4.6 14.2 14.7 17.1
Operating profit (loss) 60.5 27.1 (6.5) (12.0) (24.6) (13.4)
Net interest (income) expense and
other (1.0) (1.4) 16.1 (e) 41.6 (e) 44.7(e) 39.4(e)
Income (loss) before effect of
changes in accounting 36.6 17.1 (13.9) (34.7) (68.2) (53.7)
Net income (loss) 33.8 (b) 17.1 (13.9) (34.7) (68.2) (53.7)
Stock dividend on PIK Preferred Stock --- --- .8 2.3 2.7 3.1
Net loss applicable to Common Stock --- --- (14.7) (37.0) (70.9) (56.8)
OTHER DATA:
EBITDA(a) $ 68.6 $ 32.0 $ 32.3 $ 54.2 $ 48.2 $ 30.6
Depreciation and amortization 8.1 4.9 39.1 65.8 62.2 38.2
Capital expenditures 5.9 5.5 .8 6.3 6.9 8.9
Software capitalization --- 2.5 1.7 4.7 6.2 10.3
EBITDA margin (a) 19.8% 15.8% 21.5% 16.3% 14.2% 9.2%
BALANCE SHEET DATA
(AT END OF PERIOD):
Working capital $ 64.2 $ 43.3 $ 33.0 $ 51.2 $ 50.8
Total assets 268.5 550.7 504.8 470.0 454.3
Long term debt --- 350.0 352.6 343.6 370.5
Total liabilities 70.4 456.2 445.4 444.8 482.9
Stockholders' equity 198.1 94.5 59.4 25.2 (28.6)
</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. EBITDA margin is defined as EBITDA as
a percent of revenue.
(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, rentals and support services for the twenty weeks ended
December 31, 1995 and years ended December 31, 1996, 1997 and 1998
includes $14.7 million, $8.8 million, $2.4 million and $0.4 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, 1997 and 1998 includes $21.8 million,
$46.2 million, $41.5 million and $23.2 million, respectively, of non-cash
purchase accounting charges.
(e) Includes $.9 million, $5.3 million, $6.3 million and $1.7 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, 1997 and 1998, respectively.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
financial statements and accompanying notes included in "Item 8. -- Financial
Statements and Supplementary Data." Certain amounts have been reclassified to
conform to current year presentation.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------
1996 1997 1998
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Total revenue................................................... $ 332.5 $ 340.0 $ 332.3
Cost of sales, rentals and support services..................... 181.1 194.4 188.7
Selling and administrative expense (1).......................... 149.2 155.5 139.9
Research and development........................................ 14.2 14.7 17.1
------- -------- --------
Operating loss .......................................... (12.0) (24.6) (13.4)
------- -------- --------
Net interest expense and other.................................. 41.6 44.7 39.4
Income tax (benefit) provision.................................. (18.9) (1.1) 0.9
------- -------- --------
Net loss ....................................................... $ (34.7) $ (68.2) $ (53.7)
======= ======== ========
</TABLE>
- ----------------------
(1) Includes amortization of intangibles.
11
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------------
1996 1997 1998
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Revenue:
Sales:
Integrated Voice Systems................................... $ 49.1 $ 45.7 $ 41.4
Integrated Health Systems.................................. 31.4 37.4 44.8
-------- --------- ---------
Total U.S. Voice Systems............................... 80.5 83.1 86.2
Communications Recording Systems........................... 57.7 59.3 61.0
Customer Service Parts..................................... 18.4 18.0 17.4
International and Dealer Operations........................ 40.4 40.7 31.3
Rentals .................................................. 2.1 1.8 1.4
-------- --------- ---------
Product sales and rentals.............................. 199.1 202.9 197.3
======== ========= =========
Support service:
Customer Service........................................... 80.0 81.3 77.2
Application and Training Specialists....................... 1.3 2.6 3.1
International and Dealer Operations........................ 11.5 10.4 7.6
-------- --------- ---------
Total support service.................................. 92.8 94.3 87.9
-------- --------- ---------
Total System Products and Services......................... 291.9 297.2 285.2
Contract Manufacturing..................................... 40.6 42.8 47.1
-------- --------- ---------
Total revenue .................................................. $ 332.5 $ 340.0 $ 332.3
========= ========== ==========
</TABLE>
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
Total revenue declined 2.3% to $332.3 million in 1998 from $340.0
million in 1997. System Products and Services revenue declined 4.0% to $285.2
million in 1998 from $297.2 million in 1997. This decline is attributable to
lower product sales revenue from I.V.S. and lower revenue from Customer Service
and International and Dealer Operations, offset in part by increased product
sales revenue from I.H.S. and C.R.S., and increased revenue from Application and
Training Specialists ("A.T.S."). Contract Manufacturing revenue increased 9.8%
to $47.1 million in 1998 from $42.8 million in 1997.
I.V.S. revenue declined 9.5% to $41.4 million due to lower sales of the
Company's Straight Talk(TM), Synergy(TM), desktop and portable products. I.V.S.
orders declined 7.2% to $45.3 million. I.V.S. order backlog declined 27.2%
during 1998 to $4.7 million. I.H.S. revenue increased 19.9% to $44.8 million due
to higher Enterprise Express(TM) installations. I.H.S. order growth of 18.5% to
$48.3 million is also attributable to Enterprise Express(TM). I.H.S. order
backlog increased 22.8% during 1998 to $14.5 million. C.R.S. revenue increased
3.0% to $61.0 million due to the one-time sale of Prolog(TM)/Guardian(TM)
software upgrades. C.R.S. orders declined slightly (0.9%) to $58.7 million.
C.R.S. order backlog declined 32.4% in 1998 to $5.1 million. Customer Service
revenue (including sale of parts) declined 4.7% to $94.6 million due to lower
proprietary product service contract, installation, integration and third party
maintenance revenue. A.T.S. revenue increased 17.6% to $3.1 million due to
increased customer training provided in support of I.H.S. products. Sales and
service revenue from International and Dealer Operations declined 23.7% to $38.9
million resulting primarily from lower desktop, portable and CRS product sales
revenue in Canada as well as from lower desktop, portable, system and C.R.S.
product sales and lower service revenue in Europe. Orders from International and
Dealer Operations declined 27.1% to $29.9 million. Order backlog for
International and Dealer Operations declined 16.3% during 1998 to $1.7 million.
Contract Manufacturing growth reflects turnkey manufacturing of electronic
12
<PAGE>
products from existing customers as well as the addition of new Contract
Manufacturing accounts.
Cost of sales, rentals and support services declined 2.9% to $188.7
million (56.8% of revenue) versus $194.4 million (57.2% of revenue) for 1997.
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
0.2 percentage points to 56.7% due to primarily to increased Customer Service
costs, a higher content of low margin Contract Manufacturing revenue and
unfavorable manufacturing cost adjustments, partially offset by 1997 charges for
excess inventory associated with Digital Express(TM) and Records Express(TM)
products.
Selling and administrative expenses (including amortization of
intangibles) declined 10.0% to $139.9 million (42.1% of revenue) from $155.5
million (45.7% of revenue) in 1997. Excluding additional depreciation and
amortization expense associated with purchase accounting adjustments related to
the Acquisition of $23.2 million and $41.5 million for 1998 and 1997,
respectively, selling and administrative expenses expressed as a percentage of
revenue would have increased by 1.6 percentage points. This increase is
attributable to $1.9 million of additional severance associated with continuing
efforts to reduce the Company's cost structure, increased C.R.S. selling
expenses, Year 2000 and information system implementation costs. Partially
offsetting these expense increases were lower I.V.S. and I.H.S. selling
expenses.
Research and development expenses of $17.1 million (8.7% of product
sales and rental revenue) increased 16.5% from $14.7 million (7.2% of product
sales and rental revenue), reflecting increased staffing and compensation.
The Company recorded an operating loss of $13.4 million (4.0% of
revenue) in 1998 compared to an operating loss of $24.6 million (7.2% of
revenue) for 1997. Excluding the impact of purchase accounting adjustments from
both 1998 and 1997 discussed above, operating profit would have declined by
47.1% to $10.2 million due to lower revenue, higher costs, the provision for
severance and increased operating expenses.
Interest expense of $39.7 million declined 10.6% from $44.4 million
reflecting lower amortization of deferred financing fees.
1997 COMPARED TO 1996
Total revenue increased 2.3% to $340.0 million in 1997 from $332.5
million in 1996. System Products and Services revenue increased 1.8% to $297.2
million in 1997 from $291.9 million in 1996. This increase in revenue is
attributable to higher product sales revenue from I.H.S. and C.R.S., and higher
revenue from Customer Service (including sale of parts) and A.T.S., offset in
part by lower revenue from I.V.S. and International and Dealer Operations
support services. Contract Manufacturing revenue increased 5.5% to $42.8
million.
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.
13
<PAGE>
Cost of sales, rentals and support services increased 7.3% to $194.4
million (57.2% of revenue) versus $181.1 million (54.5% of 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
revenue) for 1997 compared to an operating loss of $12.0 million (3.6% of
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.
Interest expense of $44.4 million increased 3.6% from $42.9 million in
1996 due to higher effective interest rates on the Term Loans (as defined below)
and Revolving Credit Facility.
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, 1998, the Company had outstanding term
loans of $131.6 million (the "Term Loans") and loans of $38.5 million
outstanding under the $40.0 million revolving credit facility (the "Revolving
Credit Facility"), and the Notes. Availability under the Revolving Credit
Facility at December 31, 1998 was $1.5 million. Scheduled annual principal
payments will be $0.6 million in 1999 and 2000 and $36.3 million in 2001. There
are no scheduled reductions in the Revolving Credit Facility over the next two
years.
On December 31, 1998, the Company and the lenders executed a fifth
amendment to the Credit Agreement. Under the terms of this amendment, the
lenders agreed to waive compliance by the Company with the financial covenants
as of December 31, 1998 and for the four-Fiscal Quarter period then ended. Other
changes effected by the amendment were (i) modifications to the covenants and
related definitions in respect of certain asset sales and the utilization of the
proceeds from such asset sales, (ii) modifications to the required Maximum
Leverage, Minimum EBITDA and Minimum Interest Coverage Ratio covenants (as
defined in the Credit Agreement), (iii) a change in the maturity date of the
Tranche C Term Loans (the "Tranche C Loans") to be equal to that of the Tranche
14
<PAGE>
B Term Loans (the "Tranche B Loans"), and (iv) an increase in the interest rate
on the Tranche B Loans to be equal to that of the Tranche C Loans.
In January 1999, the Company sold 2.0 million shares of its 12%
Convertible Pay-in-Kind Preferred Stock to Stonington for $20 million. In
February 1999, $11.75 million was used for the semi-annual interest payment on
the Notes. Proceeds from this sale were also used to repay amounts outstanding
under 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 9.55%.
No funds under the swap agreements are actually borrowed or are to be repaid.
Amounts due to or from the counterparties are reflected in interest expense in
the periods in which they accrue. The fair value of the interest rate swaps as
of December 31, 1998 was unfavorable $0.1 million, based on dealer quotes. On
February 11, 1999, the Company entered into interest rate cap agreements
effective February 16, 1999, with an aggregate notional principal amount
equivalent to $66 million maturing on February 16, 2001. The cap limits that
portion of the Company's Term Loans to a fixed rate component of 5.5%; thus
reducing the impact of increases in interest rates, limiting the effective
interest rate on fifty percent of the currently outstanding Term Loans to 9.25%.
In addition, the Credit Agreement contains covenants that significantly
limit or prohibit, among other things, the ability of the Company 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, 1998. The Notes are subordinated to the Credit
Agreement and other senior indebtedness, as defined in the Note Indenture. The
Notes contain similar types of covenants 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, 1998 was favorable $50.0
million, based upon dealer quotes.
Capital expenditures for 1998 totaled $8.9 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 and annual 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 or year. 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, the ability to attract and maintain qualified
technical personnel, 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 1998 and plans to introduce additional products
in 1999 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, the proceeds from its 1999 sale
of 12% Convertible Pay-in-Kind Preferred Stock to Stonington, proceeds from the
sale or financing of certain assets, as well as its available borrowings 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.
15
<PAGE>
The Company has recorded a gross deferred tax asset of $95.3 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, 1998 is
approximately $122.5 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, $40.0 million will expire in the year 2012, and $35.6 million will expire
in the year 2018. 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 carryforward. In 1997, the Company established a valuation
allowance of $24.1 million against the deferred tax assets. During 1998, the
Company increased its valuation allowance by $20.8 million resulting in a net
deferred tax asset of $50.5 million. Management believes, based upon the
Company's history of prior operating results, its current circumstances, and its
expectations for the future, that taxable income of the Company will more likely
than not be sufficient to fully utilize the net deferred tax asset of $50.5
million recorded at December 31, 1998, prior to expiration. 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.
A reconciliation of the Company's loss before taxes for financial
statement purposes to taxable loss for the years ended December 31, 1997 and
1998 is as follows (in thousands).
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Loss before taxes for financial statement purposes................ $ (69,282) $ (52,812)
Differences between loss for financial statement
purposes and taxable loss:
State income taxes - current portion.............................. 2,692 2,738
Permanent differences:
Goodwill....................................................... 1,375 1,428
All other permanent items...................................... 4,235 1,186
Temporary differences:
Intangible amortization........................................ 21,309 3,149
All other temporary differences (net).......................... 6,333 7,859
---------- ----------
Total differences........................................ 35,944 16,360
---------- ----------
Taxable loss...................................................... $ (33,338) $ (36,452)
========== ==========
</TABLE>
YEAR 2000 READINESS
GENERAL
Most businesses are facing a challenge at the turn of the century due
to a common computer-related practice employed since the 1960's of representing
a year with just two digits rather than four digits. The problem is not
restricted to system hardware components but will be manifested within many
operating systems, firmware, application software and equipment used throughout
an organization. Dictaphone has been and continues to be actively engaged in
resolving its Year 2000 issues. The Company has established a Year 2000 Project
Office charged with evaluating the Company's Year 2000 issues and identifying
and developing appropriate remedies and action plans with respect to the
Company's internal systems and the Company's products to ensure a smooth
transition into the new millennium.
The Year 2000 Project Office has adopted a five phase program to
address the Company's Year 2000 issues consisting of Phase I - review and
inventory of existing systems, products, equipment and suppliers that may be
affected by the Year 2000 issue; Phase II - assessment of the impact of the Year
2000 issue on systems, products, equipment and suppliers; Phase III -
remediation or replacement of non-compliant systems, products and equipment and
determination and implementation of solutions to address non-compliant suppliers
and vendors; Phase IV testing of systems, product and equipment following
remediation; and Phase V - contingency planning.
16
<PAGE>
The Company's Year 2000 efforts have been concentrated in two major
areas: 1) internal use systems, equipment and third party products used in the
Company's operations and 2) products sold by the Company to its customers.
STATE OF READINESS
The Company is utilizing both internal and external resources to
perform Year 2000 testing on its internal systems and equipment. The Company has
completed Phase I of the program and has made substantial progress on Phases II,
III and IV for all of its critical systems and equipment. The Company
anticipates completion of the work required on the remaining systems and
equipment by mid 1999. In connection with the Company's efforts to make its
internal systems Year 2000 compliant, the Company has accelerated the
implementation of a new enterprise-wide computer system in certain areas. The
implementation timetable for the components of the new system is currently on
schedule and will be completed by mid 1999.
With respect to third party suppliers, in early 1998 the Company began
the process of identifying and prioritizing critical suppliers and vendors and
initiated communication concerning their plans to address the Year 2000 issue.
This process is continuing and the Company believes efforts in this area will
continue throughout 1999 as more information becomes available from these third
parties.
With respect to products sold to the Company's customers, the Company
has completed Phase I of the program and is actively engaged in Phases II, III
and IV. The Company has identified certain products which require remediation
and is actively involved in the development and communication of such
remediations to the Company's customers. Based on current estimates, the Company
anticipates completion of these phases by mid 1999.
Many of the Company's products rely on third party hardware, software
and firmware. The Company has been diligently working with all such third
parties to ascertain their readiness and the affect, if any, of their products'
compliance status on the efficient and effective operation and use of the
Company's products. Generally, all software, hardware and firmware are supplied
to the Company by leading software companies that have Year 2000 programs of
their own. A majority of these vendors have provided information to the Company
as to their products' Year 2000 compliance status. However, there can be no
guarantee that the software, hardware or firmware certified by third parties, on
which the Company's products may rely, will operate effectively and efficiently
during and after the millennium. The Company has, however, conducted its own
Year 2000 testing on integrated products and believes that the risk of material
operating failures associated with the components provided by these third
parties is consistent with their product representations concerning Year 2000
compliance.
COSTS
The Company estimates that the aggregate costs of its Year 2000 program
will be approximately $12.5 million, including $8.5 million of costs already
incurred. Of the total program costs, approximately $9.0 million represents new
software and hardware purchases for internal Company systems which have been
accelerated in connection with the Year 2000 issue. A significant portion of the
remaining $3.5 million in costs have not been and will not consist of
incremental costs, but rather will represent the redeployment of existing
Company resources. This redeployment of resources is not expected to have a
significant impact on the day to day operations of the Company. Based on current
estimates and information, the Company does not anticipate that these costs
associated with Year 2000 issues will have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows
in future periods. However, these cost estimates, as well as the project
timetables previously mentioned are based on management's best estimates, and
there can be no guarantee that these estimates will be achieved or that actual
results will not materially differ from these estimates.
RISKS
With respect to the Company's internal systems, the most reasonably
likely worst case scenario for the Company's failure to identify or remediate a
17
<PAGE>
Year 2000 problem could be an interruption in, or failure of, certain normal
business activities or operations. Such failures could materially and adversely
affect the Company's results of operations, liquidity and financial condition.
In addition, due to the uncertainty of the Year 2000 readiness of third parties
and suppliers and customers, the Company is unable to determine at this time
whether the consequences of the Year 2000 failures by these parties will have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
The Company's Year 2000 program, however, is expected to significantly
reduce the Company's exposure to these types of failures. The Company believes
that the implementation of new systems and the timely completion of the Year
2000 program should reduce the risk of internal business interruption and
adverse financial impact.
With respect to products sold to customers, the most reasonably likely
worst case scenario for Year 2000 related product failures could include the
suspension of use of such product, or continued use of the product with reduced
functionality or operating ability. If this were to occur, customers could
attempt to assert liability claims against the Company. However, the Company
believes that, based on the level of Year 2000 testing performed to date, the
product remedies expected to be made available to its customers, the time
remaining to implement such remedies, and the legal defenses available to the
Company, the likelihood of the occurrence of such worst case scenario is
minimized.
CONTINGENCY PLANS
Contingency plans are being prepared so that critical business
functions will continue to operate. These plans will address the Company's
internal systems and equipment, products sold by the Company to customers and
third party supplier relationships. The contingency plans will include manual
alternatives to electronic processes, repair or replacement of products and
systems and changes in suppliers. The Company expects that contingency planning
will continue throughout 1999, and will further evolve as the Company obtains
additional information on the state of its Year 2000 readiness.
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. Because the Company wishes to take advantage of the "safe harbor"
provision of the Private Securities and Litigation Reform Act of 1995, readers
are cautioned to consider, among others, those risks previously discussed
herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's cash flows and earnings are subject to fluctuations from
changes in interest rates and, to a lesser extent, foreign currency exchange
fluctuations. See "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" for
further information on interest rate risk.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
1998 ------------- ------------- ------------- -------------
----
<S> <C> <C> <C> <C>
Total revenue................ $ 83,825 $ 84,985 $ 85,876 $ 77,632
Cost of sales, rentals and support
services.................... 45,012 46,957 45,131 51,588
Net loss .................... (10,845) (10,711) (5,384) (26,750)(a)
Net loss applicable to
Common Stock................ $ (11,574) $ (11,466) $ (6,166) $ (27,558)
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
1997 ------------- ------------- ------------- -------------
----
Total 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) (b) (6,023) (35,285)(c)
Net loss applicable to
Common Stock................ $ (8,469) $ (19,758) $ (6,704) $ (35,990)
</TABLE>
- ---------------------
(a) Net loss includes after tax charges of $3.1 million for product
obsolescence, $2.7 million for severance and restructuring charges and
a $11.1 million increase to the deferred tax valuation allowance.
(b) Net loss includes after tax charges of $6.7 million for digital product
obsolescence and $1.5 million for severance.
(c) 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.
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Dictaphone Corporation
We have audited the accompanying consolidated balance sheets of Dictaphone
Corporation and Subsidiaries (the "Company") as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the years ended December 31, 1998, 1997 and 1996.
Our audits also included the financial statement schedule as of and for the
years ended December 31, 1998, 1997 and 1996 listed in the Index as 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 the Company at December 31, 1998
and 1997, and the results of its operations and its cash flows for the years
ended December 31, 1998, 1997 and 1996 in conformity with generally accepted
accounting principles. Also, in our opinion, the financial statement schedule as
of and for the years ended December 31, 1998, 1997 and 1996, 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
Hartford, Connecticut
February 3, 1999
20
<PAGE>
<TABLE>
DICTAPHONE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
<CAPTION>
ASSETS DECEMBER 31, 1997 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,277 $ 11,727
Accounts receivable, less allowance of
$810 and $968, respectively 71,939 77,432
Inventories 48,779 53,362
Other current assets 11,675 7,259
----------- -----------
Total current assets 142,670 149,780
Property, plant and equipment, net 35,331 32,425
Deferred financing costs, net of accumulated
amortization of $12,517 and $14,246, respectively 10,900 9,920
Intangibles, net of accumulated amortization of $99,439
and $122,595, respectively 229,322 206,122
Deferred tax asset 39,539 39,765
Other assets 12,280 16,315
----------- -----------
Total assets $ 470,042 $ 454,327
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,940 $ 8,778
Interest payable 10,144 10,067
Accrued pension liability 7,571 8,352
Accrued liabilities 24,802 31,433
Advance billings 37,184 39,586
Current portion of long-term debt 795 795
----------- -----------
Total current liabilities 91,436 99,011
Long-term debt 342,816 369,737
Other liabilities 10,529 14,141
----------- -----------
Total liabilities 444,781 482,889
----------- -----------
Commitments, contingencies and concentration of risks (Note 11)
Stockholders' equity:
Preferred stock ($.01 par value; 10,000,000 shares
authorized; 2,084,100 and 2,391,500 shares of 14% PIK
perpetual preferred stock issued and outstanding, liquidation
values of $20,841 and $23,915 at December 31, 1997 and
1998, respectively) 20,841 23,915
Common stock ($.01 par value; 20,000,000 shares
authorized; 12,952,000 and 12,934,000 shares outstanding
at December 31, 1997 and 1998, respectively) 130 130
Notes receivable from stockholders (831) (741)
Additional paid-in capital 124,029 120,955
Treasury stock, at cost (48,000 and 66,000 shares
at December 31, 1997 and 1998, respectively) (480) (660)
Accumulated deficit (116,756) (170,417)
Accumulated other comprehensive loss (1,672) (1,744)
----------- -----------
Total stockholders' equity (deficit) 25,261 (28,562)
----------- -----------
Total liabilities and stockholders' equity $ 470,042 $ 454,327
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
<TABLE>
DICTAPHONE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues:
Product sales and rentals $ 199,024 $ 202,894 $ 197,330
Contract manufacturing sales 40,614 42,864 47,063
Support services 92,830 94,284 87,925
----------- ----------- -----------
Total revenue 332,468 340,042 332,318
----------- ----------- -----------
Costs and expenses:
Cost of sales, rentals and support
services 181,148 194,432 188,688
Selling and administrative 108,008 114,263 116,716
Amortization of intangibles 41,209 41,262 23,156
Research and development 14,135 14,705 17,128
----------- ----------- -----------
Operating loss (12,032) (24,620) (13,370)
Interest expense 42,897 44,438 39,715
Other (income) expense - net (1,338) 224 (273)
----------- ----------- -----------
Loss before income taxes (53,591) (69,282) (52,812)
Income tax benefit (expense) 18,931 1,060 (878)
----------- ----------- -----------
Net loss (34,660) (68,222) (53,690)
Stock dividends on PIK Preferred Stock 2,327 2,699 3,074
----------- ----------- -----------
Net loss applicable to Common Stock $ (36,987) $ (70,921) $ (56,764)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
22
<PAGE>
<TABLE>
DICTAPHONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Operating activities:
Net loss $ (34,660) $ (68,222) $ (53,690)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization (including
$5,775, $8,114 and $17, respectively, of
nonrecurring charges) 71,135 68,515 39,895
Provision for deferred income taxes (18,876) (1,767) (227)
Non-cash charge for product obsolescence
(Note 4) --- 14,902 4,999
Changes in assets and liabilities:
Accounts receivable 3,320 (18,869) (5,749)
Inventories 3,833 (4,528) (9,735)
Other current assets (513) (1,876) 4,690
Accounts payable and accrued liabilities (5,672) 5,896 4,922
Advance billings 167 2,502 2,523
Other assets and other (12,416) (10,996) (16,051)
---------- ---------- -----------
Net cash provided by (used in) operating 6,318 (14,443) (28,423)
activities ---------- ---------- -----------
Investing activities:
Payments for acquisition (8,000) --- ---
Net investment in fixed assets (6,225) (5,899) (8,851)
Proceeds from sale of building --- --- 14,000
---------- ---------- -----------
Net cash (used in) provided by investing (14,225) (5,899) 5,149
activities ---------- ---------- -----------
Financing activities:
Borrowings under term loan facility --- 62,750 ---
Repayment under term loan facility (7,750) (71,000) (2,427)
Proceeds from sale of common stock --- 35,000 ---
Borrowings under revolving credit facility 32,000 88,600 79,000
Repayment under revolving credit facility (23,000) (88,600) (49,500)
International borrowing, net 1,277 (717) (150)
Payment of deferred financing costs (791) (2,927) (749)
Repayment under capital lease obligations (198) (266) (1,355)
Repayment of management loans 108 221 90
Payments to acquire treasury stock (100) (280) (180)
Other --- --- 29
---------- ---------- -----------
Net cash provided by financing activities 1,546 22,781 24,758
---------- ---------- -----------
Effect of exchange rate changes on cash 9 (89) (34)
---------- ----------- ------------
(Decrease) increase in cash (6,352) 2,350 1,450
Cash and cash equivalents, beginning of period 14,279 7,927 10,277
---------- ---------- -----------
Cash and cash equivalents, end of period $ 7,927 $ 10,277 $ 11,727
========== ========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 38,142 $ 38,372 $ 38,001
========== ========== ===========
Income taxes paid $ 1,960 $ 1,039 $ 432
========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
<TABLE>
DICTAPHONE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
<CAPTION>
NOTES ACCUMULATED
RECEIVABLE ADDITIONAL OTHER COMPREHENSIVE TOTAL
PREFERRED COMMON FROM TREASURY PAID-IN ACCUMULATED COMPREHENSIVE EARNINGS EQUITY
STOCK STOCK STOCKHOLDERS STOCK CAPITAL DEFICIT INCOME (LOSS) (LOSS) (DEFICIT)
--------- -------- ------------ -------- ---------- ----------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 $ 15,815 $ 95 $ (1,160) $ (100) $ 94,090 $(13,874) $ (363) $ --- $ 94,503
Net loss --- --- --- --- --- (34,660) --- (34,660) (34,660)
Stock dividends 2,327 --- --- --- (2,327) --- --- --- ---
Repayment of
management loans --- --- 108 --- --- --- --- --- 108
Stock repurchase --- --- --- (100) --- --- --- --- (100)
Translation loss --- --- --- --- --- --- (473) (473) (473)
------- -------- -------- -------- -------- -------- --------- --------- --------
Comprehensive loss (35,133)
========
Balance at
December 31, 1996 18,142 95 (1,052) (200) 91,763 (48,534) (836) --- 59,378
Net loss --- --- --- --- --- (68,222) --- (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
Stock repurchase --- --- --- (280) --- --- --- --- (280)
Translation loss --- --- --- --- --- --- (836) (836) (836)
------- -------- -------- -------- -------- -------- --------- -------- --------
Comprehensive Loss (69,058)
========
Balance at
December 31, 1997 20,841 130 (831) (480) 124,029 (116,756) (1,672) --- 25,261
Net loss --- --- --- --- --- (53,690) --- (53,690) (53,690)
Stock dividends 3,074 --- --- --- (3,074) --- --- --- ---
Repayment of
management loans --- --- 90 --- --- --- --- --- 90
Stock repurchase --- --- --- (180) --- --- --- --- (180)
Translation loss --- --- --- --- --- --- (72) (72) (72)
Disposal of
Dictaphone --- --- --- --- --- 29 --- 29 29
Netherlands BV ------- -------- -------- -------- -------- --------- -------- --------- ---------
$(53,733)
Comprehensive Loss =========
Balance at
December 31, 1998 $ 23,915 $ 130 $ (741) $ (660) $120,955 $(170,417) $ (1,744) $(28,562)
======== ======== ========= ========= ======== ========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
DICTAPHONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts 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. The Company has two operating segments, System Products
and Services and Contract Manufacturing. The System Products and
Services segment consists of the sale and service of system-related
products to dictation and voice management and communications recording
system customers in selected vertical markets. Dictaphone markets these
products worldwide with 88% of its revenue generated from the U.S.
market. The Contract Manufacturing segment consists of manufacturing
operations which provides outside electronic manufacturing services to
original equipment manufacturers in the telecommunications, data
management, computer and electronics industries.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF 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.
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.
25
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY VALUATION. Inventories are valued at the lower of
cost or market. Cost is determined on the first-in, first-out (FIFO)
method.
COMPUTER SOFTWARE DEVELOPMENT COSTS. The Company capitalizes
certain software costs (approximately $6,945, $6,225 and $10,249 for
the years ended December 31, 1996, 1997 and 1998, 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. Amortization expense in
1996, 1997 and 1998 related to the capitalized amounts was $1,418,
$5,821 and $5,542, 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 three 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 amortized ratably into income as
earned.
REVENUE. Revenue is recognized when earned. In accordance with
American Institute of Certified Public Accountants Statements of
Position 97-2 and 98-4, "Software Revenue Recognition", for products
with a significant software element, the Company records revenue
attributable to the hardware and software elements upon shipment and
defers revenue attributable to undelivered elements (principally
installation and training) to the periods in which the related
obligations are performed. Revenue for all other products is recognized
when the related service is performed.
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.
26
<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 and
cap 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 other comprehensive income
(loss) within the stockholders' equity section of the consolidated
balance sheet. Foreign currency gains and losses resulting from
transactions are included in results of operations.
STOCK-BASED COMPENSATION. 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.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Raw materials and work in process $ 18,481 $ 15,799
Supplies and service parts 14,087 15,376
Finished products 16,211 22,187
----------- -----------
Total inventories $ 48,779 $ 53,362
=========== ===========
</TABLE>
With the commencement of 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 was replacing. During 1997,
these non-cash charges totalled $14.9 million.
In December 1998, after assessing prospective sales, the
Company recorded a non-cash charge of $5.0 million associated with the
provision for excess inventory related to the Company's Boomerang(TM),
Insight(TM), FTR(TM) and Synergy(TM) products.
27
<PAGE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------- ------------
<S> <C> <C>
Land $ 1,766 $ 1,058
Buildings 17,228 10,030
Machinery and equipment 47,497 56,100
----------- -----------
Subtotal 66,491 67,188
Accumulated depreciation (31,160) (34,763)
----------- -----------
Property, plant and equipment, net $ 35,331 $ 32,425
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1996,
1997 and 1998 was $15,130, $7,739 and $7,898, respectively.
In May 1998, the Company entered into a sale/leaseback
agreement for the sale of its Stamford, CT land and headquarters
facility for total proceeds of $14 million. The Company realized a gain
on the sale of $1.8 million. The gain has been deferred and is being
recognized over the term of the operating lease of 20 years.
6. INTANGIBLES
The following summarizes intangible assets, net of accumulated
amortization and writedowns of $99,439 and $122,595 for the years ended
December 31, 1997 and 1998, respectively. In 1997, the Company recorded
a non-cash pretax charge of $5.4 million to writedown certain patents
and associated goodwill to their fair value. Amortization expense for
the years ended December 31, 1997 and December 31, 1998 was $41,262 and
$23,156, respectively.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------- ------------
<S> <C> <C>
Goodwill $ 135,004 $ 127,611
Tradenames 73,211 71,265
Service contracts 8,920 2,530
Non-compete agreement 11,696 2,463
Patents 491 2,253
----------- -----------
$ 229,322 $ 206,122
=========== ===========
</TABLE>
7. DEBT
The following summarizes the debt structure of the Company:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------- ------------
<S> <C> <C>
Current portion of long-term debt $ 795 $ 795
----------- -----------
Long-term debt:
Senior debt:
Term loans:
Tranche B 71,250 69,450
Tranche C 62,122 61,495
Revolving credit loans 9,000 38,500
International debt 444 292
Subordinated notes 200,000 200,000
----------- -----------
Total long-term debt 342,816 369,737
----------- -----------
Total debt $ 343,611 $ 370,532
=========== ===========
</TABLE>
28
<PAGE>
In connection with the financing of the Acquisition, the
Company entered into a Credit Agreement, dated August 7, 1995, as
amended by five amendments to Credit Agreement, dated June 28, 1996,
June 27, 1997, July 21, 1997, November 14, 1997 and December 31, 1998
(collectively, the "Credit Agreement") with a syndicate of financial
institutions for whom Bankers Trust Company ("Bankers Trust") is the
Administrative Agent and NationsBank, N.A. (Carolinas) ("Nations") is
the Documentation Agent.
The fifth amendment to the Credit Agreement provided for (i) a
waiver of compliance with the financial covenants by the Company as of
December 31, 1998 and for the four-Fiscal Quarter periods then ended,
(ii) modifications to the covenants and related definitions in respect
of certain asset sales and the utilization of the proceeds from such
asset sales, (iii) modifications to the required Maximum Leverage,
Minimum EBITDA and Minimum Interest Coverage Ratio covenants (as
defined in the Credit Agreement), (iv) a change in the maturity date of
the Tranche C Loans to be equal to that of the Tranche B Loans, and (v)
an increase in the interest rate on the Tranche B Loans to be equal to
that of the Tranche C Loans. 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, 2002, 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.
At December 31, 1998, the Company had Term Loans of $131,573
and loans of $38,500 outstanding under the Revolving Credit Facility.
The maturity schedule relating to the $131,573 of outstanding Term
Loans is as follows:
1999 $ 628
2000 628
2001 36,328
2002 93,989
2003 ---
Thereafter ---
-----------
$ 131,573
===========
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 its term. The Revolving Credit Facility terminates March
31, 2001. Availability under the Revolving Credit Facility at December
31, 1998 was $1,500. The Company had outstanding letters of credit of
$1,430 as of December 31, 1998.
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 2.75% or
the reserve Eurodollar Rate plus 3.75%. 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
29
<PAGE>
7. DEBT (CONTINUED)
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 9.55%. No funds under
the swap agreements are actually borrowed or are to be repaid. The
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, 1998 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. On February 11, 1999, the Company entered into interest
rate cap agreements effective February 16, 1999, with an aggregate
notional principal amount equivalent to $66 million maturing on
February 16, 2001. The cap limits that portion of the Company's Term
Loans to a fixed rate component of 5.5%; thus reducing the impact of
increases in interest rates, limiting the effective interest rate on
fifty percent of the currently outstanding Term Loans to 9.25%. The
effective interest rate for the year ended December 31, 1998 was 8.90%,
9.35% and 8.38% on the Tranche B Loan, Tranche C Loan and the Revolving
Credit Facility, respectively.
Dictaphone Non-U.S. is not a guarantor of 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 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, 1998 was favorable $50.0 million, based on dealer quotes. The Notes
are fully and unconditionally guaranteed by Dictaphone U.S. The Notes
contain similar types of covenants to the Facilities and provides for
each noteholder to have the right to require that the Company
repurchase the Notes at 101% of the principal amount upon a change of
control as defined in the Note Indenture.
8. EQUITY AND STOCK OPTIONS
COMMON STOCK
On December 31, 1998, the Company had 20 million shares of
common stock, $.01 par value ("Common Stock") authorized of which
12,934,000 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 10).
At December 31, 1997 and 1998, the Company had 48,000 and
66,000 shares of treasury stock, respectively.
30
<PAGE>
8. EQUITY AND STOCK OPTIONS (CONTINUED)
PREFERRED STOCK AND WARRANT
The Company is authorized to issue up to 25,000,000 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 pari passu with the Convertible PIK Preferred
(as hereinafter defined) and ranks senior to all other classes and
series of stock of the Company with respect to dividend rights and
rights on liquidation, winding up and dissolution of the Company. The
PIK Preferred Stock 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 additional paid-in capital $2,327, $2,699 and
$3,074 for the years ended December 31, 1996, 1997 and 1998,
respectively, as a result of the required dividends representing
232,700, 269,900 and 307,400 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, 1998.
In connection with a January 1999 equity infusion of $20.0
million from Stonington, the Company issued 2,000,000 shares of newly
issued 12% Convertible Pay-In-Kind Preferred Stock ("Convertible PIK
Preferred"). The Convertible PIK Preferred is non-voting and has a
stated value and liquidation preference of $10 per share and carries a
cumulative pay-in-kind dividend of 12% per year payable quarterly in
arrears from January 28, 1999 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 percent). The Convertible PIK
Preferred has the same redemption rights as the PIK Preferred. The
Convertible PIK Preferred is convertible into Common Stock on a one to
one basis, subject to adjustments as described in the certificate of
designation for the Company's Convertible PIK Preferred.
Together with the issuance of the PIK Preferred Stock, the
Company issued a warrant to purchase 350,000 shares of 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 an exercise price of $10.00 per share
(estimated fair value of the Common Stock at date of grant) to
officers, key employees and non-employee directors of the Company. The
Plan provides that one-half of the options (service-based options)
granted under the Plan will vest automatically over a five year period
and the other one-half (performance-based options) became eligible for
vesting as to 10% on April 15, 1996, as to 20% on April 15, 1997, as to
20% on April 15, 1998 and the remaining options become eligible for
vesting as to an additional 20% on each of April 15, 1999 and 2000,
31
<PAGE>
8. EQUITY AND STOCK OPTIONS (CONTINUED)
MANAGEMENT STOCK OPTION PLAN (CONT.)
with the remaining 10% becoming eligible for vesting 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 performance in 1995, 1996, 1997
and 1998, the Company's Board of Directors determined that the
following eligible performance-based options would vest: 60% on April
15, 1996, 0% on April 15, 1997, 0% on April 15, 1998 and 0% on April
15, 1999. 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, all outstanding unvested
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:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Outstanding, beginning of year 683,000 650,000 1,096,500
Granted 89,000 551,500 141,500
Cancelled (122,000) (105,000) (171,000)
---------- ---------- -----------
Outstanding, end of year 650,000 1,096,500 1,067,000
========== ========= ===========
Exercisable, end of year 82,680 161,470 295,473
========== ========== ===========
</TABLE>
The exercise price for all options was $10.00
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 loss
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net loss As reported $(36,987) $(70,921) $(56,764)
Pro Forma $(37,182) $(71,503) $(57,051)
</TABLE>
32
<PAGE>
8. EQUITY AND STOCK OPTIONS (CONTINUED)
MANAGEMENT STOCK OPTION PLAN (CONT.)
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:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate 6.21% 5.72% 4.56%
Expected life 5 years 5 years 5 years
Expected volatility --- --- ---
Expected dividend yield --- --- ---
</TABLE>
9. INCOME TAXES
The (benefit) provision for income taxes for the years ended
December 31, 1996, 1997 and 1998 consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- ----------------- -----------------
Current:
<S> <C> <C> <C>
Federal $ --- $ --- $ ---
State --- --- ---
Foreign (55) 707 1,105
---------- ---------- ----------
Total $ (55) $ 707 1,105
---------- ---------- ----------
Deferred:
Federal $ (14,686) $ 1,059 $ 929
State (3,139) (2,203) 221
Foreign (1,051) (623) (1,377)
---------- ---------- ----------
Total (18,876) (1,767) (227)
---------- ---------- ----------
Total $ (18,931) $ (1,060) $ 878
========== ========== ==========
</TABLE>
The difference between the Company's effective income tax rate
and the United States statutory rate for the years ended December 31,
1996, 1997 and 1998 is reconciled below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
United States statutory rate 35.00% 35.00% 35.00%
State income taxes, net of Federal
income tax benefit 3.81% 4.32% 4.17%
Effect of foreign operations (1.39%) (0.17%) (3.55%)
Miscellaneous (2.09%) (2.83%) (1.73%)
Net operating loss carryforwards
with no anticipated benefit --- (34.79%) (35.54%)
------- -------- --------
Total 35.33% 1.53% (1.65%)
======= ======= ========
</TABLE>
See Footnote 12 for disaggregated information as to domestic
and foreign income before taxes.
33
<PAGE>
9. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities arise from the impact of
temporary differences between the amount of assets and liabilities
recognized for financial reporting purposes and such amounts recognized
for tax purposes and resulted from the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $ 33,321 $ 48,725
Amortization - identifiable intangibles 22,694 25,646
Postretirement and pension benefits 5,010 5,185
Inventory 3,010 5,130
Depreciation 3,683 4,809
Other 3,347 5,824
--------- ----------
Total gross deferred tax assets 71,065 95,319
--------- ----------
Less: valuation allowance (24,100) (44,868)
--------- ----------
Net deferred tax assets $ 46,965 $ 50,451
========= ==========
Deferred tax liabilities:
Amortization - goodwill $ (3,735) $ (5,481)
Capitalized software costs (2,240) (4,209)
Other (1,451) (996)
---------- ----------
Total deferred tax liabilities $ (7,426) $ (10,686)
========= ==========
</TABLE>
The Company has recorded a gross deferred tax asset of $95.3
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, 1998 is approximately $122.5 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, $40.0
million will expire in the year 2012, and $35.6 million will expire in
the year 2018. In order to fully realize the deferred tax asset, the
Company will need to generate future taxable income prior to expiration
of the net operating loss carryforwards. In 1997, the Company
established a valuation allowance of $24.1 million against the deferred
tax assets. During 1998, the Company increased its valuation allowance
by $20.8 million resulting in a net deferred tax asset of $50.5
million. Management believes, based upon the Company's history of prior
operating results, its current circumstances, and its expectations for
the future, that taxable income of the Company will more likely than
not be sufficient to fully utilize the net deferred tax asset of $50.5
million recorded for December 31, 1998, prior to expiration. The amount
of the deferred tax asset considered realizable, however, could be
reduced if estimates of future taxable income during the net operating
loss carryforward period are reduced.
10. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH STONINGTON CAPITAL APPRECIATION 1994 FUND, L.P.
In the first quarter of 1999, the Company received an
additional $20.0 million from the sale of 2,000,000 shares of
Convertible PIK Preferred Stock to Stonington.
Stonington, together with an affiliate of a limited partner of
Stonington, own 99.0% 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. Three of the seven members of the Board of Directors of the
Company are employees of an affiliate of Stonington and serve as
representatives of Stonington.
34
<PAGE>
10. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
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 was 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.
11. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK
CONCENTRATIONS OF RISKS
A substantial portion of the Company's revenues are derived
from the sale of products manufactured at the Company's manufacturing
facility which is located in Melbourne, Florida. This manufacturing
facility is subject to the normal hazards of any such facility that
could result in damage to the facility. Any such damage to this
facility or prolonged delay in the operations of this facility for
repairs or other reason would have a materially adverse effect on the
Company's financial position and results of operations.
COMMITMENTS
The Company leases certain factory and office facilities under
lease agreements extending from one to twenty-five years. In addition
to factory and office facilities leased, the Company leases computer
and information processing equipment under lease agreements extending
from three to five years.
Future minimum lease payments for operating leases as of
December 31, 1998 are as follows:
YEARS ENDING DECEMBER 31,
1999 $ 5,421
2000 4,691
2001 3,545
2002 2,672
2003 2,479
Later years 24,792
-----------
Total minimum lease payments $ 43,600
===========
35
<PAGE>
11. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK (CONTINUED)
COMMITMENTS (CONT.)
Rental expense under operating leases was $5,168, $5,073 and
$4,952 for the years ended December 31, 1996, 1997 and 1998,
respectively.
CONTINGENCIES
On February 14, 1995, Pitney Bowes, Inc. ("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 final stage of discovery. A trial date
is likely to be set in 1999. Pitney Bowes and the Company have not yet
received Sudbury's revised damages report nor has Sudbury's damages
expert given deposition testimony. Accordingly, at this time, the
Company cannot 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. As these proceedings are at a preliminary stage, 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 $11 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.
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.
36
<PAGE>
12. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION
Dictaphone Corporation has fully and unconditionally
guaranteed the repayment of the Notes. 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.
The following are the supplemental consolidating statement of
operations and cash flow information for the years ended December 31,
1996, 1997 and 1998, and the supplemental consolidating balance sheet
information as of December 31, 1997 and 1998.
<TABLE>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, 1996
<CAPTION>
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------- ------------
Revenue from:
<S> <C> <C> <C> <C>
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 126,057 23,160 --- 149,217
Research and development 14,135 --- --- 14,135
Interest expense - net and other 40,387 1,158 14 41,559
---------- ---------- ---------- ----------
Total costs and expenses 344,331 53,419 (11,691) 386,059
---------- ---------- ---------- ----------
Equity (loss) earnings (7,024) --- 7,024 ---
---------- ---------- ---------- ----------
(Loss) income before income taxes (54,478) (5,671) 6,558 (53,591)
Income tax benefit 17,508 1,232 191 18,931
---------- ---------- ---------- ----------
Net (loss) income $ (36,970) $ (4,439) $ 6,749 $ (34,660)
========== ========== ========== ==========
</TABLE>
37
<PAGE>
12. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (CONTINUED)
<TABLE>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, 1997
<CAPTION>
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------- ------------
Revenue from:
<S> <C> <C> <C> <C>
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 141,749 13,776 --- 155,525
Research and development 14,705 --- --- 14,705
Interest expense - net and other 42,111 2,551 --- 44,662
---------- ---------- ---------- ----------
Total costs and expenses 379,066 43,391 (13,133) 409,324
---------- ---------- ---------- ----------
Equity (loss) earnings (11,382) --- 11,382 ---
---------- ---------- ---------- ----------
(Loss) income before income taxes (80,466) (669) 11,853 (69,282)
Income tax benefit (expense) 1,163 87 (190) 1,060
---------- ---------- ---------- ----------
Net (loss) income $ (79,303) $ (582) $ 11,663 $ (68,222)
========== ========== ========== ==========
</TABLE>
38
<PAGE>
12. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (CONTINUED)
<TABLE>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, 1998
<CAPTION>
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------- ------------
Revenue from:
<S> <C> <C> <C> <C>
Product sales and rentals $ 189,818 $ 17,355 $ (9,843) $ 197,330
Contract manufacturing sales 47,063 --- --- 47,063
Support services 80,330 7,595 --- 87,925
---------- ---------- ---------- ----------
Total revenues 317,211 24,950 (9,843) 332,318
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales, rentals and support
services 183,066 16,002 (10,380) 188,688
Selling and administrative 126,691 13,174 7 139,872
Research and development 17,128 --- --- 17,128
Interest expense - net and other 36,482 2,960 --- 39,442
---------- ---------- ---------- ----------
Total costs and expenses 363,367 32,136 (10,373) 385,130
---------- ---------- ---------- ----------
Equity (loss) earnings (4,496) --- 4,496 ---
---------- ---------- ---------- ----------
(Loss) income before income taxes (50,652) (7,186) 5,026 (52,812)
Income tax (expense) benefit (1,405) 732 (205) (878)
---------- ---------- ---------- ----------
Net (loss) income $ (52,057) $ (6,454) $ 4,821 $ (53,690)
========== ========== ========== ==========
</TABLE>
39
<PAGE>
12. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (CONTINUED)
<TABLE>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION
DECEMBER 31, 1997
<CAPTION>
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------- ------------
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 8,276 $ 2,001 $ --- $ 10,277
Accounts receivable, less allowances 64,884 8,699 (1,644) 71,939
Inventories 45,962 3,645 (828) 48,779
Other current assets 7,869 3,806 --- 11,675
---------- ---------- ---------- ----------
Total current assets 126,991 18,151 (2,472) 142,670
Investments in subsidiaries 34,170 --- (34,170) ---
Property, plant and equipment, net 32,041 3,290 --- 35,331
Deferred financing costs 10,900 --- --- 10,900
Intangibles, net 214,070 15,252 --- 229,322
Other assets 49,131 2,365 323 51,819
---------- ---------- ---------- ----------
Total assets $ 467,303 $ 39,058 $ (36,319) $ 470,042
========== ========== =========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable, interest payable
and accrued liabilities $ 48,649 $ 6,602 $ (1,794) $ 53,457
Advance billings 34,252 2,932 --- 37,184
Current portion of long-term debt 628 167 --- 795
---------- ---------- ---------- ----------
Total current liabilities 83,529 9,701 (1,794) 91,436
Long-term debt 342,372 17,935 (17,491) 342,816
Other liabilities 10,477 52 --- 10,529
Stockholders' equity (deficit) 30,925 11,370 (17,034) 25,261
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 467,303 $ 39,058 $ (36,319) $ 470,042
========== ========== ========== ==========
</TABLE>
40
<PAGE>
12. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (CONTINUED)
<TABLE>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION
DECEMBER 31, 1998
<CAPTION>
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------- ------------
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 10,114 $ 1,613 $ --- $ 11,727
Accounts receivable, less allowances 75,447 6,782 (4,797) 77,432
Inventories 50,666 2,987 (291) 53,362
Other current assets 4,062 3,079 118 7,259
---------- ---------- ---------- ----------
Total current assets 140,289 14,461 (4,970) 149,780
Investments in subsidiaries 28,520 --- (28,520) ---
Property, plant and equipment, net 29,320 3,105 --- 32,425
Deferred financing costs 9,920 --- --- 9,920
Intangibles, net 192,492 13,630 --- 206,122
Other assets 52,028 4,052 --- 56,080
---------- ---------- ---------- ----------
Total assets $ 452,569 $ 35,248 $ (33,490) $ 454,327
========== ========== =========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable, interest payable
and accrued liabilities $ 53,100 $ 11,111 $ (5,581) $ 58,630
Advance billings 37,294 2,292 --- 39,586
Current portion of long-term debt 628 167 --- 795
---------- ---------- ---------- ----------
Total current liabilities 91,022 13,570 (5,581) 99,011
Long-term debt 369,445 17,783 (17,491) 369,737
Other liabilities 13,324 817 --- 14,141
Stockholders' equity (deficit) (21,222) 3,078 (10,418) (28,562)
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 452,569 $ 35,248 $ (33,490) $ 454,327
========== ========== ========== ==========
</TABLE>
41
<PAGE>
12. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (CONTINUED)
<TABLE>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31, 1996
<CAPTION>
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- -------------- ------------
Operating activities:
<S> <C> <C> <C> <C>
Net loss $ (32,696) $ (4,439) $ 2,475 $ (34,660)
Adjustments to reconcile net
loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 66,889 4,246 --- 71,135
Provision for deferred income taxes (17,633) (1,052) (191) (18,876)
Change in assets and liabilities:
Accounts receivable 1,053 167 2,100 3,320
Inventories 2,346 1,021 466 3,833
Other current assets (244) (204) (65) (513)
Accounts payable and
accrued liabilities (4,537) 900 (2,035) (5,672)
Advance billings 715 (548) --- 167
Other assets and other (8,228) (1,438) (2,750) (12,416)
---------- ---------- ---------- ----------
Net cash provided by (used in)
operating activities 7,665 (1,347) --- 6,318
---------- ---------- ---------- ----------
Investing activities:
Payment for acquisition (8,000) --- --- (8,000)
Net investment in fixed assets (5,007) (1,218) --- (6,225)
---------- ---------- ---------- ----------
Net cash used for investing activities (13,007) (1,218) --- (14,225)
---------- ---------- ---------- ----------
Financing activities:
Repayment under term loan facility (7,750) --- --- (7,750)
Borrowing from promissory notes (147) 147 --- ---
Borrowing under revolving credit
facility 32,000 --- --- 32,000
Repayment under revolving credit
facility (23,000) --- --- (23,000)
Other (783) 1,079 --- 296
----------- ---------- ---------- ----------
Net cash provided by financing activities 320 1,226 --- 1,546
---------- ---------- ---------- ----------
Effect of exchange rate changes on cash --- 9 --- 9
---------- ---------- ---------- ----------
Decrease in cash (5,022) (1,330) --- (6,352)
Cash and cash equivalents,
beginning of period 11,591 2,688 --- 14,279
---------- ---------- ---------- ----------
Cash and cash equivalents,
end of period $ 6,569 $ 1,358 $ --- $ 7,927
========== ========== ========== ==========
</TABLE>
42
<PAGE>
12. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (CONTINUED)
<TABLE>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31, 1997
<CAPTION>
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------- ------------
Operating activities:
<S> <C> <C> <C> <C>
Net loss $ (66,646) $ (582) $ (994) $ (68,222)
Adjustments to reconcile net
loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 65,115 3,400 --- 68,515
Provision for deferred income taxes (1,334) (623) 190 (1,767)
Non-recurring charge for digital
product obsolescence 13,426 1,476 --- 14,902
Change in assets and liabilities:
Accounts receivable (14,811) (1,165) (2,893) (18,869)
Inventories (8,442) 4,385 (471) (4,528)
Other current assets (1,907) 31 --- (1,876)
Accounts payable and
accrued liabilities 6,821 (3,815) 2,890 5,896
Advance billings 3,006 (504) --- 2,502
Other assets and other (12,323) 169 1,158 (10,996)
---------- ---------- ---------- ----------
Net cash (used in) provided by
operating activities (17,095) 2,772 (120) (14,443)
----------- ---------- ----------- ----------
Investing activities:
Net investment in fixed assets (4,962) (937) --- (5,899)
---------- ---------- ---------- ----------
Net cash used for investing activities (4,962) (937) --- (5,899)
---------- ---------- ---------- ----------
Financing activities:
Borrowing under term loan facility 62,750 --- --- 62,750
Repayment under term loan facility (71,000) --- --- (71,000)
Proceeds from sale of common stock 35,000 --- --- 35,000
Borrowing under revolving credit
facility 88,600 --- --- 88,600
Repayment under revolving credit
facility (88,600) --- --- (88,600)
Other (2,986) (1,103) 120 (3,969)
----------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities 23,764 (1,103) 120 22,781
---------- ---------- ---------- ----------
Effect of exchange rate changes on cash --- (89) --- (89)
---------- ---------- ---------- ----------
Increase in cash 1,707 643 --- 2,350
Cash and cash equivalents,
beginning of period 6,569 1,358 --- 7,927
---------- ---------- ---------- ----------
Cash and cash equivalents,
end of period $ 8,276 $ 2,001 $ --- $ 10,277
========== ========== ========== ==========
</TABLE>
43
<PAGE>
12. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31, 1998
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss $ (52,057) $ (6,461) $ 4,828 $ (53,690)
Adjustments to reconcile net
loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 36,987 2,908 --- 39,895
Provision for deferred income taxes 1,150 (1,377) --- (227)
Non-recurring charge for product
obsolescence 4,999 --- --- 4,999
Change in assets and liabilities:
Accounts receivable (10,563) 1,661 3,153 (5,749)
Inventories (9,703) 505 (537) (9,735)
Other current assets 3,807 678 205 4,690
Accounts payable and
accrued liabilities 3,978 4,731 (3,787) 4,922
Advance billings 3,042 (519) --- 2,523
Other assets and other (10,488) 87 (5,650) (16,051)
---------- ---------- ---------- ----------
Net cash (used in) provided by
operating activities (28,848) 2,213 (1,788) (28,423)
----------- ---------- ----------- ----------
Investing activities:
Net investment in fixed assets (8,224) (627) --- (8,851)
Proceeds from sale of building 14,000 --- --- 14,000
---------- ---------- ---------- ----------
Net cash provided by (used in) investing
activities 5,776 (627) --- 5,149
---------- ---------- ---------- ----------
Financing activities:
Repayment under term loan facility (2,427) --- --- (2,427)
Borrowing under revolving credit
facility 79,000 --- --- 79,000
Repayment under revolving credit
facility (49,500) --- --- (49,500)
Other (2,163) (1,940) 1,788 (2,315)
----------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities 24,910 (1,940) 1,788 24,758
---------- ---------- ---------- ----------
Effect of exchange rate changes on cash --- (34) --- (34)
---------- ---------- ---------- ----------
Increase/(decrease) in cash 1,838 (388) --- 1,450
Cash and cash equivalents,
beginning of period 8,276 2,001 --- 10,277
---------- ---------- ---------- ----------
Cash and cash equivalents,
end of period $ 10,114 $ 1,613 $ --- $ 11,727
========== ========== ========== ==========
</TABLE>
44
<PAGE>
13. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION
Dictaphone has two reportable segments: System Products and
Services, and Contract Manufacturing. The System Products and Services
segment consists of the sale and service of system-related products to
dictation and voice management and communications recording system
customers in selected vertical markets. The Contract Manufacturing
segment consists of the manufacturing operations of Dictaphone which
provides outside electronics manufacturing services to original equipment
manufacturers in the telecommunications, data management, computer and
electronics industries.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. Dictaphone
evaluates performance based on profit or loss from operations before
income taxes, including nonrecurring gains and losses and foreign
exchange gains and losses.
<TABLE>
DICTAPHONE CORPORATION
SEGMENT PROFIT AND LOSS
<CAPTION>
SYSTEM
PRODUCTS & CONTRACT
SERVICES MANUFACTURING TOTAL
---------- ------------- -----
<S> <C> <C> <C> <C>
Revenue from external customers 1998 $ 285,255 $ 47,063 $ 332,318
1997 297,178 42,864 340,042
1996 291,854 40,614 332,468
Intersegment revenues 1998 --- 54,411 54,411
1997 --- 55,919 55,919
1996 --- 53,531 53,531
Interest expense, net 1998 39,442 --- 39,442
1997 44,662 -- 44,662
1996 41,559 --- 41,559
Depreciation and amortization 1998 38,240 1,655 39,895
1997 66,534 1,981 68,515
1996 67,004 4,131 71,135
Segment profit 1998 (57,424) 4,612 (52,812)
1997 (76,036) 6,754 (69,282)
1996 (56,116) 2,525 (53,591)
Segment assets 1998 444,979 43,805 488,784
1997 459,607 51,050 510,657
1996 499,274 43,957 543,231
Expenditures for segment assets 1998 (8,503) (348) (8,851)
1997 (5,754) (145) (5,899)
1996 (6,025) (200) (6,225)
</TABLE>
45
<PAGE>
13. DISCLOSURES ABOUT SEGMENTS ON AN ENTERPRISE AND RELATED
INFORMATION (CONTINUED)
<TABLE>
GEOGRAPHIC INFORMATION
<CAPTION>
LONG-LIVED
REVENUES ASSETS
-------- ----------
<S> <C> <C> <C>
United States 1998 $ 293,321 $ 312,280
1997 288,906 340,312
1996 280,447 385,920
Canada 1998 11,641 5,320
1997 16,659 5,439
1996 14,439 6,444
Europe 1998 19,492 15,467
1997 25,156 15,468
1996 30,982 16,669
Latin America 1998 3,625 ---
1997 3,674 ---
1996 1,890 ---
Far East 1998 4,239 ---
1997 5,647 ---
1996 4,710 ---
Adjustments 1998 --- (28,520)
1997 --- (33,847)
1996 --- (32,499)
TOTAL 1998 332,318 304,547
1997 340,042 327,372
1996 332,468 376,534
REVENUE RECONCILIATION
Total revenue for reportable segments 1998 $ 386,729
1997 395,961
1996 385,999
Elimination of intersegment revenues 1998 (54,411)
1997 (55,919)
1996 (53,531)
TOTAL CONSOLIDATED REVENUES 1998 332,318
1997 340,042
1996 332,468
</TABLE>
46
<PAGE>
13. DISCLOSURES ABOUT SEGMENTS ON AN ENTERPRISE AND RELATED
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
ASSET RECONCILIATION
<S> <C> <C>
Total assets for reportable segments 1998 $ 488,784
1997 510,657
1996 543,231
Adjustments 1998 (34,457)
1997 (40,615)
1996 (38,396)
CONSOLIDATED TOTAL 1998 454,327
1997 470,042
1996 $ 504,835
</TABLE>
14. PENSION AND OTHER POSTRETIREMENT BENEFITS
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
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 1998, the Company matched 50% of employee
contributions up to 4% of eligible compensation, subject to certain
limitations. Total Company contributions were $345, $840 and $1,181 for
the years ended December 31, 1996, 1997 and 1998, respectively.
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.
The following table sets forth the amounts recognized in the
Company's balance sheet at December 31, 1997 and 1998 for Company
sponsored defined benefit pension plans and postretirement benefit
plans.
47
<PAGE>
14. PENSION AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
--------------------- ------------------------
1997 1998 1997 1998
RECONCILIATION OF PROJECTED BENEFIT OBLIGATION
<S> <C> <C> <C> <C>
Projected benefit obligation at beginning of year $ 44,129 $ 50,182 $ 9,550 $ 10,946
Service cost 2,185 2,393 630 668
Interest cost 3,197 3,499 685 353
Benefits paid (1,400) (1,778) (226) (289)
Actuarial (gain) or loss 2,354 3,683 347 (5,621)
Foreign exchange (283) (10) --- ---
---------- ---------- ---------- ----------
Projected benefit obligation at end of year 50,182 57,969 10,986 6,057
---------- ---------- ---------- ----------
RECONCILIATION OF ASSETS
Assets at beginning of year 44,558 51,954 --- ---
Actual return on plan assets 8,409 7,632 --- ---
Employer contributions 279 372 226 289
Benefits paid (1,400) (1,778) --- ---
Foreign exchange 108 (405) (226) (289)
---------- ---------- ---------- ----------
Fair value of plan assets at end of year 51,954 57,775 --- ---
---------- ---------- ---------- ----------
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS
Vested benefit obligation 38,449 45,652 --- ---
Accumulated benefit obligation 42,480 49,525 10,986 6,057
Projected benefit obligation 50,182 57,969 --- ---
Plan assets at fair value 51,954 57,775 --- ---
Projected benefit obligation (in excess of) or less than
plan assets 1,772 (194) (10,986) (6,057)
Unrecognized net (gain) or loss (5,004) (4,072) 1,264 (3,692)
Prior service cost not yet recognized in net periodic
benefit cost --- --- --- ---
Unrecognized net obligation (asset) existing at year end (989) (769) --- ---
--------- -------- ---------- ----------
Prepaid benefit cost (liability) recognized in the
statement of financial position (4,221) (5,035) (9,722) (9,749)
--------- -------- ---------- ----------
Net periodic benefit cost included in the following components:
Service cost - benefits earned during the year 2,185 2,393 630 668
Interest on projected benefit obligation 3,197 3,499 685 353
Expected return on assets (4,138) (4,682) --- ---
Amortization of transitional assets at beginning of year (205) (204) --- ---
Amortization of prior service cost at beginning of year --- --- --- ---
Amortization of (gain)/loss at beginning of year (126) (80) (3) (656)
--------- -------- ---------- ----------
Net periodic benefit cost $ 913 $ 926 $ 1,312 $ 365
--------- -------- ---------- ----------
Discount rate for net periodic benefit cost 7.50% 6.78% 7.50% 7.00%
Discount rate for disclosure information 7.07% 6.73% 7.00% 6.75%
Salary increase assumption 4.97% 4.56% 4.75% 4.75%
Long term rate of return on assets 9.35% 8.87% --- ---
</TABLE>
<TABLE>
<CAPTION>
1 PERCENTAGE 1 PERCENTAGE
POINT INCREASE POINT INCREASE
-------------- --------------
<S> <C> <C> <C>
Effect on total of service and interest cost components -- 1998 $ 61 $ (54)
-- 1997 167 N/A
Effect on postretirement benefit obligation -- 1998 252 (244)
-- 1997 1,177 N/A
</TABLE>
48
<PAGE>
SCHEDULE II
<TABLE>
DICTAPHONE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
- ----------------------------
Allowance for doubtful accounts $ 810 $ 1,872 $ 1,714 $ 968
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
</TABLE>
49
<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, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John H. Duerden ............... 58 Chairman, Chief Executive Officer and President
Joseph D. Skrzypczak........... 43 Chief Operating Officer and Director
Albert J. Fitzgibbons, III..... 53 Director
Emil F. Jachmann............... 52 Director
Alexis P. Michas............... 41 Director
Scott M. Shaw ............... 36 Director
Peter P. Tong ............... 57 Director
Joseph Delaney ............... 53 Senior Vice President, Customer Support
Ronald A. Elwell............... 38 Senior Vice President and General Manager, Communications
Recording Systems and International Operations
Daniel P. Hart ............... 40 Senior Vice President, General Counsel and Secretary
Thomas C. Hodge ............... 53 Senior Vice President, Manufacturing and Logistics
Robert G. Schwager............. 45 Senior Vice President and General Manager, Voice Systems
</TABLE>
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. and is on the Board of
Advisors of Outward Bound U.S.A.
50
<PAGE>
JOSEPH D. SKRZYPCZAK has been a Director of the Company since August
1995. Mr. Skrzypczak has served as Chief Operating Officer and Chief Financial
Officer since October 1998. Prior to being elected Chief Operating Officer, Mr.
Skrzypczak served as Senior Vice President and Chief Financial Officer from
October 1997 to October 1998 and served as Vice President and Chief Financial
Officer from May 1994 to October 1997. While serving in such capacity prior to
the Acquisition, Mr. Skrzypczak's 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.
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. and U.S. Foodservice.
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 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 Partner of Stonington Partners, a position that he has held since
February 1999. Prior to being elected Partner, Mr. Shaw had been a Principal of
Stonington Partners 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 Goss
Graphic Systems, Inc., United Artists Theater Circuit, Inc. and a privately held
company.
PETER P. TONG has served as a Director of the Company since February
1997. Mr. Tong is President of Mandarin Partners LLC, an investment partnership.
Mr. Tong was a private investor from 1996 to 1997. 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 a
Director of Packard BioScience Company and is also on the Boards of Directors of
several privately held companies.
51
<PAGE>
JOSEPH DELANEY has served as Senior Vice President, Customer Support
since October 1998. From October 1997 to October 1998, Mr. Delaney served as
Senior Vice President, Customer Service Operations and from June 1997 to October
1997 served as Vice President, Customer Service Operations. 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 and International Operations since October
1998. From October 1997 to October 1998, Mr. Elwell served as Senior Vice
President and General Manager, Communications Recording Systems, and from August
1997 to October 1997 as Vice President and General Manager, Communications
Recording Systems. 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 Company's 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
a consultant and private investor from 1994 to 1995.
THOMAS C. HODGE has served as Senior Vice President, Manufacturing and
Logistics since October 1997. From June 1989 to October 1997, Mr. Hodge served
as Vice President, Operations Manufacturing for the Company's facility in
Melbourne, Florida. Prior to June 1989, Mr. Hodge 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, Voice Systems since October 1998. Mr. Schwager served as Senior Vice
President and General Manager, Integrated Health Systems from October 1997 to
October 1998, and from August 1997 to October 1997 as Vice President and General
Manager, Integrated Health Systems. 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.
52
<PAGE>
Messrs. Fitzgibbons, Michas and Shaw serve as members of the Audit
Committee and the Compensation Committee (the "Compensation Committee"). Each of
Messrs. Fitzgibbons, 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 1998, 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 1998 and
the four other most highly compensated executive officers of the Company, whose
aggregate cash and cash equivalent compensation exceeded $100,000 (the "named
executives") during 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------- ---------------------------------------------
AWARDS PAYOUTS
------ -------
OTHER SECURITIES LONG-TERM
NAME AND ANNUAL UNDERLYING INCENTIVE PLAN ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION(1)($) OPTIONS (#) PAYOUTS ($) COMPENSATION ($)
- ------------------ ---- ---------- --------- ------------------ ----------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
John H. Duerden 1998 $1,033,269 $497,500 $199,844 --- --- $285,893(3)
Chairman, President 1997 985,981 497,500 95,713 325,000 --- 172,540
and Chief Executive 1996 660,000 660,000 108,407 --- --- 142,024
Officer
Joseph D. Skrzypczak, 1998 298,269 395,000(2) 41,863 20,000 --- 45,067(3)
Chief Operating 1997 239,171 137,500 12,455 --- --- 17,047
Officer 1996 167,607 140,791 11,828 --- --- 15,365
Robert G. Schwager, 1998 259,616 277,787 --- --- --- 3,579(3)
Senior VP & General 1997 199,796 77,500 --- --- --- 837
Manager, Voice 1996 184,377 106,933 --- --- --- 100
Systems
Daniel P. Hart, 1998 228,462 65,000 --- 3,000 --- 4,188(3)
Senior VP and 1997 172,669 77,000 --- 7,000 --- 2,690
General Counsel 1996 122,500 59,450 --- --- --- 100
Ronald A. Elwell, 1998 271,635 --- --- --- --- 5,100(3)
Senior VP & General 1997 191,333 77,500 --- 15,000 --- 2,970
Manager, Communica- 1996 151,389 77,760 88,501 --- --- 1,229
tions Recording Systems
and International Opera-
tions
</TABLE>
--------------------------------
(1) The amounts reported in this column for 1998, 1997 and 1996 for each of
Messrs. Duerden and Skrzypczak 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 aggregate
value of the perquisites and other personal benefits received by each of
Messrs. Duerden, Skrzypczak, Schwager and Hart in 1998, 1997 and 1996, and
53
<PAGE>
for Mr. Elwell in 1998 and 1997 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) Includes a one time payment in the amount of $250,000 paid in connection
with the termination of prior employment agreements. See "Employment and
Consulting Agreements."
(3) The compensation reflected in this column for 1998 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 1998 were
$0, $235,054 and $50,839 for Mr. Duerden; $2,523, $42,361 and $183 for Mr.
Skrzypczak; $3,479, $0 and $100 for Mr. Schwager; $4,023, $0 and $165 for
Mr. Hart; and $5,000, $0 and $100 for Mr. Elwell.
STOCK OPTION GRANTS
The following table sets forth information regarding grants of options to
purchase Common Stock during the fiscal year ended December 31, 1998 to each of
the named executives. No stock appreciation rights were granted during 1998.
<TABLE>
<CAPTION>
OPTION GRANTS IN 1998
INDIVIDUAL GRANTS
-----------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (3)
OPTIONS EMPLOYEES IN PRICE ($/ EXPIRATION ---------------------------
GRANTED(#) 1998(1) SHARE)(2) DATE (5%) (10%)
---------- ------- --------- ---------- ---- -----
NAME
<S> <C> <C> <C> <C> <C> <C>
John Duerden............ --- --- --- --- --- ---
Joseph D. Skrzypczak.... 20,000(4) 14% $10.00 11/20/08 $325,779 $518,748
Robert G. Schwager...... --- --- --- --- --- ---
Daniel P. Hart.......... 3,000(4) 2% 10.00 1/30/08 48,867 77,812
Ronald A. Elwell........ --- --- --- --- --- ---
</TABLE>
- --------------------------------
(1) The Company granted options to purchase a total of 141,500 shares of
Common Stock in 1998.
(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, 1998 was $10.00 (as determined by the Company's Board of
Directors).
(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on
the Common Stock over the term of the options. These assumptions are based
on rules promulgated by the Commission and do not reflect the Company's
estimate of future stock price appreciation. Actual gains, if any, on the
stock option exercises and common stock holdings are dependent on the
timing of such exercise and the future performance of the underlying
common stock. There can be no assurance that the rates of appreciation
assumed in this table can be achieved or that the amounts reflected will
be received by the option holder.
54
<PAGE>
(4) One-half of the options granted vest automatically over a five year
period and, of the other half, 6% were retroactively vested on April
15, 1996, 0% were vested on April 15, 1997 and 1998, 0% will be vested
on April 15, 1999 and the remaining will become eligible for vesting as
to an additional 20% on April 15, 2000, with the remaining 10% on April
15, 2001 if the Company attains certain predetermined financial
performance goals.
OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table sets forth information regarding the exercise of
stock options during fiscal 1998 and the number and year end value of
unexercised options held at December 31, 1998 by each of the named executives.
No stock appreciation rights were exercised by the named executives during
fiscal 1998.
<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISES IN FISCAL 1998
AND FISCAL 1998 OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY(1)
SHARES UNDERLYING UNEXERCISED (OPTIONS)
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------ ------------ ------------------------- -------------------------
NAME
- ----
<S> <C> <C> <C> <C>
John H. Duerden........... --- --- 177,633/357,367(2) $0/$0(4)
Joseph D. Skrzypczak...... --- --- 14,850/50,150(2) 0/0(4)
Robert G. Schwager........ --- --- 14,850/30,150(2) 0/0(4)
3,900 $167,206 4,000/0(3) 182,188/0(5)
Daniel P. Hart............ --- --- 11,300/28,700(2) 0/0(4)
Ronald A. Elwell.......... --- --- 12,900/32,100(2) 0/0(4)
468 15,049 0/0(3) 0/0(5)
</TABLE>
- -----------------------------
(1) Options are "in-the-money" if the fair market value of the underlying
securities exceeds the exercise price of the options.
(2) Represents options granted under the Company's Management Stock Option
Plan.
(3) Represents options granted under the Pitney Bowes Stock Option Plan
during the period 1985 through 1996. The numbers have been adjusted to
give effect to the 1986, 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, 1998 (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 $66.06 per
share, the fair market value of Pitney Bowes common stock issuable upon
exercise of options at December 31, 1998 and the exercise price of the
Pitney Bowes option, multiplied by the applicable number of options.
55
<PAGE>
PENSION PLANS
The Company currently maintains a non-contributory pension plan for all
employees (the "Pension Plan"). As of December 31, 1998, 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 -
$20,474; Mr. Skrzypczak - $54,219; Mr. Schwager - $73,572; Mr. Hart - $57,379;
and Mr. Elwell - $70,360. 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 - $22,036; Mr. Skrzypczak -
$73,008; Mr. Schwager - $88,658; Mr. Hart - $82,694; and Mr. Elwell - $98,107.
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.
<TABLE>
<CAPTION>
RETIREMENT PLAN TABLE
YEARS OF SERVICE
-------------------------------------------------------------
AVERAGE ANNUAL COMPENSATION 15 20 25 30 35
- --------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 130,000.................................. $24,120 $32,160 $40,200 $48,240 $56,280
160,000.................................. 30,870 41,160 51,450 61,740 72,030
</TABLE>
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.
56
<PAGE>
Mr. Duerden's Employment Agreement also provides that if he terminates
his employment without Good Cause (as defined therein) he will not, for two
years either (i) directly or indirectly, in any capacity, engage or participate
in, or become employed by or under advisory or consulting or other services in
connection with any Prohibited Business (as hereinafter defined) or (ii) make
any financial investment, whether in the form of equity or debt, or own any
interest, directly or indirectly, in any Prohibited Business. Notwithstanding
the foregoing, Mr. Duerden is not restricted from making any investment in any
company whose stock is listed on an American securities exchange or actively
traded in the over-the-counter market and has sales in excess of $500 million;
provided that (i) such investment does not give Mr. Duerden the right or ability
to control or influence the policy decisions of any Prohibited Business, and
(ii) such investment does not create a conflict of interest between Mr.
Duerden's duties under the Employment Agreement and his interest in such
investment. For purposes of the Employment Agreement "Prohibited Business" means
any dictation product or communications recording systems business located
within, or providing service to any area located within, any state or other
jurisdiction to which the Company (or any of its subsidiaries) provides
dictation products or communications recording systems services, or located
within, or providing service to any area located within, any other area within
the United States.
Pursuant to the Employment Agreement, if Mr. Duerden is terminated by the
Company without Cause or if he resigns for Good Reason (as defined therein)
during the term of the agreement, Mr. Duerden is entitled to receive a lump sum
payment equal to two times his base salary. Mr. Duerden is not entitled to
receive severance in connection with a termination for Cause or resignation for
other than Good Reason. Upon a termination of employment due to death or
Disability (as defined therein), the Company is required to pay Mr. Duerden or
his estate, as the case may be, an amount equal to the sum of the accrued annual
base salary as of the date of death or Disability and the accrued unpaid annual
bonus, if any, for the fiscal year prior to the date of death or Disability and
a pro-rata portion of the annual bonus accrued to the date of such death or
Disability.
Mr. Duerden's Employment Agreement also includes a provision requiring
the Company to establish an annual deferred annuity bonus arrangement (the
"Deferred Annuity Bonus Arrangement") on his behalf. The Company finalized the
Deferred Annuity Bonus Arrangement in February 1997. The intended annual benefit
to Mr. Duerden under the terms of the Deferred Annuity Bonus Arrangement is an
amount which is estimated to be equal to two-thirds of his average base salary
over the final three years of his employment (reduced by amounts receivable by
him from certain other pensions, profit sharing accounts and Social Security).
Benefits under the Deferred Annuity Bonus Arrangement are payable to Mr. Duerden
annually and are to be utilized by him for the purchase of an annuity contract
chosen and owned by him. As the owner of the annuity contract, Mr. Duerden has
the sole power to direct the investment funds held. The actual benefits under
the annuity contract are dependent upon Mr. Duerden's investment decision. Mr.
Duerden's entitlement to benefits under the Deferred Annuity Bonus Arrangement
vest in increments of one-twelfth for each full year of employment from his date
of hire.
As part of his employment arrangement, Mr. Duerden agreed to purchase
70,000 shares of the Company's Common Stock. Mr. Duerden purchased such shares
on August 11, 1995 with funds provided by the Company pursuant to an
interest-bearing non-recourse loan in the amount of $350,000. Mr. Duerden also
received 210,000 options under the Plan (as hereinafter defined). See
"Management Stock Option Plan". The 1995 options granted to, and Common Stock
purchased by, Mr. Duerden are subject to the same conditions as apply to other
Management Investors (as hereinafter defined), as described in the "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
vest in one-third increments on the first three anniversaries of the date of
grant. These 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, Schwager Hart and Elwell. The agreements have no fixed term
of employment. In the event of an involuntary termination of employment by the
Company for any reason other than for cause (as defined), Mr. Skrzypczak is
entitled to receive salary continuation for twenty-four months irrespective of
subsequent employment status and payable in accordance with the Company's
existing payroll practices. In the event of an involuntary termination of
employment by the Company for any reason other than for cause or substantial
underperformance (as defined), Mr. Hart is entitled to receive salary
57
<PAGE>
continuation for eighteen months after termination of employment without
mitigation and irrespective of subsequent employment status. At the conclusion
of the eighteen months of salary continuation, if Mr. Hart has not secured other
employment at that time, the Company will extend salary continuation for an
additional six months, on a month-by-month basis, as long as Mr. Hart, using
reasonable efforts, has not secured other employment. 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, the
Company's practice and policy is 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, including a pro-rated amount in respect of the
year in which termination occurs. In addition, Mr. Skrzypczak's bonus for 1998
was guaranteed to be not less than fifty percent (50%) of his base salary. In
October 1998, Mr. Skrzypczak entered into a new letter employment agreement with
the Company, the severance terms of which are reflected above. In addition, in
consideration of the termination of Mr. Skrzypczak's prior employment
agreements, the Company paid Mr. Skrzypczak the sum of $250,000 (which sum has
been included in the Summary Compensation Table).
Each of Messrs. Skrzypczak, Schwager, Hart and Elwell are also entitled
to receive senior executive outplacement services from a nationally recognized
outplacement firm and are entitled to continue 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 new employment
or the twelve month anniversary of the date of termination of employment.
Messrs. Skrzypczak, Schwager, Hart and Elwell are entitled to elect to receive a
cash amount equal to the cost of the above mentioned outplacement services in
lieu thereof. Each of Messrs. Skrzypczak, Schwager, Hart 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 arrangement with
Mr. Skrzypczak. The arrangement 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 1998, Mr.
Jachmann received $15,000 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 1998, Mr. Tong received no income for
consulting services. Mr. Tong is also entitled to receive $25,000 for services
as a Director.
MANAGEMENT STOCK OPTION PLAN
On August 11, 1995, the Company adopted the Management Stock Option Plan,
which was amended on April 27, 1996 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.
58
<PAGE>
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 granted prior to 1996, 10% were eligible for vesting on April 15, 1996,
20% were eligible for vesting on each of April 15, 1997 and April 15, 1998 and
the remaining options become eligible for vesting as to an additional 20% on
each of April 15, 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 performance in 1995, 1996, 1997 and 1998, the
Company's Board of Directors determined that the following eligible Performance
Options would vest: 60% on April 15, 1996, 0% on April 15, 1997 and 0% on April
15, 1998. In addition, the Board has determined that no eligible Performance
Options will vest on April 15, 1999. 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, all outstanding unvested 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.
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;
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<PAGE>
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, 1999, 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)................ 14,803,000 97.4%
767 Fifth Avenue
New York, New York 10153
John H. Duerden(3)................................................ 247,633 1.6%
Joseph D. Skrzypczak(3)........................................... 29,850 *
Robert G. Schwager(3)............................................. 29,850 *
Daniel P. Hart(3)................................................. 19,300 *
Ronald A. Elwell(3)............................................... 22,900 *
Albert J. Fitzgibbons, III(4)..................................... 14,803,000 97.4%
Emil F. Jachmann.................................................. 10,000 *
Alexis P. Michas(4)............................................... 14,803,000 97.4%
Peter P. Tong..................................................... 10,000 *
Scott M. Shaw(4).................................................. 14,803,000 97.4%
Directors and executive officers as a group ((15) persons)(4)(5).. 15,201,253 100.0%
</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, warrants or convertible
securities held by that person that are currently exercisable or
convertible, or exercisable or convertible within 60 days of March 15,
1999 are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage of any other
person. Except as indicated in the footnotes to this table, the
stockholders named in the table have sole voting and investment power with
respect to the shares set forth opposite such stockholder's name.
(2) Stonington is the record holder of 14,653,000 shares, or 96.4%, of Common
Stock. Stonington also controls, but disclaims beneficial ownership of, an
additional 150,000 shares purchased by an institutional investor, pursuant
to the Stockholder Agreement. Stonington is a Delaware limited partnership
whose limited partners consist of certain institutional investors, formed
to invest in corporate acquisitions organized by Stonington Partners.
SPLP, a Delaware limited partnership, is the general partner of Stonington
with a 1% economic interest in Stonington. Except for such economic
interest, SPLP disclaims beneficial ownership of the shares set forth
above. Stonington II, a Delaware corporation, is the general partner of
SPLP with a 1% economic interest in SPLP. Except for such economic
interest, Stonington II disclaims beneficial ownership of the shares set
forth above. Stonington Partners, a Delaware corporation, is the
management company for Stonington with a 1% 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.
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<PAGE>
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, 1999, as follows: Mr. Duerden - 177,633 shares; Mr.
Skrzypczak - 14,850 shares; Mr. Schwager - 14,850 shares; Mr. Hart -
11,300 shares; and Mr. Elwell - 12,900 shares. Mr. Duerden is a 3.1%
limited partner of SPLP.
(4) The shares indicated as owned beneficially by Messrs. Fitzgibbons, Michas
and Shaw 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 Shaw disclaim beneficial
ownership of such shares.
(5) Includes 267,253 shares of Common Stock subject to options granted under
the Plan which are currently exercisable or vest within 60 days of March
15, 1999 and 2,000,000 shares of Common Stock issuable upon conversion of
Convertible Preferred Stock which are currently convertible or are
convertible within 60 days of March 15, 1999.
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 was 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.
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 Common Stock (the
"Equity Private Placement"), and each of Messrs. Duerden, Skrzypczak, Schwager,
Hart 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 seven 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
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<PAGE>
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 not permitted to sell or transfer Common
Stock, other than to an Affiliate (as defined in the Stockholders Agreement),
prior to the occurrence of an IPO. Following an IPO, the Institutional Investors
will, with certain limited exceptions, generally be permitted to sell or
transfer Common Stock subject to applicable Securities Act restrictions. The
Pay-in-Kind Preferred Stock and Warrants are subject to transfer restrictions as
set forth in the Stockholders Agreement.
Prior to an IPO, the Company will have the right to require a Management
Investor to sell his or her shares of Common Stock and Options upon a
termination of employment for any reason. Such right will be exercisable within
a period of one year after the date of termination of employment (or within a
period of six months in the event of a termination of employment due to death)
at a price per share equal to the higher of Fair Value Price (as defined in the
Stockholders Agreement) or the original per share purchase price of a share of
Common Stock and at a price per Option equal to the difference between the Fair
Value Price or the original per share purchase price of the shares of Common
Stock covered by such Option and the exercise price of the shares of Common
Stock covered by such Option, multiplied by the number of shares of Common Stock
covered by the Option. Prior to an IPO, the Management Investor will have the
right to require the Company to purchase his or her shares of Common Stock or
Options upon termination of employment due to death, Disability, Retirement or
Involuntary Termination (as defined therein). Such a right will be exercisable
within a period of 180 days after the date of termination of employment due to
death, Disability, Retirement or Involuntary Termination (a) at a price per
share of Common Stock equal to the Fair Value Price of a share of Common Stock;
provided, however, that upon a termination of employment due to death,
Disability or Retirement, the purchase price per share will be equal to the
greater of (x) the Fair Value Price and (y) the original purchase price plus
interest at the Adjusted Eurodollar Rate plus 2.75%, minus the Applicable
Pricing Discount (as defined in the Credit Agreement) as of the date of such
death, Disability or Retirement) (in either case, the "Put Price"); and (b) at a
price per Option equal to the difference between the Put Price of the shares of
Common Stock covered by such Option and the exercise price of the shares of
Common Stock covered by such Option, multiplied by the number of shares of
Common Stock covered by the Option.
Stockholders are, subject to certain limitations, entitled to register
shares of Common Stock in connection with a registration statement prepared by
the Company to register Common Stock. Stonington has the right to require the
Company to take such steps as necessary to register all or part of the Common
Stock held by Stonington under the Securities Act pursuant to the provisions of
the Stockholders Agreement. The Stockholders Agreement contains customary terms
and provisions with respect to, among other things, registration procedures and
certain rights to indemnification granted by parties thereunder in connection
with the registration of Common Stock subject to such agreement.
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<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 January 8, 1999, 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
waive compliance by the Company of the financial covenants as of
December 31, 1998 and for the four Fiscal Quarter period then ended, to
modify the covenants and related definitions in respect of certain asset
sales and the utilization of the proceeds from such asset sales, to
modify the required Maximum Leverage, Minimum EBITDA and Minimum
Interest Coverage Ratio Covenants, to change the maturity date of the
Tranche C Loans to be equal to that of the Tranche B Loans, and to
increase the interest rate on the Tranche B Loans to be equal to that of
the Tranche C Loans.
In addition, with the fifth amendment, the Company's principal
shareholder (the "Shareholders") agreed to provide the Company with
$20,000,000 in new cash equity (the "New Equity") contributions on or
before January 28, 1999 to fund working capital and for general
corporate purposes.
(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).
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<PAGE>
EXHIBITS DESCRIPTION
- -------- -----------
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 (filed as
Exhibit 2.10 to the Company's Form 10-K for the fiscal year ended
December 31, 1997, filed on March 30, 1998).
2.11 -- Certificate of Ownership and Merger merging Dictaphone Corporation
with and into Dictaphone (U.S.) (filed as Exhibit 2.11 to the
Company's Form 10-K for the fiscal year ended December 31, 1997, filed
on March 30, 1998).
3(i) -- Restated 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 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 -- Limited Waiver and Fifth Amendment to Credit Agreement, dated December
31, 1998, by and among Dictaphone Corporation (U.S.) and the Lenders
party thereto.
*4.8 -- Limited Waiver and First Amendment to Credit Agreement, dated as of
December 31, 1998, among Dictaphone Corporation (U.S.) and the
Lenders party thereto.
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).+
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EXHIBITS DESCRIPTION
- -------- -----------
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 fiscal
year ended December 31, 1996, filed on March 31, 1997).+
*10.6 -- Letter Agreement, dated October 21, 1998, between Dicataphone
Corporation and Joseph D. Skrzypczak.+
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 -- 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).+
10.13 -- 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).+
10.14 -- Stock Option Agreement, dated August 1, 1997, between the Company and
John H. Duerden (filed as Exhibit 10.15 to the Company's Form 10-K405
for the fiscal year ended December 31, 1997, filed on March 31,
1998).+
10.15 -- 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).+
10.16 -- Letter Agreement between the Company and Ronald A. Elwell, dated
November 8, 1996 (filed as Exhibit 10.18 to the Company's Form 10-K405
for the fiscal year ended December 31, 1997, filed on March 31,
1998).+
10.17 -- Stock Option Agreement, dated August 1, 1997, between the Company and
Peter P. Tong (filed as Exhibit 10.19 to the Company's Form 10-Q for
the fiscal quarter ended March 31, 1998, filed on May 14, 1998).+
10.18 -- Agreement of Purchase and Sale of Stratford, CT property between
Dictaphone Corporation and Stratford, CT Business Trust, dated May 14,
1998 (filed as Exhibit 10.20 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1998, filed August 14, 1998).
10.19 -- Lease Agreement of Stratford, CT property between Dictaphone
Corporation and Stratford, CT Business Trust, dated May 14, 1998
(filed as Exhibit 10.21 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1998, filed August 14, 1998).
*10.20 -- Letter Agreement, dated May 28, 1997, between Dictaphone Corporation
and Mr. Daniel P. Hart.+
*10.21 -- Executive Severance Agreement, dated November 11, 1996, between
Dictaphone Corporation and Mr. Daniel Hart.+
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.
65
<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, 1999.
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, 1999.
SIGNATURE TITLE(S)
/S/ JOHN H. DUERDEN Chairman, Chief Executive Officer
- ------------------------------ and President (Principal Executive
John H. Duerden Officer)
/S/ JOSEPH D. SKRZYPCZAK Chief Operating Officer, Chief Financial
- ------------------------------ Officer and Director (Principal Financial
Joseph D. Skrzypczak and Accounting Officer)
/S/ ALBERT J. FITZGIBBONS, III Director
- ------------------------------
Albert J. Fitzgibbons, III
/S/ EMIL F. JACHMANN Director
- ------------------------------
Emil F. Jachmann
/S/ ALEXIS P. MICHAS Director
- ------------------------------
Alexis P. Michas
/S/ SCOTT M. SHAW Director
- ------------------------------
Scott M. Shaw
/S/ PETER P. TONG Director
- ------------------------------
Peter P. Tong
66
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBITS DESCRIPTION NUMBERED PAGE
- -------- ----------- -------------
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 (filed as Exhibit 2.10 to the
Company's Form 10-K for the fiscal year ended December
31, 1997, filed on March 30, 1998).
2.11 -- Certificate of Ownership and Merger merging Dictaphone
Corporation with and into Dictaphone (U.S.) (filed as
Exhibit 2.11 to the Company's Form 10-K for the fiscal
year ended December 31, 1997, filed on March 30,
1998).
3(i) -- Restated 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).
67
<PAGE>
SEQUENTIALLY
EXHIBITS DESCRIPTION NUMBERED PAGE
- -------- ----------- -------------
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
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 -- Limited Waiver and Fifth Amendment to Credit
Agreement, dated December 31, 1998, by and among
Dictaphone Corporation (U.S.) and the Lenders party
thereto.
*4.8 -- Limited Waiver and First Amendment to Credit
Agreement, dated as of December 31, 1998, among
Dictaphone Corporation (U.S.) and the Lender's party
thereto.
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 fiscal year ended
December 31, 1996, filed on March 31, 1997).+
*10.6 -- Letter Agreement, dated October 21, 1998, between
Dictaphone Corporation and Joseph D. Skrzypczak.+
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).+
68
<PAGE>
SEQUENTIALLY
EXHIBITS DESCRIPTION NUMBERED PAGE
- -------- ----------- -------------
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 -- 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).+
10.13 -- 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).+
10.14 -- Stock Option Agreement, dated August 1, 1997,
between the Company and John H. Duerden (filed as
Exhibit 10.15 to the Company's Form 10-K405 for the
fiscal year ended December 31, 1997, filed on March
31, 1998).+
10.15 -- 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).+
10.16 -- Letter Agreement between the Company and Ronald A.
Elwell, dated November 8, 1996 (filed as Exhibit 10.18
to the Company's Form 10-K405 for the fiscal year
ended December 31, 1997, filed on March 31, 1998). +
10.17 -- Stock Option Agreement, dated August 1, 1997, between
the Company and Peter P. Tong (filed as Exhibit 10.19
to the Company's Form 10-Q for the fiscal quarter
ended March 31, 1998, filed on May 14, 1998).+
10.18 -- Agreement of Purchase and Sale of Stratford, CT
property between Dictaphone Corporation and Stratford,
CT Business Trust, dated May 14, 1998 (filed as
Exhibit 10.20 to the Company's Form 10-Q for the
fiscal quarter ended June 30, 1998, filed August 14,
1998).
10.19 -- Lease Agreement of Stratford, CT property between
Dictaphone Corporation and Stratford, CT Business
Trust, dated May 14, 1998 (filed as Exhibit 10.21
to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1998, filed August 14, 1998).
69
<PAGE>
SEQUENTIALLY
EXHIBITS DESCRIPTION NUMBERED PAGE
- -------- ----------- -------------
*10.20 -- Letter Agreement, dated May 28, 1997, between
Dictaphone Corporation and Mr. Daniel P. Hart.+
*10.21 -- Executive Severance Agreement, dated November 11,
1996, between Dictaphone Corporation and Mr. Daniel
Hart.+
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.
70
Exhibit 4.7
DICTAPHONE CORPORATION
LIMITED WAIVER AND FIFTH AMENDMENT
TO CREDIT AGREEMENT
This LIMITED WAIVER AND FIFTH AMENDMENT TO CREDIT AGREEMENT (this
"AMENDMENT") is dated as of December 31, 1998 and entered into by and among
DICTAPHONE CORPORATION (successor to Dictaphone Acquisition Inc.), a Delaware
corporation ("COMPANY"), and the financial institutions listed on the signature
pages hereof ("LENDERS"), and is made with reference to that certain Credit
Agreement dated as of August 7, 1995, as amended to the date hereof (as so
amended, the "CREDIT AGREEMENT"), by and among Company, Lenders, NationsBank,
N.A. (Carolinas), as documentation agent for Lenders, and Bankers Trust Company,
as administrative agent for Lenders and as collateral agent for Lenders.
Capitalized terms used herein without definition shall have the same meanings
herein as set forth in the Credit Agreement.
R E C I T A L S
- - - - - - - -
WHEREAS, Company has informed Lenders that it will not be in
compliance with the covenants set forth in subsection 7.6 of the Credit
Agreement as of December 31, 1998 and for the four-Fiscal Quarter period ending
on such date;
WHEREAS, Company has requested Lenders to waive Company's compliance
with subsection 7.6 of the Credit Agreement as of December 31, 1998 and for the
four-Fiscal Quarter period ending on such date;
WHEREAS, Stonington Fund has agreed to provide Company with
$20,000,000 in new cash equity contributions, the proceeds of which Company
desires to use for working capital and general corporate purposes; and
WHEREAS, Company also desires (i) to consummate the Melbourne Asset
Sale, (ii) to retain a portion of the proceeds thereof for working capital and
general corporate purposes, and (iii) to use the remainder of the proceeds
thereof (a) to prepay certain scheduled principal installments in respect of the
Tranche B Term Loans and the New Term Loans and (b) to reduce the Subordinated
Indebtedness evidenced by the Subordinated Notes by making certain scheduled
interest payments and repurchasing certain Subordinated Notes.
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
SECTION 1. WAIVER
Subject to the terms and conditions set forth herein and in reliance
on the representations and warranties of Company herein contained, Lenders
hereby waive compliance by Company with the provisions of subsection 7.6 of the
Credit Agreement as of December 31, 1998 and for the four-Fiscal Quarter period
ending on such date.
<PAGE>
SECTION 2. LIMITATION OF WAIVER
Without limiting the generality of the provisions of subsection 10.6
of the Credit Agreement, the waiver set forth above shall be limited precisely
as written and shall relate solely to Company's non-compliance with the
provisions of subsection 7.6 of the Credit Agreement in the manner and to the
extent described above, and nothing in this Amendment shall be deemed to:
(i) constitute a waiver of compliance by Company with respect to
(a) subsection 7.6 of the Credit Agreement in any other instance for
any period commencing after December 31, 1998 or (b) any other term,
provision or condition of the Credit Agreement, the other Loan
Documents or any other instrument or agreement referred to therein
(whether in connection with the above waiver or otherwise); or
(ii) prejudice any right or remedy that Agent or any Lender may
now have or may have in the future under or in connection with the
Credit Agreement, the other Loan Documents, any other instrument or
agreement referred to therein or under applicable law.
Except as expressly set forth herein, the terms, provisions and
conditions of the Credit Agreement and the other Loan Documents shall remain in
full force and effect and in all other respects are hereby ratified and
confirmed.
SECTION 3. AMENDMENTS TO THE CREDIT AGREEMENT
3.1 AMENDMENTS TO SUBSECTION 1.1: CERTAIN DEFINED TERMS.
---------------------------------------------------
A. AMENDMENTS TO EXISTING DEFINITIONS. Certain definitions contained
in subsection 1.1 of the Credit Agreement are hereby amended as
follows:
(i) The definition of "CONSOLIDATED NET WORTH" is hereby amended
by adding the phrase "or the Melbourne Asset Sale"
immediately after the phrase "Specified Asset
Sale/Financing" contained therein.
(ii) The definition of "SPECIFIED ASSET SALE/FINANCING" is hereby
amended by deleting it in its entirety and substituting
therefor the following:
"SPECIFIED ASSET SALE/FINANCING" means each of the
Headquarters Asset Sale, the Headquarters
Financing and/or the Swiss Asset Sale.
B. ADDITION OF NEW DEFINITIONS. Subsection 1.1 of the Credit Agreement
is hereby amended by adding thereto the following definitions which
shall be inserted in proper alphabetical order:
"JANUARY 1999 EQUITY" means not less than $20,000,000 in new
cash payment in kind preferred equity contributions made to
Company by the Stonington Fund on or before January 28,
1999.
2
<PAGE>
"FIFTH AMENDMENT" means that certain Limited Waiver and
Fifth Amendment to Credit Agreement dated as of December 31,
1998 by and among Company and Lenders.
"FIFTH AMENDMENT EFFECTIVE DATE" has the meaning assigned to
that term in the Fifth Amendment.
"FIRST AMENDMENT TO NEW CREDIT AGREEMENT" means that certain
Limited Waiver and First Amendment to Credit Agreement dated
as of December 31, 1998 by and among Company and New
Lenders.
"INITIAL PREPAYMENT AMOUNT" means the first $35,000,000 of
the Net Cash Proceeds of the Melbourne Asset Sale, Existing
Lenders' Share of which amount shall be applied to prepay
the Tranche B Term Loans pursuant to subsection
2.4B(iii)(c).
"INITIAL RETAINED AMOUNT" has the meaning assigned to that
term in subsection 2.4B(iii)(c).
3.2 AMENDMENT TO SUBSECTION 2.2A(II): RATE OF INTEREST.
--------------------------------------------------
(i) Subsection 2.2A(ii)(a) of the Credit Agreement is hereby amended
by deleting the reference to "2.25%" contained therein and
substituting therefor "2.75%".
(ii) Subsection 2.2A(ii)(b) of the Credit Agreement is hereby amended
by deleting the reference to "3.25%" contained therein and
substituting therefor "3.75%".
3.3 AMENDMENTS TO SUBSECTION 2.4B: PREPAYMENTS AND REDUCTIONS IN COMMITMENTS.
------------------------------------------------------------------------
A. MANDATORY PREPAYMENT EVENTS. Subsection 2.4B(iii) of the Credit
Agreement is hereby amended as follows:
(i) Paragraphs (c), (d), (e), (f), (g), (h), (i) and (j) of
subsection 2.4B(iii) of the Credit Agreement are relettered as
(d), (e), (f), (g), (h), (i), (j) and (k).
(ii) A new paragraph (c) of subsection 2.4B(iii) of the Credit
Agreement is added as follows:
"(c) PREPAYMENTS FROM THE MELBOURNE ASSET SALE. On the
date of receipt by Company or any of its Subsidiaries of any
Cash Proceeds of an Asset Sale constituting the Melbourne
Asset Sale, Company shall prepay the Tranche B Term Loans in
an amount equal to Existing Lenders' Share of the Net Cash
Proceeds of the Melbourne Asset Sale; PROVIDED that,
anything contained herein to the contrary notwithstanding,
(1) from and after such time as the aggregate Net Cash
Proceeds of the Melbourne Asset Sale equals or exceeds the
3
<PAGE>
Initial Prepayment Amount, Company shall be entitled to
retain (without any corresponding prepayment under this
subsection 2.4B(iii)(c)) the next $20,000,000 in excess of
the Initial Prepayment Amount (the "INITIAL RETAINED
AMOUNT") of the Net Cash Proceeds of the Melbourne Asset
Sale and (2) from and after such time as the aggregate Net
Cash Proceeds of the Melbourne Asset Sale equals or exceeds
$55,000,000, Company shall prepay the Tranche B Term Loans
in an amount equal to Existing Lenders' Share of 50% of the
Net Cash Proceeds of the Melbourne Asset Sale in excess of
$55,000,000 (any Net Cash Proceeds of the Melbourne Asset
Sale being retained by Company pursuant to this clause (2)
shall not be subject to prepayment under this subsection
2.4B(iii)(c)); and PROVIDED, FURTHER that, to the extent any
portion of New Lenders' Share of any Net Cash Proceeds of
the Melbourne Asset Sale are not applied to prepay the New
Term Loans as required under subsection 2.4B(ii)(b) of the
New Credit Agreement as in effect on the Fifth Amendment
Effective Date (after giving effect to the First Amendment
to New Credit Agreement), Company shall promptly make an
additional prepayment of the Tranche B Term Loans in an
amount equal to such portion not so applied to prepay the
New Term Loans. Any prepayments of the Tranche B Term Loans
pursuant to this subsection 2.4B(iii)(c) shall be applied to
the remaining scheduled installments of principal of the
Tranche B Term Loans set forth in subsection 2.4A(ii) in
forward order of maturity."
(iii)Paragraph (c) of subsection 2.4B(iii) of the Credit Agreement
(before giving effect to the relettering of such paragraph) is
amended by adding the phrase "or the Melbourne Asset Sale"
immediately after the phrase "Specified Asset Sale/Financing".
(iv) Paragraph (d) of subsection 2.4B(iii) of the Credit Agreement
(before giving effect to the relettering of such paragraph) is
amended by deleting "(other than Cash proceeds of any
Headquarters Financing or any other Indebtedness permitted under
subsection 7.1)" and substituting therefor the following:
"(other than the January 1999 Equity, the Cash proceeds
of any Headquarters Financing or any other Indebtedness
permitted under subsection 7.1)".
(v) Paragraph (h) of subsection 2.4B(iii) of the Credit Agreement
(before giving effect to the relettering of such paragraph) is
amended by:
(a) deleting the reference to "subsections 2.4B(iii)(b)-(g)"
contained therein and substituting therefor "subsections
2.4B(iii)(b)-(h)"; and
4
<PAGE>
(b) adding the phrase "(including, without limitation, the
Melbourne Asset Sale)" immediately after the phrase "Net
Cash Proceeds of Asset Sale".
B. APPLICATION OF CERTAIN MANDATORY PREPAYMENTS. Subsection 2.4B(iv)(b) of
the Credit Agreement is hereby amended by deleting it in its entirety and
substituting therefor the following:
"(b) APPLICATION OF CERTAIN MANDATORY PREPAYMENTS OF TRANCHE B TERM
LOANS TO THE SCHEDULED INSTALLMENTS OF PRINCIPAL THEREOF. Any
mandatory prepayments of the Tranche B Term Loans pursuant to
subsections 2.4B(iii)(d)-(h) (and any related such mandatory
prepayments pursuant to subsection 2.4B(iii)(i)) shall be applied to
reduce the remaining scheduled installments of principal of the
Tranche B Term Loans set forth in subsection 2.4A(ii) in inverse order
of maturity."
3.4 AMENDMENTS TO SUBSECTION 6.4: MAINTENANCE OF PROPERTIES; INSURANCE.
------------------------------------------------------------------
Subsection 6.4 of the Credit Agreement is amended by deleting each
reference to "subsection 2.4B(iii)(a)" contained therein and substituting
therefor "subsection 2.4B(iii)(d)".
3.5 AMENDMENTS TO SUBSECTION 7.5: RESTRICTED JUNIOR PAYMENTS.
--------------------------------------------------------
Subsection 7.5 of the Credit Agreement is hereby amended by deleting
it in its entirety and substituting therefor the following:
"7.5 RESTRICTED JUNIOR PAYMENTS.
Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, declare, order, pay,
make or set apart any sum for any Restricted Junior Payment;
PROVIDED that (i) on or after August 1, 1999, Company may
repurchase certain Subordinated Notes so long as (a) such
Subordinated Notes are repurchased only with proceeds of the
Melbourne Asset Sale constituting all or a portion of the Initial
Retained Amount, (b) Company shall have made the regularly
scheduled interest payment due on August 1, 1999 in respect of
the Subordinated Notes (subject to clause (ii) hereof), and (c)
no Event of Default or Potential Event of Default shall have
occurred and be continuing or shall be caused thereby; (ii)
Company may make regularly scheduled payments of interest in
respect of the Subordinated Indebtedness in accordance with the
terms of, and only to the extent required by, and subject to the
subordination provisions contained in, the indenture or other
agreement pursuant to which such Subordinated Indebtedness was
issued, as such indenture or other agreement may be amended from
time to time to the extent permitted under subsection 7.15B; and
(iii) so long as no Event of Default or Potential Event of
Default shall have occurred and be continuing or shall be caused
5
<PAGE>
thereby, Company may make Restricted Junior Payments to
repurchase shares of Company Common Stock (or options or warrants
to acquire Company Common Stock) from Management Investors in
accordance with the terms of the Stockholders Agreement."
3.6 AMENDMENTS TO SUBSECTION 7.6: FINANCIAL COVENANTS.
-------------------------------------------------
Subsections 7.6A, B, and D of the Credit Agreement are hereby amended
by deleting them in their entirety and substituting therefor the following:
"A. MAXIMUM LEVERAGE RATIO. Company shall not permit the ratio of (i)
Consolidated Total Debt as of the last day of any four-Fiscal Quarter
period ending during any of the periods set forth below (or as of the last
day of any of the one, two or three Fiscal Quarter periods, as the case may
be, occurring after January 1, 1999 and ending on or before September 30,
1999) to (ii) Consolidated EBITDA for such one, two, three or four-Fiscal
Quarter period, as the case may be, to exceed the applicable correlative
ratio indicated in the relevant column below (depending on whether or not
the Melbourne Asset Sale has been consummated on or before the last day of
the applicable one, two, three or four-Fiscal Quarter period):
MAXIMUM LEVERAGE RATIO MAXIMUM LEVERAGE RATIO
(BEFORE THE MELBOURNE (AFTER THE MELBOURNE
PERIOD ASSET SALE) ASSET SALE)
------------------ ---------------------- ----------------------
January 1, 1999 - 13.30:1.00 15.10:1.00
March 31, 1999
April 1, 1999 - 13.40:1.00 15.70:1.00
June 30, 1999
July 1, 1999 - 10.60:1.00 13.00:1.00
September 30, 1999
October 1, 1999 - 6.20:1.00 6.80:1.00
December 31, 1999
January 1, 2000 - 6.20:1.00 6.60:1.00
March 31, 2000
April 1, 2000 - 5.80:1.00 6.20:1.00
June 30, 2000
July 1, 2000 - 5.50:1.00 5.90:1.00
September 30, 2000
October 1, 2000 - 5.20:1.00 5.70:1.00
December 31, 2000
6
<PAGE>
January 1, 2001 - 5.00:1.00 5.50:1.00
March 31, 2001
April 1, 2001 - 4.80:1.00 5.20:1.00
June 30, 2001
July 1, 2001 - 4.60:1.00 4.90:1.00
September 30, 2001
October 1, 2001 - 4.40:1.00 4.70:1.00
December 31, 2001
January 1, 2002 - 4.20:1.00 4.50:1.00
March 31, 2002
B. MINIMUM CONSOLIDATED EBITDA. Company shall not permit Consolidated
EBITDA for any four Fiscal Quarter period ending on any of the dates set
forth below (or for any of the one, two or three consecutive Fiscal Quarter
periods, as the case may be, occurring after January 1, 1999 and ending on
or before September 30, 1999) to be less than the applicable correlative
amount indicated in the relevant column below (depending on whether or not
the Melbourne Asset Sale has been consummated on or before the last day of
the applicable one, two, three or four-Fiscal Quarter period):
MINIMUM CONSOLIDATED MINIMUM CONSOLIDATED
EBITDA (BEFORE THE EBITDA (AFTER THE
DATE MELBOURNE ASSET SALE) MELBOURNE ASSET SALE)
------------------ ---------------------- ----------------------
March 30, 1999 8,700,000 7,400,000
June 30, 1999 19,500,000 16,600,000
September 30, 1999 34,900,000 29,900,000
December 31, 1999 52,100,000 44,800,000
March 30, 2000 55,900,000 47,500,000
June 30, 2000 58,300,000 49,300,000
September 30, 2000 60,700,000 51,300,000
7
<PAGE>
December 31, 2000 61,800,000 52,000,000
March 30, 2001 62,500,000 53,000,000
June 30, 2001 63,500,000 54,100,000
September 30, 2001 65,500,000 55,700,000
December 31, 2001 69,200,000 59,100,000
March 31, 2002 70,300,000 60,000,000
D. MINIMUM INTEREST COVERAGE RATIO. Company shall not permit the ratio of
(i) Consolidated EBITDA MINUS Consolidated Capital Expenditures to (ii)
Consolidated Interest Expense for any four-Fiscal Quarter period ending
during any of the periods set forth below (or for any of the one, two or
three consecutive Fiscal Quarter periods, as the case may be, occurring
after January 1, 1999 and ending on or before September 30, 1999) to be
less than the applicable correlative ratio indicated in the relevant column
below (depending on whether or not the Melbourne Asset Sale has been
consummated on or before the last day of the applicable one, two, three or
four-Fiscal Quarter period):
MINIMUM INTEREST MINIMUM INTEREST
COVERAGE RATIO COVERAGE RATIO
PERIOD (BEFORE THE MELBOURNE (AFTER THE MELBOURNE
ASSET SALE) ASSET SALE)
------------------ ---------------------- ---------------------
January 1, 1999 - 0.00:1.00 0.00:1.00
March 31, 1999
April 1, 1999 - 0.00:1.00 0.00:1.00
June 30, 1999
July 1, 1999- 0.20:1.00 0.15:1.00
September 30, 1999
October 1, 1999 - 0.70:1.00 0.65:1.00
December 31, 1999
January 1, 2000 - 0.70:1.00 0.60:1.00
March 31, 2000
8
<PAGE>
April 1, 2000 - 0.80:1.00 0.60:1.00
June 30, 2000
July 1, 2000 - 0.80:1.00 0.70:1.00
September 30, 2000
October 1, 2000 - 0.90:1.00 0.70:1.00
December 31, 2000
January 1, 2001 - 0.95:1.00 0.70:1.00
March 31, 2001
April 1, 2001 - 1.00:1.00 0.80:1.00
June 30, 2001
July 1, 2001 - 1.05:1.00 0.85:1.00
September 30, 2001
October 1, 2001 - 1.10:1.00 0.90:1.00
December 31, 2001
January 1, 2002 - 1.20:1.00 1.00:1.00
March 31, 2002
3.7 AMENDMENTS TO SUBSECTION 7.7: RESTRICTION ON FUNDAMENTAL CHANGES; ASSET
---------------------------------------------------------------------------
SALES AND ACQUISITIONS.
----------------------
Subsection 7.7(vii) of the Credit Agreement is hereby amended by
deleting it in its entirety and substituting therefor the following:
"(vii) subject to subsection 7.13, Company and its Subsidiaries (a)
may make Asset Sales constituting Specified Asset Sale/Financings or
the Melbourne Asset Sale and (b) may make other Asset Sales of assets
having a fair market value not in excess of $2,000,000 in the
aggregate during the term of this Agreement; PROVIDED that (x) the
consideration received for the assets that are the subject of any such
Asset Sale described in the foregoing clause (a) or (b) shall be in an
amount at least equal to the fair market value thereof; (y) at least
80% (or 100% in the case of the Melbourne Asset Sale) of the
consideration received shall be cash; and (z) the proceeds of such
Asset Sales shall be applied as required by subsection 2.4B(iii)(b),
(c) or (d), as the case may be; and PROVIDED, FURTHER that, the
Melbourne Asset Sale shall occur on or before December 31, 1999 and
the consideration received therefor shall be in a net aggregate amount
of not less than $37,500,000."
9
<PAGE>
3.8 AMENDMENT TO SUBSECTION 7.17: RECEIVABLES PROGRAM.
-------------------------------------------------
Subsection 7.17 of the Credit Agreement is amended by deleting the
reference to "subsection 2.4B(iii)(b)" contained therein and substituting
therefor "subsection 2.4B(iii)(d)".
3.9 AMENDMENTS TO SECTION 8: EVENTS OF DEFAULT.
------------------------------------------
Section 8 of the Credit Agreement is hereby amended by deleting ":" at
the end of subsection 8.14 and substituting "; or" therefor, and by adding
a new subsection 8.15 thereto as follows:
"8.15 STONINGTON FUND'S FAILURE TO MAKE THE JANUARY 1999 EQUITY
CONTRIBUTION.
Stonington Fund shall not have contributed the January 1999
Equity to Company on or before January 28, 1999, in cash in an
aggregate amount of at least $20,000,000:"
SECTION 4. CONDITIONS TO EFFECTIVENESS
Sections 1, 2 and 3 of this Amendment shall become effective only upon the
prior or concurrent satisfaction of all of the following conditions (the date of
satisfaction of such conditions being referred to herein as the "FIFTH AMENDMENT
EFFECTIVE DATE"):
A. COMPANY DOCUMENTS. On or before the Fifth Amendment Effective Date,
Company shall deliver to Lenders (or to Administrative Agent for Lenders
with sufficient originally executed copies, where appropriate, for each
Lender and its counsel) the following, each, unless otherwise noted, dated
the Fifth Amendment Effective Date:
(i) Resolutions of its Board of Directors approving and authorizing
the execution, delivery, and performance of this Amendment,
certified as of the Fifth Amendment Effective Date by its
corporate secretary or an assistant secretary as being in full
force and effect without modification or amendment;
(ii) Signature and incumbency certificates of its officers executing
this Amendment;and
(iii) Executed copies of this Amendment.
B. FIRST AMENDMENT TO NEW CREDIT AGREEMENT. All conditions set forth in
subsection 4 of that certain First Amendment and Limited Waiver to Credit
Agreement dated as of December 31, 1998 by and among Company and New
Lenders (the "FIRST AMENDMENT TO NEW CREDIT AGREEMENT") shall have been
satisfied and the First Amendment to New Credit Agreement shall have become
effective.
10
<PAGE>
C. OPINION OF COMPANY'S COUNSEL. Lenders shall have received originally
executed copies of a favorable written opinion of Dan Hart, Esq., counsel
for Company, in form and substance satisfactory to Administrative Agent and
its counsel, dated the Fifth Amendment Effective Date.
D. OTHER PROCEEDINGS. On or before the Fifth Amendment Effective Date, all
corporate and other proceedings taken or to be taken in connection with the
transactions contemplated hereby and all documents incidental thereto not
previously found acceptable by Administrative Agent, acting on behalf of
Lenders, and its counsel shall be satisfactory in form and substance to
Administrative Agent and such counsel, and Administrative Agent and such
counsel shall have received all such counterpart originals or certified
copies of such documents as Administrative Agent may reasonably request.
SECTION 5. COMPANY'S REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Amendment and to amend
the Credit Agreement in the manner provided herein, Company represents and
warrants to each Lender that the following statements are true, correct and
complete:
A. CORPORATE POWER AND AUTHORITY. Company has all requisite corporate power
and authority to enter into this Amendment and to carry out the
transactions contemplated by, and perform its obligations under, the Credit
Agreement as amended by this Agreement (the "AMENDED AGREEMENT").
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this
Amendment and the performance of the Amended Agreement have been duly
authorized by all necessary corporate action on the part of Company.
C. NO CONFLICT. The execution and delivery by Company of this Amendment and
the performance by Company of the Amended Agreement do not and will not (i)
violate any provision of any law or any governmental rule or regulation
applicable to Company or any of its Subsidiaries, the Certificate or
Articles of Incorporation or Bylaws of Company or any of its Subsidiaries
or any order, judgment or decree of any court or other agency of government
binding on Company or any of its Subsidiaries, (ii) conflict with, result
in a breach of or constitute (with due notice or lapse of time or both) a
default under any Contractual Obligation of Company or any of its
Subsidiaries, (iii) result in or require the creation or imposition of any
Lien upon any of the properties or assets of Company or any of its
Subsidiaries (other than Liens created under any of the Loan Documents in
favor of Agents on behalf of Lenders), or (iv) require any approval of
stockholders or any approval or consent of any Person under any Contractual
Obligation of Company or any of its Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by Company of this
Amendment and the performance by Company of the Amended Agreement do not
and will not require any registration with, consent or approval of, or
notice to, or other action to, with or by, any federal, state or other
governmental authority or regulatory body.
11
<PAGE>
E. BINDING OBLIGATION. This Amendment has been duly executed and delivered
by Company, and this Amendment and the Amended Agreement are the legally
valid and binding obligations of Company, enforceable against Company in
accordance with their respective terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating
to or limiting creditors' rights generally or by equitable principles
(regardless of whether such enforceability is considered in a proceeding at
law or in equity).
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT AGREEMENT.
The representations and warranties contained in Section 5 of the Credit
Agreement are and will be true, correct and complete in all material
respects on and as of the Fifth Amendment Effective Date to the same extent
as though made on and as of that date, except to the extent such
representations and warranties specifically relate to an earlier date, in
which case they were true, correct and complete in all material respects on
and as of such earlier date.
G. ABSENCE OF DEFAULT. (i) After giving effect to this Amendment, no event
has occurred and is continuing that would constitute an Event of Default or
a Potential Event of Default and (ii) no Event of Default or Potential
Event of Default will result from the consummation of the transactions
contemplated by this Amendment.
SECTION 6. MISCELLANEOUS
A. Reference to and Effect on the Credit Agreement and the Other Loan
Documents.
(i) On and after the Fifth Amendment Effective Date, each reference
in the Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import referring to the
Credit Agreement, and each reference in the other Loan Documents
to the "Credit Agreement", "thereunder", "thereof" or words of
like import referring to the Credit Agreement shall mean and be a
reference to the Amended Agreement.
(ii) Except as specifically amended or waived by this Amendment, the
Credit Agreement and the other Loan Documents shall remain in
full force and effect and are hereby ratified and confirmed.
(iii)The execution, delivery and performance of this Amendment shall
not, except as expressly provided herein, constitute a waiver of
any provision of, or operate as a waiver of any right, power or
remedy of Agent or any Lender under, the Credit Agreement or any
of the other Loan Documents.
B. FEES AND EXPENSES. Company acknowledges that all costs, fees and
expenses as described in subsection 10.2 of the Credit Agreement incurred
by Administrative Agent and its counsel with respect to this Amendment and
the documents and transactions contemplated hereby shall be for the account
of Company.
12
<PAGE>
C. HEADINGS. Section and subsection headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of
this Amendment for any other purpose or be given any substantive effect.
D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING
WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE
STATE OF NEW YORK).
E. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered (whether in
original form or by telecopy) shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument;
signature pages may be detached from multiple separate counterparts and
attached to a single counterpart so that all signature pages are physically
attached to the same document. This Amendment (other than the provisions of
Section 1-3 hereof, the effectiveness of which is governed by Section 4
hereof) shall become effective upon the execution of a counterpart hereof
by Company, by Requisite Lenders and by Requisite Class Lenders of Lenders
having Tranche B Term Loan Exposure and upon receipt by Company and
Administrative Agent of written or telephonic notification of such
execution and authorization of delivery thereof.
[Remainder of page intentionally left blank]
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
COMPANY:
DICTAPHONE CORPORATION
By: /s/ JOSEPH D. SKRYZYPCZAK
-------------------------------------
Name: Joseph D. Skryzypczak
Title: Chief Operating Officer
S-1
<PAGE>
LENDERS:
BANKERS TRUST COMPANY
By: /s/ ROBERT R. TELESCA
-------------------------------------
Name: Robert R. Telesca
Title: Assistant Vice President
NATIONSBANK, N.A. (CAROLINAS)
By: /s/ CHRIS BARTON
-------------------------------------
Name: Chris Barton
Title: Vice President
DK ACQUISITION PARTNERS, L.P.
by M.H. Davidson & Co.,
its General Partner
By:
-------------------------------------
Name:
Title:
S-2
<PAGE>
THE CHASE MANHATTAN BANK, N.A.
By:
-------------------------------------
Name:
Title:
CAPTIVA FINANCE LTD.
By: /s/ DAVID EGGLISHAW
-------------------------------------
Name: David Egglishaw
Title:
CAPTIVA II FINANCE LTD.
By: /s/ DAVID EGGLISHAW
-------------------------------------
Name: David Egglishaw
Title:
CERES FINANCE LTD.
By: /s/ DAVID EGGLISHAW
-------------------------------------
Name: David Egglishaw
Title:
BEAR STEARNS INVESTMENT PRODUCTS, INC.
By:
-------------------------------------
Name:
Title:
S-3
<PAGE>
MERRILL LYNCH SENIOR
FLOATING RATE FUND, INC.
By:
-------------------------------------
Name:
Title:
MERRILL LYNCH PRIME RATE PORTFOLIO
By:
-------------------------------------
Name:
Title:
MERRILL LYNCH DEBT STRATEGIES PORTFOLIO,
INC.
By:
-------------------------------------
Name:
Title:
ML CBO IV (CAYMAN) LTD.
By Highland Capital Management, L.P.
as Collateral Manager
By: /s/ JOSEPH DONDERO
-------------------------------------
Name: Joseph Dondero
Title: President
Highland Capital Management, L.P.
S-4
<PAGE>
PAMCO CAPITAL
By Highland Capital Management, L.P.
as Collateral Manager
By: /s/ JOSEPH DONDERO
----------------------------------------
Name: Joseph Dondero
Title: President
Highland Capital Management, L.P.
PAMCO CAYMAN LTD.
By Highland Capital Management, L.P.
as Collateral Manager
By: /s/ JOSEPH DONDERO
----------------------------------------
Name: Joseph Dondero
Title: President
Highland Capital Management, L.P.
MORGAN STANLEY SENIOR FUNDING, INC.
By: /s/ C. PUCILLO
----------------------------------------
Name: C. Pucillo
Title:
FRANKLIN MUTUAL ADVISORS, INC.
By:
----------------------------------------
Name:
Title:
S-5
<PAGE>
MERRILL LYNCH PIERCE,
FENNER & SMITH INCORPORATED
By: /s/ NEIL BRISSON
-------------------------------------
Name: Neil Brisson
Title: Director
KZH-PAMCO LLC
By: /s/ VIRGINIA CONWAY
-------------------------------------
Name: Virginia Conway
Title: Authorized Agent
PPM AMERICA, INC.
By:
-------------------------------------
Name:
Title:
TD SECURITIES (USA), INC.
By:
-------------------------------------
Name:
Title:
S-6
Exhibit 4.8
DICTAPHONE CORPORATION
LIMITED WAIVER AND FIRST AMENDMENT
TO CREDIT AGREEMENT
This LIMITED WAIVER AND FIRST AMENDMENT TO CREDIT AGREEMENT (this
"AMENDMENT") is dated as of December 31, 1998 and entered into by and among
DICTAPHONE CORPORATION (successor to Dictaphone Acquisition Inc.), a Delaware
corporation ("COMPANY"), and the financial institutions listed on the signature
pages hereof ("LENDERS"), and is made with reference to that certain Credit
Agreement dated as of November 14, 1997 (the "CREDIT AGREEMENT"), by and among
Company, Lenders, Morgan Stanley Senior Funding, Inc., as syndication agent for
lenders, and Bankers Trust Company, as administrative agent for Lenders and as
collateral agent for Lenders. Capitalized terms used herein without definition
shall have the same meanings herein as set forth in the Credit Agreement.
R E C I T A L S
- - - - - - - -
WHEREAS, Company has informed Lenders that it will not be in compliance
with the covenants set forth in subsection 7.6 of the Credit Agreement as of
December 31, 1998 and for the four-Fiscal Quarter period ending on such date;
WHEREAS, Company has requested Lenders to waive Company's compliance
with subsection 7.6 of the Credit Agreement as of December 31, 1998 and for the
four-Fiscal Quarter period ending on such date;
WHEREAS, Stonington Fund has agreed to provide Company with $20,000,000
in new cash equity contributions, the proceeds of which Company desires to use
for working capital and general corporate purposes; and
WHEREAS, Company also desires (i) to consummate the Melbourne Asset
Sale, (ii) to retain a portion of the proceeds thereof for working capital and
general corporate purposes, and (iii) to use the remainder of the proceeds
thereof (a) to prepay certain scheduled principal installments in respect of the
Loans and the Existing Tranche B Term Loans and (b) to reduce the Subordinated
Indebtedness evidenced by the Subordinated Notes by making certain scheduled
interest payments and repurchasing certain Subordinated Notes.
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
SECTION 1. WAIVER
Subject to the terms and conditions set forth herein and in reliance on
the representations and warranties of Company herein contained, Lenders hereby
waive compliance by Company with the provisions of subsection 7.6 of the Credit
Agreement as of December 31, 1998 and for the four-Fiscal Quarter period ending
on such date.
<PAGE>
SECTION 2. LIMITATION OF WAIVER
Without limiting the generality of the provisions of subsection 10.6 of
the Credit Agreement, the waiver set forth above shall be limited precisely as
written and shall relate solely to Company's non-compliance with the provisions
of subsection 7.6 of the Credit Agreement in the manner and to the extent
described above, and nothing in this Amendment shall be deemed to:
(i) constitute a waiver of compliance by Company with respect to (a)
subsection 7.6 of the Credit Agreement in any other instance for any period
commencing after December 31, 1998 or (b) any other term, provision or
condition of the Credit Agreement, the other Loan Documents or any other
instrument or agreement referred to therein (whether in connection with the
above waiver or otherwise); or
(ii) prejudice any right or remedy that Agent or any Lender may now
have or may have in the future under or in connection with the Credit
Agreement, the other Loan Documents, any other instrument or agreement
referred to therein or under applicable law.
Except as expressly set forth herein, the terms, provisions and
conditions of the Credit Agreement and the other Loan Documents shall remain in
full force and effect and in all other respects are hereby ratified and
confirmed.
SECTION 3. AMENDMENTS TO THE CREDIT AGREEMENT
3.1 AMENDMENTS TO SUBSECTION 1.1: CERTAIN DEFINED TERMS.
----------------------------------------------------
A. AMENDMENTS TO EXISTING DEFINITIONS. Certain definitions contained
in subsection 1.1 of the Credit Agreement are hereby amended as
follows:
(i) The definition of "CONSOLIDATED NET WORTH" is hereby amended
by adding the phrase "or the Melbourne Asset Sale"
immediately after the phrase "Specified Asset Sale/Financing"
contained therein.
(ii) The definition of "SPECIFIED ASSET SALE/FINANCING" is hereby
amended by deleting it in its entirety and substituting
therefor the following:
"SPECIFIED ASSET SALE/FINANCING" means each of the
Headquarters Asset Sale, the Headquarters Financing
and/or the Swiss Asset Sale.
B. ADDITION OF NEW DEFINITIONS. Subsection 1.1 of the Credit
Agreement is hereby amended by adding thereto the following
definitions which shall be inserted in proper alphabetical order:
"JANUARY 1999 EQUITY" means not less than $20,000,000 in new
cash payment in kind preferred equity contributions made to
Company by the Stonington Fund on or before January 28, 1999.
2
<PAGE>
"FIRST AMENDMENT" means that certain Limited Waiver and First
Amendment to Credit Agreement dated as of December 31, 1998
by and among Company and Lenders.
"FIRST AMENDMENT EFFECTIVE DATE" has the meaning assigned to
that term in the First Amendment.
"FIFTH AMENDMENT TO EXISTING CREDIT AGREEMENT" means that
certain Limited Waiver and Fifth Amendment to Credit
Agreement dated as of December 31, 1998 by and among Company
and Existing Lenders.
"INITIAL PREPAYMENT AMOUNT" means the first $35,000,000 of
the Net Cash Proceeds of the Melbourne Asset Sale, Lenders'
Share of which amount shall be applied to prepay the Loans
pursuant to subsection 2.4B(ii)(b).
"INITIAL RETAINED AMOUNT" has the meaning assigned to that
term in subsection 2.4B(ii)(b).
3.2 AMENDMENTS TO SUBSECTION 2.4A: SCHEDULED PAYMENTS OF LOANS.
-----------------------------------------------------------
Subsection 2.4A of the redit Agreement is hereby amended as follows:
(i) The table set forth in subsection 2.4A is deleted in its
entirety and the following table is substituted therefor:
DATE SCHEDULED REPAYMENT OF LOANS
---- ----------------------------
December 31, 1998 $627,500
December 31, 1999 $627,500
December 31, 2000 $627,500
December 31, 2001 $627,500
June 30, 2002 $60,240,000
--------------------- ----------------------------
Total $62,750,000
(ii) The reference to "June 30, 2003" contained in the second
proviso of subsection 2.4A is deleted and "June 30, 2002" is
substituted therefor.
3.3 AMENDMENTS TO SUBSECTION 2.4B: PREPAYMENTS.
------------------------------------------
A. MANDATORY PREPAYMENT EVENTS. Subsection 2.4B(ii) of the Credit
Agreement is hereby amended as follows:
3
<PAGE>
(i) Paragraph (a) of subsection 2.4B(ii) of the Credit
Agreement is amended by adding the phrase "or the
Melbourne Asset Sale" immediately after the phrase
"Specified Asset Sale/Financing".
(ii) Paragraphs (b), (c), (d), (e), and (f) of subsection
2.4B(ii) of the Credit Agreement are relettered as (c),
(d), (e), (f), and (g).
(iii) A new paragraph (b) of subsection 2.4B(ii) of the Credit
Agreement is added as follows:
"(b) PREPAYMENTS FROM THE MELBOURNE ASSET SALE.
On the date of receipt by Company or any of its
Subsidiaries of any Cash Proceeds of an Asset Sale
constituting the Melbourne Asset Sale, Company shall
prepay the Loans in an amount equal to Lenders' Share of
the Net Cash Proceeds of the Melbourne Asset Sale;
PROVIDED that, anything contained herein to the contrary
notwithstanding, (1) from and after such time as the
aggregate Net Cash Proceeds of the Melbourne Asset Sale
equals or exceeds the Initial Prepayment Amount, Company
shall be entitled to retain (without any corresponding
prepayment under this subsection 2.4B(ii)(b)) the next
$20,000,000 in excess of the Initial Prepayment Amount
(the "INITIAL RETAINED AMOUNT") of the Net Cash Proceeds
of the Melbourne Asset Sale and (2) from and after such
time as the aggregate Net Cash Proceeds of the Melbourne
Asset Sale equals or exceeds $55,000,000, Company shall
prepay the Loans in an amount equal to Lenders' Share of
50% of the Net Cash Proceeds of the Melbourne Asset Sale
in excess of $55,000,000 (any Net Cash Proceeds of the
Melbourne Asset Sale being retained by Company pursuant
to this clause (2) shall not be subject to prepayment
under this subsection 2.4B(ii)(b)); and PROVIDED,
FURTHER that, to the extent any portion of Existing
Lenders' Share of any Net Cash Proceeds of the Melbourne
Asset Sale are not applied to prepay the Existing
Tranche B Term Loans as required under subsection
2.4B(iii)(c) of the Existing Credit Agreement as in
effect on the First Amendment Effective Date (after
giving effect to the Fifth Amendment to Existing Credit
Agreement), Company shall promptly make an additional
prepayment of the Loans in an amount equal to such
portion not so applied to prepay the Existing Tranche B
Term Loans. Any prepayments of the Loans pursuant to
this subsection 2.4B(ii)(b) shall be applied to the
remaining scheduled installments of principal of the
Loans set forth in subsection 2.4A in forward order of
maturity."
(iv) Paragraph (b) of subsection 2.4B(ii) of the Credit
Agreement (before giving effect to the relettering of
such paragraph) is amended by deleting "(other than Cash
4
<PAGE>
proceeds of any Headquarters Financing or any other
Indebtedness permitted under subsection 7.1)" and
substituting therefor the following:
"(other than the January 1999 Equity, the Cash
proceeds of any Headquarters Financing or any other
Indebtedness permitted under subsection 7.1)".
(v) Paragraph (f) of subsection 2.4B(ii) of the Credit
Agreement (before giving effect to the relettering
of such paragraph) is amended by:
(a) deleting the reference to "subsections
2.4B(ii)(a)-(e)" contained therein and substituting
therefor "subsections 2.4B(ii)(a)-(f)"; and
(b) adding the phrase "(including, without limitation,
the Melbourne Asset Sale)" immediately after the
phrase "Net Cash Proceeds of Asset Sale".
B. APPLICATION OF PREPAYMENTS. Subsection 2.4B(iii)(b) of the Credit
Agreement is hereby amended by deleting it in its entirety and
substituting therefor the following:
"(b) APPLICATION OF MANDATORY PREPAYMENTS OF LOANS TO THE
SCHEDULED INSTALLMENTS OF PRINCIPAL THEREOF. Except as
provided in subsection 2.4B(ii)(b), any mandatory
prepayment of the Loans shall be applied to reduce the
scheduled installments of principal of the Loans set
forth in subsection 2.4A in inverse order of maturity."
3.4 AMENDMENTS TO SUBSECTION 6.4: MAINTENANCE OF PROPERTIES; INSURANCE.
-------------------------------------------------------------------
Subsection 6.4 of the Credit Agreement is amended (a) by deleting
the phrase "subsection 2.4B(ii)(a) and" and (b) by adding the phrase "and
subsection 2.4B(iii)(d)" immediately after the phrase "subsection
2.4B(iii)(c)".
3.5 AMENDMENTS TO SUBSECTION 7.5: RESTRICTED JUNIOR PAYMENTS.
---------------------------------------------------------
Subsection 7.5 of the Credit Agreement is hereby amended by deleting
it in its entirety and substituting therefor the following:
"7.5 RESTRICTED JUNIOR PAYMENTS.
--------------------------
Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, declare, order,
pay, make or set apart any sum for any Restricted Junior
Payment; PROVIDED that (i) on or after August 1, 1999,
Company may repurchase certain Subordinated Notes so long as
(a) such Subordinated Notes are repurchased only with
proceeds of the Melbourne Asset Sale constituting all or a
portion of the Initial Retained Amount, (b) Company shall
have made the regularly scheduled interest payment due on
August 1, 1999 in respect of the Subordinated Notes (subject
5
<PAGE>
to clause (ii) hereof), and (c) no Event of Default or
Potential Event of Default shall have occurred and be
continuing or shall be caused thereby; (ii) Company may make
regularly scheduled payments of interest in respect of the
Subordinated Indebtedness in accordance with the terms of,
and only to the extent required by, and subject to the
subordination provisions contained in, the indenture or
other agreement pursuant to which such Subordinated
Indebtedness was issued, as such indenture or other
agreement may be amended from time to time to the extent
permitted under subsection 7.15B; and (iii) so long as no
Event of Default or Potential Event of Default shall have
occurred and be continuing or shall be caused thereby,
Company may make Restricted Junior Payments to repurchase
shares of Company Common Stock (or options or warrants to
acquire Company Common Stock) from Management Investors in
accordance with the terms of the Stockholders Agreement."
3.6 AMENDMENTS TO SUBSECTION 7.6: FINANCIAL COVENANTS.
-------------------------------------------------
Subsections 7.6A, B, and D of the Credit Agreement are hereby amended
by deleting them in their entirety and substituting therefor the following:
"A. MAXIMUM LEVERAGE RATIO. Company shall not permit the ratio of (i)
Consolidated Total Debt as of the last day of any four-Fiscal Quarter
period ending during any of the periods set forth below (or as of the last
day of any of the one, two or three Fiscal Quarter periods, as the case may
be, occurring after January 1, 1999 and ending on or before September 30,
1999) to (ii) Consolidated EBITDA for such one, two, three or four-Fiscal
Quarter period, as the case may be, to exceed the applicable correlative
ratio indicated in the relevant column below (depending on whether or not
the Melbourne Asset Sale has been consummated on or before the last day of
the applicable one, two, three or four-Fiscal Quarter period):
MAXIMUM LEVERAGE RATIO MAXIMUM LEVERAGE RATIO
(BEFORE THE MELBOURNE (AFTER THE MELBOURNE
PERIOD ASSET SALE) ASSET SALE)
--------------------- ----------------------- ------------------------
January 1, 1999 - 13.30:1.00 15.10:1.00
March 31, 1999
April 1, 1999 - 13.40:1.00 15.70:1.00
June 30, 1999
July 1, 1999 - 10.60:1.00 13.00:1.00
September 30, 1999
October 1, 1999 - 6.20:1.00 6.80:1.00
December 31, 1999
6
<PAGE>
January 1, 2000 - 6.20:1.00 6.60:1.00
March 31, 2000
April 1, 2000 - 5.80:1.00 6.20:1.00
June 30, 2000
July 1, 2000 - 5.50:1.00 5.90:1.00
September 30, 2000
October 1, 2000 - 5.20:1.00 5.70:1.00
December 31, 2000
January 1, 2001 - 5.00:1.00 5.50:1.00
March 31, 2001
April 1, 2001 - 4.80:1.00 5.20:1.00
June 30, 2001
July 1, 2001 - 4.60:1.00 4.90:1.00
September 30, 2001
October 1, 2001 - 4.40:1.00 4.70:1.00
December 31, 2001
January 1, 2002 - 4.20:1.00 4.50:1.00
March 31, 2002
B. MINIMUM CONSOLIDATED EBITDA. Company shall not permit Consolidated
EBITDA for any four Fiscal Quarter period ending on any of the dates set
forth below (or for any of the one, two or three consecutive Fiscal Quarter
periods, as the case may be, occurring after January 1, 1999 and ending on
or before September 30, 1999) to be less than the applicable correlative
amount indicated in the relevant column below (depending on whether or not
the Melbourne Asset Sale has been consummated on or before the last day of
the applicable one, two, three or four-Fiscal Quarter period):
MINIMUM CONSOLIDATED MINIMUM CONSOLIDATED
EBITDA (BEFORE THE EBITDA (AFTER THE
DATE MELBOURNE ASSET SALE) MELBOURNE ASSET SALE)
------------------ ------------------------- ---------------------------
March 30, 1999 8,700,000 7,400,000
7
<PAGE>
June 30, 1999 19,500,000 16,600,000
September 30, 1999 34,900,000 29,900,000
December 31, 1999 52,100,000 44,800,000
March 30, 2000 55,900,000 47,500,000
June 30, 2000 58,300,000 49,300,000
September 30, 2000 60,700,000 51,300,000
December 31, 2000 61,800,000 52,000,000
March 30, 2001 62,500,000 53,000,000
June 30, 2001 63,500,000 54,100,000
September 30, 2001 65,500,000 55,700,000
December 31, 2001 69,200,000 59,100,000
March 31, 2002 70,300,000 60,000,000
D. MINIMUM INTEREST COVERAGE RATIO. Company shall not permit the ratio
of (i) Consolidated EBITDA MINUS Consolidated Capital Expenditures to (ii)
Consolidated Interest Expense for any four-Fiscal Quarter period ending
during any of the periods set forth below (or for any of the one, two or
three consecutive Fiscal Quarter periods, as the case may be, occurring
after January 1, 1999 and ending on or before September 30, 1999) to be
less than the applicable correlative ratio indicated in the relevant column
below (depending on whether or not the Melbourne Asset Sale has been
consummated on or before the last day of the applicable one, two, three or
four-Fiscal Quarter period):
MINIMUM INTEREST MINIMUM INTEREST
COVERAGE RATIO COVERAGE RATIO
(BEFORE THE MELBOURNE (AFTER THE MELBOURNE
PERIOD ASSET SALE) ASSET SALE)
--------------------- --------------------- --------------------
January 1, 1999 - 0.00:1.00 0.00:1.00
March 31, 1999
8
<PAGE>
April 1, 1999 - 0.00:1.00 0.00:1.00
June 30, 1999
July 1, 1999- 0.20:1.00 0.15:1.00
September 30, 1999
October 1, 1999 - 0.70:1.00 0.65:1.00
December 31, 1999
January 1, 2000 - 0.70:1.00 0.60:1.00
March 31, 2000
April 1, 2000 - 0.80:1.00 0.60:1.00
June 30, 2000
July 1, 2000 - 0.80:1.00 0.70:1.00
September 30, 2000
October 1, 2000 - 0.90:1.00 0.70:1.00
December 31, 2000
January 1, 2001 - 0.95:1.00 0.70:1.00
March 31, 2001
April 1, 2001 - 1.00:1.00 0.80:1.00
June 30, 2001
July 1, 2001 - 1.05:1.00 0.85:1.00
September 30, 2001
October 1, 2001 - 1.10:1.00 0.90:1.00
December 31, 2001
January 1, 2002 - 1.20:1.00 1.00:1.00
March 31, 2002
3.7 AMENDMENTS TO SUBSECTION 7.7: RESTRICTION ON FUNDAMENTAL CHANGES;
-----------------------------------------------------------------
ASSET SALES AND ACQUISITIONS.
----------------------------
Subsection 7.7(vii) of the Credit Agreement is hereby amended by
deleting it in its entirety and substituting therefor the following:
9
<PAGE>
"(vii) subject to subsection 7.13, Company and its Subsidiaries (a) may
make Asset Sales constituting Specified Asset Sale/Financings or the
Melbourne Asset Sale and (b) may make other Asset Sales of assets having a
fair market value not in excess of $2,000,000 in the aggregate during the
term of this Agreement; PROVIDED that (x) the consideration received for
the assets that are the subject of any such Asset Sale described in the
foregoing clause (a) or (b) shall be in an amount at least equal to the
fair market value thereof; (y) at least 80% (or 100% in the case of the
Melbourne Asset Sale) of the consideration received shall be cash; and (z)
the proceeds of such Asset Sales shall be applied as required by subsection
2.4B(ii)(a) or (b), as the case may be; and PROVIDED, FURTHER that, the
Melbourne Asset Sale shall occur on or before December 31, 1999 and the
consideration received therefor shall be in a net aggregate amount of not
less than $37,500,000."
3.8 AMENDMENT TO SUBSECTION 7.17: RECEIVABLES PROGRAM.
-------------------------------------------------
Subsection 7.17 of the Credit Agreement is amended by deleting the
reference to "subsection 2.4B(ii)(c)" contained therein and substituting
therefor "subsection 2.4B(ii)(d)".
3.9 AMENDMENTS TO SECTION 8: EVENTS OF DEFAULT.
------------------------------------------
Section 8 of the Credit Agreement is hereby amended (a) by adding "or"
at the end of subsection 8.13, and (b) by adding a new subsection 8.14
thereto as follows:
"8.14 STONINGTON FUND'S FAILURE TO MAKE THE JANUARY 1999
--------------------------------------------------
EQUITY CONTRIBUTION.
-------------------
Stonington Fund shall not have contributed the January 1999
Equity to Company on or before January 28, 1999, in cash in an
aggregate amount of at least $20,000,000:"
SECTION 4. CONDITIONS TO EFFECTIVENESS
Sections 1, 2 and 3 of this Amendment shall become effective only upon
the prior or concurrent satisfaction of all of the following conditions (the
date of satisfaction of such conditions being referred to herein as the "FIRST
AMENDMENT EFFECTIVE DATE"):
A. COMPANY DOCUMENTS. On or before the First Amendment Effective Date,
Company shall deliver to Lenders (or to Administrative Agent for
Lenders with sufficient originally executed copies, where appropriate,
for each Lender and its counsel) the following, each, unless otherwise
noted, dated the First Amendment Effective Date:
(i) Resolutions of its Board of Directors approving and
authorizing the execution, delivery, and performance of this
Amendment, certified as of the First Amendment Effective
Date by its corporate secretary or an assistant secretary as
being in full force and effect without modification or
amendment;
10
<PAGE>
(ii) Signature and incumbency certificates of its officers
executing this Amendment; and
(iii) Executed copies of this Amendment.
B. FIFTH AMENDMENT TO EXISTING CREDIT AGREEMENT. All conditions set
forth in subsection 4 of that certain Fifth Amendment and Limited
Waiver to Credit Agreement dated as of December 31, 1998 by and among
Company and Existing Lenders (the "FIFTH AMENDMENT TO EXISTING CREDIT
AGREEMENT") shall have been satisfied and the Fifth Amendment to
Existing Credit Agreement shall have become effective.
C. OPINION OF COMPANY'S COUNSEL. Lenders shall have received
originally executed copies of a favorable written opinion of Dan Hart,
Esq., counsel for Company, in form and substance satisfactory to
Administrative Agent and its counsel, dated the First Amendment
Effective Date.
D. OTHER PROCEEDINGS. On or before the First Amendment Effective Date,
all corporate and other proceedings taken or to be taken in connection
with the transactions contemplated hereby and all documents incidental
thereto not previously found acceptable by Administrative Agent,
acting on behalf of Lenders, and its counsel shall be satisfactory in
form and substance to Administrative Agent and such counsel, and
Administrative Agent and such counsel shall have received all such
counterpart originals or certified copies of such documents as
Administrative Agent may reasonably request.
SECTION 5. COMPANY'S REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Amendment and to amend
the Credit Agreement in the manner provided herein, Company represents and
warrants to each Lender that the following statements are true, correct and
complete:
A. CORPORATE POWER AND AUTHORITY. Company has all requisite corporate
power and authority to enter into this Amendment and to carry out the
transactions contemplated by, and perform its obligations under, the
Credit Agreement as amended by this Agreement (the "AMENDED
AGREEMENT").
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this
Amendment and the performance of the Amended Agreement have been duly
authorized by all necessary corporate action on the part of Company.
C. NO CONFLICT. The execution and delivery by Company of this
Amendment and the performance by Company of the Amended Agreement do
not and will not (i) violate any provision of any law or any
governmental rule or regulation applicable to Company or any of its
Subsidiaries, the Certificate or Articles of Incorporation or Bylaws
of Company or any of its Subsidiaries or any order, judgment or decree
of any court or other agency of government binding on Company or any
of its Subsidiaries, (ii) conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under
11
<PAGE>
any Contractual Obligation of Company or any of its Subsidiaries,
(iii) result in or require the creation or imposition of any Lien upon
any of the properties or assets of Company or any of its Subsidiaries
(other than Liens created under any of the Loan Documents in favor of
Agents on behalf of Lenders), or (iv) require any approval of
stockholders or any approval or consent of any Person under any
Contractual Obligation of Company or any of its Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by Company of
this Amendment and the performance by Company of the Amended Agreement
do not and will not require any registration with, consent or approval
of, or notice to, or other action to, with or by, any federal, state
or other governmental authority or regulatory body.
E. BINDING OBLIGATION. This Amendment has been duly executed and
delivered by Company, and this Amendment and the Amended Agreement are
the legally valid and binding obligations of Company, enforceable
against Company in accordance with their respective terms, except as
may be limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws relating to or limiting creditors' rights generally or
by equitable principles (regardless of whether such enforceability is
considered in a proceeding at law or in equity).
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT
AGREEMENT. The representations and warranties contained in Section 5
of the Credit Agreement are and will be true, correct and complete in
all material respects on and as of the First Amendment Effective Date
to the same extent as though made on and as of that date, except to
the extent such representations and warranties specifically relate to
an earlier date, in which case they were true, correct and complete in
all material respects on and as of such earlier date.
G. ABSENCE OF DEFAULT. (i) After giving effect to this Amendment, no
event has occurred and is continuing that would constitute an Event of
Default or a Potential Event of Default and (ii) no Event of Default
or Potential Event of Default will result from the consummation of the
transactions contemplated by this Amendment.
SECTION 6. MISCELLANEOUS
A. Reference to and Effect on the Credit Agreement and the Other Loan
Documents.
(i) On and after the First Amendment Effective Date, each
reference in the Credit Agreement to "this Agreement",
"hereunder", "hereof", "herein" or words of like import
referring to the Credit Agreement, and each reference in
the other Loan Documents to the "Credit Agreement",
"thereunder", "thereof" or words of like import referring
12
<PAGE>
to the Credit Agreement shall mean and be a reference to
the Amended Agreement.
(ii) Except as specifically amended or waived by this
Amendment, the Credit Agreement and the other Loan
Documents shall remain in full force and effect and are
hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Amendment
shall not, except as expressly provided herein, constitute
a waiver of any provision of, or operate as a waiver of
any right, power or remedy of Agent or any Lender under,
the Credit Agreement or any of the other Loan Documents.
B. FEES AND EXPENSES. Company acknowledges that all costs, fees and
expenses as described in subsection 10.2 of the Credit Agreement
incurred by Administrative Agent and its counsel with respect to this
Amendment and the documents and transactions contemplated hereby shall
be for the account of Company.
C. HEADINGS. Section and subsection headings in this Amendment are
included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose or be given
any substantive effect.
D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW
YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL
OBLIGATIONS LAW OF THE STATE OF NEW YORK).
E. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered (whether in
original form or by telecopy) shall be deemed an original, but all
such counterparts together shall constitute but one and the same
instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all
signature pages are physically attached to the same document. This
Amendment (other than the provisions of Section 1-3 hereof, the
effectiveness of which is governed by Section 4 hereof) shall become
effective upon the execution of a counterpart hereof by Company and by
Requisite Lenders and upon receipt by Company and Administrative Agent
of written or telephonic notification of such execution and
authorization of delivery thereof.
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
COMPANY:
DICTAPHONE CORPORATION
By: /s/ JOSEPH D. SKRZYPCZAK
------------------------------------------------
Name: Joseph D. Skrzypczak
Title: Chief Operating Officer
S-1
<PAGE>
LENDERS:
MORGAN STANLEY SENIOR FUNDING, INC.
By: /s/ C. PUCILLO
------------------------------------------------
Name: C. Pucillo
Title: Vice President
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
By:
------------------------------------------------
Name:
Title:
CAPTIVA FINANCE LTD.
By: /s/ DAVID EGGLISHAW
------------------------------------------------
Name: David Egglishaw
Title:
CAPTIVA II FINANCE LTD.
By: /s/ DAVID EGGLISHAW
------------------------------------------------
Name: David Egglishaw
Title:
CERES FINANCE LTD.
By: /s/ DAVID EGGLISHAW
------------------------------------------------
Name: David Egglishaw
Title:
S-2
<PAGE>
GOLDMAN, SACHS & CO.
By:
------------------------------------------------
Name:
Title:
KZH-PAMCO CORPORATION
By:
------------------------------------------------
Name:
Title:
ML CBO IV (CAYMAN) LTD.
Highland Capital Management, L.P.
as Collateral Manager
By: /s/ JAMES DONDERO
------------------------------------------------
Name: James Dondero
Title: President
Highland Capital Management, L.P.
PAMCO CAYMAN LTD
By Highland Capital Management, L.P.
as Collateral Manager
By:/s/ JAMES DONDERO
------------------------------------------------
Name: James Dondero
Title: President
Highland Capital Management, L.P.
S-3
<PAGE>
PAMCO CAPITAL FUNDING, L.P.
By Highland Capital Management, L.P.
as Collateral Manager
By:/s/ JAMES DONDERO
------------------------------------------------
Name: James Dondero
Title: President
Highland Capital Management, L.P.
S-4
October 21, 1998
Mr. Joseph D. Skrzypczak
Chief Operating Officer
Dictaphone Corporation
3191 Broadbridge Avenue
Stratford, CT 06614
Dear Joe:
Reference is made to the employment letter agreement (the "1995
Agreement") dated July 21, 1995 and the employment letter agreement dated July
9, 1997 (the "1997 Agreement") both by and between Dictaphone Corporation
("Dictaphone" or the "Company") and you.
This letter will set forth our agreement with respect to certain aspects
of your employment relationship with Dictaphone and your new duties as Chief
Operating Officer.
For good and valuable consideration, including but not limited to the
agreements set forth herein, receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. POSITION AND DUTIES. You are appointed to serve Chief Operating
Officer of the Company, reporting to the Chairman and Chief
Executive Officer, with operating responsibility for the CRS,
IHS/IVS, Service and Information Systems, together with such
additions and/or changes as may be determined by the CEO and
Board of Directors of the Company. You understand and agree that
the Company presently intends to hire a new Chief Financial
Officer (with responsibility for the Company's financial affairs
and investor relations) and a new Chief Technical Officer (with
responsibility for product development and engineering), both of
which shall report to the CEO. Until the CFO and CTO positions
are filled by the Company, you shall continue to manage the
finance and engineering functions in your organization under the
terms provided herein.
<PAGE>
Mr. Joseph D. Skrzypczak
October 21, 1998
Page 2
2. SALARY. Your annual base salary is increased to Three Hundred Thirty
Five Thousand Dollars ($335,000) per year, effective immediately;
such salary, as may be increased from time to time, shall not be
decreased.
3. BONUS ARRANGEMENTS; STOCK OPTIONS.
3.1 BONUSES. With respect to calendar year 1998, you shall be paid
a minimum guaranteed bonus equal to fifty percent (50%) of
your base salary (pro-rated for the change in base salary
provided above), payable in the first quarter of 1999.
Subsequent to 1998, you shall be eligible to participate in
the standard senior executive bonus plan, which provides for a
potential bonus of up to 100% of base salary, but which does
not provide for a minimum guaranteed bonus.
3.2 ADDITIONAL STOCK OPTIONS. You shall be granted an additional
Twenty Thousand (20,000) stock options pursuant to the
Company's 1995 Stock Option Plan, as amended.
4. PRIOR AGREEMENTS TERMINATED. The 1995 Agreement and the 1997
Agreement are hereby terminated and are of no further force and
effect. In consideration of your agreement to terminate such
agreements, Dictaphone shall pay to you the sum of Two Hundred and
Fifty Thousand ($250,000), promptly following the execution of this
Agreement.
5. SEVERANCE ARRANGEMENTS. As an "at will" employee, you or the Company
have the right to terminate your employment at will at any time. In
the event that your employment with Dictaphone is terminated by
Dictaphone without "cause" ( as defined on Exhibit A hereto), you
shall be offered an "Executive Severance Arrangement" by the
Company.
Under the terms of the aforementioned "Executive Severance
Arrangement," you will be offered your salary at the time of
separation for a period of twenty-four (24) months payable on
regular pay days such. Severance pay will be payable to you in full
regardless of your employment status with any other company. In
addition, you will be eligible for outplacement services at a
nationally recognized outplacement firm of the Company's choosing
for the severance period or, in lieu of such services, cash payment
consistent with past Company practice. Medical, dental and life
insurances will be extended to you at the rate that you would have
paid as an active employee under the terms and conditions of those
plans for up to twelve (12) months or until you have secured
employment elsewhere. You will be eligible for COBRA continuation of
applicable benefits for an additional six (6) months for a total
coverage period of eighteen (18) months.
<PAGE>
Mr. Joseph D. Skrzypczak
October 21, 1998
Page 3
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 and severance agreement will
also include a non-compete, non-solicitation of key employees,
non-disclosure of confidential information and an agreement to
cooperate with the Company on any legal and otherwise reasonable
business issues requiring your involvement for resolution.
6. MISCELLANEOUS. This Agreement contains the entire agreement between
the parties hereto with respect to those matters addressed herein.
The provisions of this Agreement shall be governed by the laws of
the State of Connecticut and shall be binding upon Dictaphone's
successors and assigns.
Please indicate your acceptance of this Agreement by signing in the space
provided below.
Sincerely,
Dictaphone Corporation
By: /s/ JOHN H. DUERDEN
-----------------------------------------
John H. Duerden
Chairman and Chief Executive Officer
cc: Executive Compensation Committee
of the Board of Directors of Dictaphone
Agreed to and Accepted:
By: /s/ JOSEPH D. SKRZYPCZAK
--------------------------------------
Joseph D. Skrzypczak
Dated:___________________________________
<PAGE>
ANNEX A
DEFINITIONS
1. "Cause" is defined as
(i) a severe breach of business ethics;
(ii) a violation of stated company policy which has been previously
characterized as a terminable offense;
(iii) any act by you which could cause harm or embarrassment to the
Company were it to be made public; or
(iv) any, willful or negligent material dereliction or substantial
under-performance of your job duties and responsibilities which
dereliction or under-performance is either (a) not capable of cure
or (b) if capable or cure are not so cured within 10 days after
written notice from the Chief Executive Officer of the Company.
Exhibit 10.20
May 28, 1997
Daniel P. Hart, Esq.
17 Whitney Street
Westport, CT 06880
Dear Dan:
In light of Kim Carpenter's imminent departure, I have asked you to be
responsible for the Company's Human Resources department and function on a
temporary basis. You have agreed to serve in that capacity for the period ending
September 1, 1997.
In consideration of your agreement to serve in the new role, the
Company agrees that, in the event that you continue to be responsible for the
Human Resources function beyond September 1, 1997, the following benefits and
agreements shall automatically (effective September 1, 1997) take effect:
1. Your base salary shall be increased by fifteen (15%) percent;
and
2. Your bonus in respect of 1997 shall be paid in the first
quarter of 1998 and shall be guaranteed to be a minimum of not
less than thirty five (35%) percent of your base salary; and
3. The two-year severance benefits you currently enjoy shall be
amended as follows:
(i) you shall be entitled to guaranteed salary
continuation severance benefits, without mitigation,
for a period of eighteen (18) months; and
(ii) you shall be entitled to six (6) months
non-guaranteed severance benefits thereafter,
consistent with Company practice in effect as of the
date hereof.
<PAGE>
Daniel P. Hart, Esq.
May 28, 1997
Page 2
You shall continue to be entitled to such other severance benefits
consistent with Company practice in effect as of the date hereof.
This agreement is dated as of the date first written above.
Sincerely,
/s/ JOHN H. DUERDEN
John H. Duerden
JHD/mgt
Agreed to and Accepted:
By: /s/ DANIEL P. HART
------------------------------
Daniel P. Hart
Exhibit 10.21
[DICTAPHONE LETTERHEAD]
November 11, 1996
Mr. Dan Hart
General Counsel
Dictaphone Corporation
3191 Broadbridge Avenue
Stratford, CT 06497
Dear Dan:
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 Stonington 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.
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
<PAGE>
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
insurances will be extended to you at the rate that you would have paid as an
active employee under the terms and conditions of those plans for up to 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, an 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 sited above.
Sincerely,
/s/ JOHN H. DUERDEN
John H. Duerden
/s/ DAN HART 11/11/96
- ------------------------------- ---------------------------------
Dan Hart Date
<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,
1998 and the condensed consolidated statement of operations for the year ended
December 31, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 11,727
<SECURITIES> 0
<RECEIVABLES> 78,400
<ALLOWANCES> 968
<INVENTORY> 53,362
<CURRENT-ASSETS> 150,103
<PP&E> 67,188
<DEPRECIATION> 34,763
<TOTAL-ASSETS> 454,256
<CURRENT-LIABILITIES> 99,011
<BONDS> 369,737
23,915
0
<COMMON> 130
<OTHER-SE> (52,607)
<TOTAL-LIABILITY-AND-EQUITY> 454,256
<SALES> 244,393
<TOTAL-REVENUES> 332,318
<CGS> 188,688
<TOTAL-COSTS> 345,688
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,715
<INCOME-PRETAX> (52,812)
<INCOME-TAX> (878)
<INCOME-CONTINUING> (53,690)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (53,690)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
