UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 33-93464
DICTAPHONE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 06-0992637
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3191 BROADBRIDGE AVENUE
STRATFORD, CT 06614
(203) 381-7000
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ____
Number of shares of Common Stock, par value $.01 per share, outstanding as of
May 11, 1999: 12,934,000 The Common Stock of the registrant is not publicly
traded.
<PAGE>
DICTAPHONE CORPORATION
----------------------
INDEX
-----
PAGE NO.
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Statements
of Operations for the Three Months Ended
March 31, 1999 and March 31, 1998 2
Condensed Consolidated Balance Sheets as of
March 31, 1999 (Unaudited) and December 31, 1998 3
Unaudited Condensed Consolidated Statements
of Cash Flow for the Three Months Ended
March 31, 1999 and March 31, 1998 4
Notes to Unaudited Consolidated Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings 24
ITEM 6. Exhibits and Reports on Form 8-K 24
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1999
-------------- --------------
Revenues:
<S> <C> <C>
Product sales and rentals $ 49,647 $ 48,228
Contract manufacturing sales 11,947 10,348
Support services 22,231 24,035
---------- ----------
Total revenue 83,825 82,611
---------- ----------
Costs and expenses:
Cost of sales, rentals and support services 45,012 43,450
Selling and administrative 27,110 26,955
Amortization of intangibles 7,881 3,239
Research and development 4,700 2,438
---------- ----------
Operating (loss) profit (878) 6,529
Interest expense 9,797 10,139
Other (income) expense - net (826) 331
---------- ----------
Loss before income taxes (9,849) (3,941)
Income tax expense 996 225
---------- ----------
Net loss (10,845) (4,166)
Stock dividends on PIK Preferred Stock 729 1,231
---------- ----------
Net loss applicable to Common Stock $ (11,574) $ (5,397)
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 11,727 $ 4,760
Accounts receivable, less allowances of $968 and $2,453, respectively 77,432 89,409
Inventories 53,362 48,899
Other current assets 7,259 5,367
---------- ----------
Total current assets 149,780 148,435
Property, plant and equipment, net 32,425 35,033
Deferred financing costs, net of accumulated amortization of $14,246
and $14,731, respectively 9,920 9,435
Intangibles, net of accumulated amortization of $122,595 and $125,834, respectively 206,122 203,047
Deferred tax asset 39,765 39,721
Other assets 16,315 18,093
---------- ----------
Total assets $ 454,327 $ 453,764
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,778 $ 7,591
Interest payable 10,067 4,150
Accrued pension liability 8,352 8,786
Accrued liabilities 31,433 24,031
Advance billings 39,586 44,407
Current portion of long-term debt 795 790
---------- ----------
Total current liabilities 99,011 89,755
Long-term debt 369,737 362,688
Other liabilities 14,141 14,163
---------- ----------
Total liabilities 482,889 466,606
---------- ----------
Contingencies (Note 5)
Stockholders' equity:
Preferred stock ($.01 par value; 7,500,000 shares authorized; 2,391,500 and
2,473,300 shares of 14% PIK perpetual preferred stock issued and
outstanding, liquidation values of $23,915 and $24,733
at December 31, 1998 and March 31, 1999, respectively) 23,915 24,733
Preferred stock ($.01 par value; 10,000,000 shares authorized; NONE
and 2,000,000 shares of 12% Convertible PIK preferred stock issued and
outstanding, liquidation values of $ NONE and $20,413 at December
31, 1998 and March 31, 1999, respectively) --- 20,413
Common stock ($.01 par value; 30,000,000 shares authorized;
12,934,000 shares outstanding at December 31, 1998 and March 31, 1999) 130 130
Notes receivable from stockholders (741) (741)
Additional paid-in capital 120,955 119,724
Treasury stock, at cost (660) (660)
Accumulated deficit (170,417) (174,583)
Accumulated other comprehensive loss (1,744) (1,858)
---------- ----------
Total stockholders' equity (deficit) (28,562) (12,842)
---------- ----------
Total liabilities and stockholders' equity $ 454,327 $ 453,764
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1999
-------------- --------------
Operating activities:
<S> <C> <C>
Net loss $ (10,845) $ (4,166)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 10,778 6,140
Provision for deferred income taxes 1,110 25
Changes in assets and liabilities:
Accounts receivable (3) (12,023)
Inventories (3,220) 4,443
Other current assets 791 1,803
Accounts payable and accrued liabilities (13,073) (13,887)
Advance billings 1,446 4,825
Other assets and other (1,505) (3,036)
---------- ----------
Net cash used in operating activities (14,521) (15,876)
---------- ----------
Investing activities:
Net investment in fixed assets (2,194) (3,733)
---------- ----------
Net cash used in investing activities (2,194) (3,733)
---------- ----------
Financing activities:
Sale of preferred stock --- 20,000
Borrowings under revolving credit facility 20,000 12,500
Repayment under revolving credit facility (8,000) (19,500)
Other 65 (316)
---------- ----------
Net cash provided by financing activities 12,065 12,684
---------- ----------
Effect of exchange rate changes on cash (32) (42)
---------- ----------
Decrease in cash (4,682) (6,967)
Cash and cash equivalents, beginning of period 10,277 11,727
---------- ----------
Cash and cash equivalents, end of period $ 5,595 $ 4,760
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 15,208 $ 15,817
========== ==========
Income taxes paid $ 57 $ 15
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
DICTAPHONE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, or as otherwise indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements of the Company are
unaudited, as of and for the three month periods ended March 31, 1999 and
March 31, 1998, but in the opinion of management contain all adjustments
which are of a normal and recurring nature necessary to present fairly
the financial position and results of operations and cash flows for the
periods presented. These financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31,
1998.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
COSTS AND EXPENSES. Operating expenses of field sales and service
offices which represent the cost of support services revenue are included
in cost of sales.
DERIVATIVE FINANCIAL INSTRUMENTS. The Company has only limited
involvement with derivative financial instruments and does not use them
for trading purposes. The Company enters into interest rate swap 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.
ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). The statement requires companies to recognize
all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains
or losses, depends on the intended use of the derivative and its
resulting designation. The statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. The Company will adopt
SFAS 133 by January 1, 2000. Adoption of SFAS 133 is not currently
expected to have a material impact on the Company's consolidated
financial statements.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1 ("SOP 98-1"), "Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use." The statement is effective for fiscal years beginning after
December 15, 1998. The statement defines which costs of computer software
developed or obtained for internal use are capital and which costs are
expensed. The Company adopted SOP 98-1 effective January 1, 1999. The
adoption of SOP 98-1 did not have a material impact on the Company's
consolidated financial position or results of operations for the first
quarter of 1999 and is not expected to have a material impact on the
Company's consolidated financial statements.
5
<PAGE>
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ----------
<S> <C> <C>
Raw materials and work in process $ 15,799 $ 16,055
Supplies and service parts 15,376 14,480
Finished products 22,187 18,364
---------- ----------
Total inventories $ 53,362 $ 48,899
========== ==========
</TABLE>
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.
3. INTANGIBLES
The following summarizes intangible assets, net of accumulated
amortization and writedowns of $122,595 and $125,834 at December 31, 1998
and March 31, 1999, respectively. Amortization expense for the three
months ended March 31, 1998 and 1999 was $7,881 and $3,239, respectively.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
----------- -----------
<S> <C> <C>
Goodwill $ 127,611 $ 126,403
Tradenames 71,265 70,778
Service contracts 2,530 1,501
Non-compete agreement 2,463 2,295
Patents 2,253 2,070
---------- ----------
$ 206,122 $ 203,047
========== ===========
</TABLE>
4. INCOME TAXES
The income tax expense for the three months ended March 31, 1999 is
$225.
The Company has recorded a gross deferred tax asset of $98.4
million reflecting the benefit of net operating loss carryforwards and
various book tax temporary differences. The net operating loss
carryforward for federal income tax purposes as of March 31, 1999 is
$130.0 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, $35.6 million
will expire in the year 2018 and $7.5 million will expire in the year
2020. 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. During the first three months of 1999, the Company increased its
valuation allowance by $1.5 million resulting in a net deferred tax asset
of $52.0 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 $52.0 million recorded at March 31, 1999, 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.
6
<PAGE>
5. 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.
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 the second half
of 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.
These proceedings are in the preliminary stage, and it is currently
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 Stock and Asset
Purchase Agreement, originally executed on April 25, 1995 and amended
August 11, 1995 between Dictaphone Acquisition Corporation and Pitney
Bowes (the "Acquisition Agreement"), subject to certain limitations.
7
<PAGE>
5. CONTINGENCIES AND CONCENTRATIONS OF RISK (CONTINUED)
The Company is a defendant in a number of additional lawsuits and
administrative proceedings, none of which will, in the opinion of
management, have a material adverse effect on the Company's consolidated
financial position or results of operations.
The Company does not believe that the ultimate resolution of the
litigation, administrative proceedings and environmental matters
described above in the aggregate will have a material adverse effect on
the Company's consolidated financial position or results of operations.
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT INFORMATION
The following consolidated financial statements include the Company
and all majority-owned subsidiaries as follows: Dictaphone Canada
Ltd/Ltee, Dictaphone Company Ltd., Dictaphone Deutschland GmbH,
Dictaphone Netherlands BV and Dictaphone International A.G. (together
"Dictaphone Non-U.S.").
Dictaphone Corporation has fully and unconditionally guaranteed the
repayment of $200.0 million of 11-3/4% Senior Subordinated Notes Due 2005
(the "Notes") issued to finance the acquisition of the Company from
Pitney Bowes. The Notes are subordinate to financing of the 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"),
and other senior indebtedness as defined in the indenture pursuant to
which the Notes were issued (the "Note Indenture"). The Credit Agreement
currently consists of a $75.0 million Tranche B Term Loan due June 30,
2002 (the "Tranche B Loan"), a $62.75 million Tranche C Term Loan due
June 30, 2002 (the "Tranche C Loan" and together with the Tranche B Loan,
the "Term Loans") and a six-year revolving credit facility of up to $40.0
million (the "Revolving Credit Facility"). Dictaphone Non-U.S. is not a
guarantor of the Notes. In January 1998, Dictaphone Corporation was
merged into Dictaphone Corporation (U.S.), whereupon the surviving
corporation changed its name to "Dictaphone Corporation".
8
<PAGE>
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
The following are the supplemental consolidating statements of
operations for the three month periods ended March 31, 1998 and 1999, the
supplemental consolidating balance sheet information as of December 31,
1998 and March 31, 1999, and cash flow information for the three month
periods ended March 31, 1998 and 1999.
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
THREE MONTHS ENDED MARCH 31, 1998
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue from:
Product sales and rentals $ 46,888 $ 5,917 $ (3,158) $ 49,647
Contract manufacturing sales 11,947 --- --- 11,947
Support services 20,260 1,971 --- 22,231
---------- ---------- ---------- ----------
Total revenues 79,095 7,888 (3,158) 83,825
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales, rentals and support services 43,154 5,069 (3,211) 45,012
Selling and administrative 31,431 3,560 --- 34,991
Research and development 4,700 --- --- 4,700
Interest expense - net and other 8,318 653 --- 8,971
---------- ---------- ---------- ----------
Total costs and expenses 87,603 9,282 (3,211) 93,674
---------- ---------- ---------- ----------
Equity (loss) earnings (752) --- 752 ---
---------- ---------- ---------- ----------
(Loss) income before income taxes (9,260) (1,394) 805 (9,849)
Income tax (expense) benefit (1,173) 186 (9) (996)
---------- ---------- ---------- ----------
Net (loss) income $ (10,433) $ (1,208) $ 796 $ (10,845)
========== ========== ========== ==========
</TABLE>
9
<PAGE>
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
THREE MONTHS ENDED MARCH 31, 1999
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue from:
Product sales and rentals $ 44,776 $ 5,722 $ (2,270) $ 48,228
Contract manufacturing sales 10,348 --- --- 10,348
Support services 21,931 2,104 --- 24,035
---------- ---------- ---------- ----------
Total revenues 77,055 7,826 (2,270) 82,611
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales, rentals and support services 41,312 4,426 (2,288) 43,450
Selling and administrative 27,956 2,238 --- 30,194
Research and development 2,438 --- --- 2,438
Interest expense - net and other 9,486 984 --- 10,470
---------- ---------- ---------- ----------
Total costs and expenses 81,192 7,648 (2,288) 86,552
---------- ---------- ---------- ----------
Equity earnings (loss) 605 --- (605) ---
---------- ---------- ---------- ----------
(Loss) income before income taxes (3,532) 178 (587) (3,941)
Income tax expense (22) (196) (7) (225)
---------- ---------- ---------- ----------
Net loss $ (3,554) $ (18) $ (594) $ (4,166)
========== ========== ========== ==========
</TABLE>
10
<PAGE>
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION
DECEMBER 31, 1998
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
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, net 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>
11
<PAGE>
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION
MARCH 31, 1999
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,173 $ 1,587 $ --- $ 4,760
Accounts receivable, less allowances 84,572 8,467 (3,630) 89,409
Inventories 46,850 2,322 (273) 48,899
Other current assets 2,307 3,272 (212) 5,367
---------- ---------- ---------- ----------
Total current assets 136,902 15,648 (4,115) 148,435
Investments in subsidiaries 29,265 --- (29,265) ---
Property, plant and equipment, net 32,069 2,964 --- 35,033
Deferred financing costs, net 9,435 --- --- 9,435
Intangibles, net 189,948 13,099 --- 203,047
Other assets 53,745 3,746 323 57,814
---------- ---------- ---------- ----------
Total assets $ 451,364 $ 35,457 $ (33,057) $ 453,764
========== ========== ==========- ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable, interest payable
and accrued liabilities $ 38,266 $ 10,846 $ (4,554) $ 44,558
Advance billings 41,402 3,005 --- 44,407
Current portion of long-term debt 628 162 --- 790
---------- ---------- ---------- ----------
Total current liabilities 80,296 14,013 (4,554) 89,755
Long-term debt 362,445 17,734 (17,491) 362,688
Other liabilities 13,399 764 --- 14,163
Stockholders' equity (deficit) (4,776) 2,946 (11,012) (12,842)
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 451,364 $ 35,457 $ (33,057) $ 453,764
========== ========== ========== ==========
</TABLE>
12
<PAGE>
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
THREE MONTHS ENDED MARCH 31, 1998
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss $ (10,433) $ (1,208) $ 796 $ (10,845)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 10,027 751 --- 10,778
Provision for deferred income taxes 1,153 (61) 18 1,110
Change in assets and liabilities:
Accounts receivable (2,099) 1,870 226 (3)
Inventories (3,003) (164) (53) (3,220)
Other current assets 1,294 (494) (9) 791
Accounts payable and accrued
liabilities (11,610) (1,387) (76) (13,073)
Advance billings 1,259 187 --- 1,446
Other assets and other (1,335) 732 (902) (1,505)
---------- ---------- ---------- ----------
Cash (used in) provided by operating
activities (14,747) 226 --- (14,521)
---------- ---------- ---------- ----------
Investing activities:
Net investment in fixed assets (1,748) (446) --- (2,194)
---------- ---------- ---------- ----------
Cash used in investing activities (1,748) (446) --- (2,194)
---------- ---------- ---------- ----------
Financing activities:
Repayment under term loan facility --- --- --- ---
Borrowing from revolving credit facility 20,000 --- --- 20,000
Repayment under revolving credit facility (8,000) --- --- (8,000)
Other (14) 79 --- 65
---------- ---------- ---------- ----------
Cash provided by financing activities 11,986 79 --- 12,065
---------- ---------- ---------- ----------
Effect of exchange rate changes on cash --- (32) --- (32)
---------- ---------- ---------- ---------
Decrease in cash (4,509) (173) --- (4,682)
Cash and cash equivalents,
beginning of period 8,276 2,001 --- 10,277
---------- ---------- ---------- ---------
Cash and cash equivalents,
end of period $ 3,767 $ 1,828 $ --- $ 5,595
========== ========== ========== ==========
</TABLE>
13
<PAGE>
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
THREE MONTHS ENDED MARCH 31, 1999
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss $ (3,554) $ (18) $ (594) $ (4,166)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 5,693 447 --- 6,140
Provision for deferred income taxes --- 25 --- 25
Change in assets and liabilities:
Accounts receivable (9,125) (1,731) (1,167) (12,023)
Inventories 3,816 645 (18) 4,443
Other current assets 1,755 41 7 1,803
Accounts payable and accrued
liabilities (14,942) 28 1,027 (13,887)
Advance billings 4,108 717 --- 4,825
Other assets and other (3,878) 97 745 (3,036)
---------- ---------- ---------- ----------
Cash (used in) provided by operating
activities (16,127) 251 --- (15,876)
---------- ---------- ---------- -----------
Investing activities:
Net investment in fixed assets (3,467) (266) --- (3,733)
---------- ---------- ---------- ----------
Cash used in investing activities (3,467) (266) --- (3,733)
---------- ---------- ---------- ----------
Financing activities:
Sale of Preferred Stock 20,000 --- --- 20,000
Borrowing from revolving credit facility 12,500 --- --- 12,500
Repayment under revolving credit facility (19,500) --- --- (19,500)
Other (347) 31 --- (316)
---------- ---------- ---------- ----------
Cash provided by financing activities 12,653 31 --- 12,684
---------- ---------- ---------- ----------
Effect of exchange rate changes on cash --- (42) --- (42)
---------- ---------- ---------- ----------
Decrease in cash (6,941) (26) --- (6,967)
Cash and cash equivalents,
beginning of period 10,114 1,613 --- 11,727
---------- ---------- ---------- ----------
Cash and cash equivalents,
end of period $ 3,173 $ 1,587 $ --- $ 4,760
========== ========== ========== ==========
</TABLE>
14
<PAGE>
7. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130") as of January 1, 1998.
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components.
Total comprehensive loss for the three months ended March 31, 1998
and 1999 consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1999
---- ----
<S> <C> <C>
Net loss $ (10,845) $ (4,166)
Foreign currency translation
adjustments (247) (114)
----------- -----------
Total comprehensive loss $ (11,092) $ (4,280)
=========== ===========
</TABLE>
15
<PAGE>
8. 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>
<CAPTION>
DICTAPHONE CORPORATION
SEGMENT PROFIT AND LOSS
SYSTEM
PRODUCTS & CONTRACT
SERVICES MANUFACTURING TOTAL
---------- ------------- -----
<S> <C> <C> <C> <C>
Revenue from external customers
Three months ended March 31, 1999 $ 72,263 $ 10,348 $ 82,611
Three months ended March 31, 1998 71,898 11,927 83,825
Intersegment revenues
Three months ended March 31, 1999 --- 10,527 10,527
Three months ended March 31, 1998 --- 17,400 17,400
Segment profit (loss)
Three months ended March 31, 1999 (5,095) 1,154 (3,941)
Three months ended March 31, 1998 (10,917) 1,068 (9,849)
Segment assets
As of March 31, 1999 447,867 44,183 492,050
As of December 31, 1998 $ 444,979 $ 43,805 $ 488,784
</TABLE>
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
OVERVIEW
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1999
---- ----
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C>
Total revenue $ 83.8 $ 82.6
Cost of sales, rentals and support services 45.0 43.5
Selling and administrative (1) 35.0 30.2
Research and development 4.7 2.4
--------- ---------
Operating (loss) profit $ (0.9) $ 6.5
---------- ---------
Net interest expense and other 8.9 10.5
Income tax expense 1.0 0.2
--------- ---------
Net loss $ (10.8) $ (4.2)
========= =========
EBITDA (2) $ 10.4 $ 12.0
========= =========
</TABLE>
---------------------
(1) Includes amortization of intangibles.
(2) 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.
17
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1999
---- ----
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C>
Revenue:
Sales:
Integrated Voice Systems................................... $ 12.5 $ 7.2
Integrated Health Systems.................................. 9.4 12.7
--------- ---------
Total U.S. Voice Systems............................... 21.9 19.9
Communications Recording Systems........................... 13.0 14.3
Customer Service Parts..................................... 4.4 3.9
International and Dealer Operations........................ 10.1 9.8
Rentals .................................................. 0.3 0.3
--------- ---------
Product sales and rentals.............................. 49.7 48.2
========= =========
Support service:
Customer Service........................................... 19.3 20.8
Application and Training Specialists....................... 0.9 1.1
International and Dealer Operations........................ 2.0 2.1
--------- ---------
Total support service.................................. 22.2 24.0
--------- ---------
Total System Products and Services......................... 71.9 72.2
Contract Manufacturing..................................... 11.9 10.4
--------- ---------
Total revenue .................................................. $ 83.8 $ 82.6
================= ===============
</TABLE>
RESULTS OF OPERATIONS - FIRST QUARTER 1999 VS. FIRST QUARTER 1998
Total revenue declined 1.4% to $82.6 million in the first quarter of 1999
from $83.8 million for the first quarter of 1998. This decline in revenue is
attributable to lower product sales revenue from Integrated Voice Systems
("I.V.S.") and lower revenue from International and Dealer Operations, offset in
part by increased product sales revenue from Integrated Health Systems
("I.H.S.") and Communications Recording Systems ("C.R.S.") and higher revenue
from Customer Service and Applications and Training Specialists ("A.T.S.").
Contract Manufacturing revenue declined 13.2% to $10.4 million from $11.9
million in the first quarter of 1998.
I.V.S. revenue declined 42.4% to $7.2 million in response to actions
taken by the Company in the fourth quarter of 1998 to reduce and consolidate its
sales force to focus on the more profitable systems business in commercial
markets. I.V.S. orders in the first quarter of 1999 declined 33.9% to $8.4
million from $12.7 million in the first quarter of 1998. I.H.S. revenue
increased 35.1% to $12.7 million from $9.4 million due to the continued growth
of Enterprise Express(TM) sales. I.H.S. orders in the first quarter of 1999
increased 109.6% to $13.8 million from $6.6 million in the first quarter of
1998. C.R.S. revenue increased 10.0% to $14.3 million due to increased
Prolog(TM)/Guardian(TM) sales. C.R.S. orders in the first quarter of 1999
increased 6.3% to $13.1 million from $12.3 million in the first quarter of 1998.
Customer Service revenue (including sale of parts) increased 4.5% to $24.7
million from $23.7 million due to increased warranty, installation and hourly
revenue. A.T.S. revenue increased 13.4% to $1.1 million due to increased
customer training provided in support of system products. Sales and Support
Service revenue from International and Dealer Operations declined slightly as
increased Canadian system revenue was offset by lower desktop/portable and
C.R.S. revenue in Europe and one time revenue in 1998 associated with
establishing a distributorship in Switzerland. International and Dealer
Operations orders in the first quarter of 1999 increased 7.4% to $9.9 million
from $9.2 million in 1998.
18
<PAGE>
Cost of sales, rentals and support services declined 3.5% to $43.5
million (52.6% of revenue) in the first quarter of 1999 from $45.0 million
(53.7% of revenue) in the first quarter of 1998. This decline in cost of sales
expressed as a percentage of revenue is attributable to lower Customer Service
costs, higher I.H.S. price realization and a reduced content of low margin
Contract Manufacturing revenue.
Selling and administrative expenses (including amortization of
intangibles) declined 13.7% to $30.2 million (36.6% of revenue) in the first
quarter of 1999 from $35.0 million (41.8% of revenue) in the first quarter of
1998. This decrease is attributable to lower amortization expense and lower
I.V.S. selling expenses associated with sales force reductions partially offset
by increased allowance for bad debts, higher I.H.S. selling expenses, costs
associated with the proposed sale of the Company's manufacturing facility and
higher legal settlement costs.
Research and development expenses of $2.4 million (5.1% of product sales
and rental revenue) declined 48.1% from $4.7 million (9.5% of product sales and
rental revenue), reflecting reduced staffing and compensation consistent with
the requirements of major project development efforts.
The Company recorded an operating profit of $6.5 million (7.9% of
revenue) during the first quarter of 1999 compared to an operating loss of $0.9
million (1.0% of revenue) for the first quarter of 1998. Excluding the impact of
the reduction in amortization expense, operating profit would have increased by
$2.8 million due to lower costs and reduced operating expenses.
The Company has recorded a gross deferred tax asset of $98.4 million
reflecting the benefit of net operating loss carryforwards and various book tax
temporary differences. The net operating loss carryforward for federal income
tax purposes as of March 31, 1999 is $130.0 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, $35.6
million will expire in the year 2018 and $7.5 million will expire in the year
2020. 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. During the first three months of 1999, the
Company increased its valuation allowance by $1.5 million resulting in net
deferred tax asset of $52.0 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 $52.0
million recorded at March 31, 1999, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements consist primarily of scheduled
payments of principal and interest on its indebtedness, working capital needs
and capital expenditures. At March 31, 1999, the Company had outstanding Term
Loans of $131.6 million, a $31.5 million loan outstanding under the $40.0
million Revolving Credit Facility and the Notes. Availability under the
Revolving Credit Facility at March 31, 1999 was $8.5 million. Scheduled annual
principal payments on the Term Loans are $0.6 million in 1999 and 2000, $36.3
million in 2001 and $94.0 million in 2002. 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
19
<PAGE>
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 Loans to be equal to that of 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 Capital Appreciation 1994
Fund, L.P. ("Stonington") for $20 million. In February 1999, $11.75 million were
used for the semi-annual interest payment on the Notes. Proceeds from the 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
which matured on February 16, 1999. The swap effectively converted that portion
of the Term Loans to a fixed rate component of 5.8%; thus, reducing the impact
of changes in interest rates, converting the total effective interest rate on
fifty percent of the initial outstanding Term Loans to 9.55%. No funds under the
swap agreements were actually borrowed or were repaid. Amounts due to or from
the counterparties were reflected in interest expense in the periods in which
they accrued. 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 and 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 of Notes outstanding as of March 31, 1999.
The Notes are subordinated to the Credit Agreement financings and other senior
indebtedness, as defined in the Note Indenture. The Notes contain covenants
similar to the Credit Agreement and provide for each noteholder to have the
right to require that the Company repurchase the Notes at 101% of the principal
amount upon a change of control (as defined in the Note Indenture). The Notes
bear interest of 11-3/4% per annum, payable semi-annually on each February 1 and
August 1. The Notes mature on August 1, 2005. At March 31, 1999, the fair value
of the Notes was favorable $56.0 million based on dealer quotes.
Capital expenditures for the first three months of 1999 totaled $3.7
million. The Company does not expect that the limitation on capital expenditures
contained in the Credit Agreement will limit, in any material respects, the
Company's ability to fund capital expenditures.
The Company's quarterly revenues and other operating results have been
and will continue to be affected by a wide variety of factors that could have a
material adverse effect on the Company's financial performance during any
particular quarter. Such factors include, but are not limited to, the level of
orders that are received and shipped by the Company in any given quarter, the
rescheduling and cancellation of orders by customers, availability and cost of
materials, the Company's ability to enhance its existing products and to
develop, manufacture and successfully introduce and market new products, new
product developments by the Company's competitors, market acceptance of products
of both the Company and its competitors, competitive pressures on prices, the
20
<PAGE>
ability to attract and retain 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
introduced a number of new products in its target markets in 1997, 1998 and the
first quarter of 1999 and plans to introduce additional new products during the
balance of 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. Notwithstanding the introduction of its new products, the 1999
sale of 12% Convertible Pay-in-Kind Preferred Stock to Stonington and its
availability under the Revolving Credit Facility, the Company will need to
improve cash flows from operating activities in order to satisfy the
requirements of the August 1, 1999 semi-annual interest payment on the Notes.
The Company has implemented new measures to improve working capital in order to
provide this improved cash flow, but there can be no assurance, however, that
the Company will be successful in such efforts.
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, products and equipment following remediation; and
Phase V - contingency planning.
The Company's Year 2000 efforts have been concentrated on 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-third quarter 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-third quarter 1999.
21
<PAGE>
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-third quarter 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
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.
22
<PAGE>
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 products, or continued use of the products 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. Factors that could cause actual results to differ from these forward
looking statements include, but are not limited to, those previously discussed
herein.
ITEM 3. 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 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" for
further information on intererst rate risk.
23
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
See Note 5 to the Company's Condensed Consolidated Statements of
Operations (Unaudited) which is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) EXHIBITS
--------
27 -- Financial Data Schedule.
UNDERTAKING:
The undersigned, Dictaphone Corporation, hereby undertakes, pursuant to
Regulation S-K, Item 601(b), paragraph (4) (iii), to furnish to the Securities
and Exchange Commission upon request all constituent instruments defining the
rights of holders of long-term debt of Dictaphone Corporation and its
consolidated subsidiaries not filed herewith for the reason that the total
amount of securities authorized under any of such instruments does not exceed 10
percent of the total consolidated assets of Dictaphone Corporation and its
consolidated subsidiaries.
(b) REPORTS ON FORM 8-K
-------------------
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 periods 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 "Shareholder") 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.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 1999 DICTAPHONE CORPORATION
-----------------------------------
(Registrant)
/S/ JOHN H. DUERDEN
By: -----------------------------------
Name: John H. Duerden
Title: Chairman, Chief Executive Officer
and President
(Principal Executive Officer)
/S/ JOSEPH D. SKRZYPCZAK
By: -----------------------------------
Name: Joseph D. Skrzypczak
Title: Chief Operating Officer, Chief
Financial Officer and Director
(Principal Financial and
Accounting Officer)
25
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBITS DESCRIPTION NUMBERED PAGE
- -------- ----------- -------------
27 -- Financial Data Schedule.
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet of Dictaphone Corporation at March 31, 1999
and the condensed consolidated statement of operations for the 3 months ended
March 31, 1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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45,146
0
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</TABLE>
