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 June 30, 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
August 9, 1999: 12,934,000. The Common Stock of the registrant is not publicly
traded.
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DICTAPHONE CORPORATION
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 1999 and June 30, 1998 2
Unaudited Condensed Consolidated Statements of Operations for the
Six Months Ended June 30, 1999 and June 30, 1998 3
Condensed Consolidated Balance Sheets as of June 30, 1999
(Unaudited) and December 31, 1998 4
Unaudited Condensed Consolidated Statements of Cash Flow for the
Six Months Ended June 30, 1999 and June 30, 1998 5
Notes to Unaudited Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 27
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 28
ITEM 6. Exhibits and Reports on Form 8-K 28
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1
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands)
<S> <C> <C>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1999
------------- -------------
Revenues:
Product sales and rentals $ 51,572 $ 48,539
Contract manufacturing sales 11,545 12,900
Support services 21,868 24,221
---------- ----------
Total revenue 84,985 85,660
---------- ----------
Costs and expenses:
Cost of sales, rentals and support services 46,957 46,302
Selling and administrative 28,219 24,410
Amortization of intangibles 7,833 3,238
Research and development 3,256 2,442
---------- ----------
Operating (loss) profit (1,280) 9,268
Interest expense 9,922 9,924
Other expense 171 46
---------- ----------
Loss before income taxes (11,373) (702)
Income tax benefit (expense) 662 (696)
---------- ----------
Net loss (10,711) (1,398)
Stock dividends on PIK Preferred Stock 755 1,479
---------- ----------
Net loss applicable to Common Stock $ (11,466) $ (2,877)
========== ==========
See accompanying notes to condensed consolidated financial statements.
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2
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<CAPTION>
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Revenues:
Product sales and rentals $ 101,219 $ 96,767
Contract manufacturing sales 23,492 23,248
Support services 44,099 48,256
---------- ----------
Total revenue 168,810 168,271
---------- ----------
Costs and expenses:
Cost of sales, rentals and support services 91,969 89,752
Selling and administrative 55,329 51,365
Amortization of intangibles 15,714 6,477
Research and development 7,956 4,880
---------- ----------
Operating (loss) profit (2,158) 15,797
Interest expense 19,719 20,063
Other (income) expense - net (655) 377
---------- ----------
Loss before income taxes (21,222) (4,643)
Income tax expense 334 921
---------- ----------
Net loss (21,556) (5,564)
Stock dividends on PIK Preferred Stock 1,484 2,710
---------- ----------
Net loss applicable to Common Stock $ (23,040) $ (8,274)
========== ==========
See accompanying notes to condensed consolidated financial statements.
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<CAPTION>
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,727 $ 5,349
Accounts receivable, less allowances of $968 and $2,348, respectively 77,432 86,777
Inventories 53,362 49,797
Other current assets 7,259 5,283
---------- ----------
Total current assets 149,780 147,206
Property, plant and equipment, net 32,425 36,175
Deferred financing costs, net of accumulated amortization of $14,246
and $15,219, respectively 9,920 8,949
Intangibles, net of accumulated amortization of $122,595 and $129,072, respectively 206,122 199,704
Deferred tax asset 39,765 39,654
Other assets 16,315 19,156
---------- ----------
Total assets $ 454,327 $ 450,844
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,778 $ 8,746
Interest payable 10,067 10,187
Accrued pension liability 8,352 8,947
Accrued liabilities 31,433 29,221
Advance billings 39,586 43,407
Current portion of long-term debt 795 789
---------- ----------
Total current liabilities 99,011 101,297
Long-term debt 369,737 350,144
Other liabilities 14,141 13,698
---------- ----------
Total liabilities 482,889 465,139
---------- ----------
Contingencies (Note 5)
Stockholders' equity:
Preferred stock ($.01 par value; 7,500,000 shares authorized; 2,391,500 and
2,559,883 shares of 14% PIK perpetual preferred stock issued and
outstanding, liquidation values of $23,915 and $25,599
at December 31, 1998 and June 30, 1999, respectively) 23,915 25,599
Preferred stock ($.01 par value; 10,000,000 shares authorized; none
and 2,000,000 shares of 12% Convertible PIK preferred stock issued and
outstanding, liquidation value of $21,026 at June 30, 1999) --- 21,026
Common stock ($.01 par value; 30,000,000 shares authorized;
12,934,000 shares outstanding at December 31, 1998 and June 30, 1999) 130 130
Notes receivable from stockholders (741) (741)
Additional paid-in capital 120,955 118,245
Treasury stock, at cost (660) (660)
Accumulated deficit (170,417) (175,981)
Accumulated other comprehensive loss (1,744) (1,913)
---------- -----------
Total stockholders' equity (deficit) (28,562) (14,295)
---------- -----------
Total liabilities and stockholders' equity $ 454,327 $ 450,844
========== ==========
See accompanying notes to condensed consolidated financial statements.
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4
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<CAPTION>
DICTAPHONE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(Dollars in thousands)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Operating activities:
Net loss $ (21,556) $ (5,564)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 24,104 13,093
Provision for deferred income taxes 1,186 47
Changes in assets and liabilities:
Accounts receivable (178) (9,259)
Inventories (2,489) 3,552
Other current assets (713) 1,860
Accounts payable and accrued liabilities (9,649) (1,264)
Advance billings 284 3,782
Other assets and other (5,785) (5,987)
---------- ----------
Net cash (used in) provided by operating activities (14,796) 260
---------- ----------
Investing activities:
Net investment in fixed assets (4,602) (6,152)
Sale of building 14,000 ---
---------- ----------
Net cash provided by (used in) investing activities 9,398 (6,152)
---------- ----------
Financing activities:
Sale of preferred stock --- 20,000
Repayment under term loan facility (1,800) ---
Borrowings under revolving credit facility 29,000 17,250
Repayment under revolving credit facility (27,000) (36,750)
Other 858 (951)
---------- ----------
Net cash provided by (used in) financing activities 1,058 (451)
---------- ----------
Effect of exchange rate changes on cash (41) (35)
---------- ----------
Decrease in cash (4,381) (6,378)
Cash and cash equivalents, beginning of period 10,277 11,727
---------- ----------
Cash and cash equivalents, end of period $ 5,896 $ 5,349
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 19,029 $ 19,136
========== ==========
Income taxes paid $ 73 $ 195
========== ==========
See accompanying notes to condensed consolidated financial statements.
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5
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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 Dictaphone
Corporation (the "Company") are unaudited, as of and for the three and
six month periods ended June 30, 1999 and June 30, 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, 2000. The Company will adopt
SFAS 133 by January 1, 2001. 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.
6
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2. INVENTORIES
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Inventories consist of the following:
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
<S> <C> <C>
Raw materials and work in process $ 15,799 $ 18,554
Supplies and service parts 15,376 13,701
Finished products 22,187 17,542
---------- ----------
Total inventories $ 53,362 $ 49,797
========== ==========
</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 $129,072 at December 31, 1998
and June 30, 1999, respectively. Amortization expense for the three and
six months ended June 30, 1998 was $7,833 and $15,714, and for the three
and six months ended June 30, 1999 was $3,238 and $6,477, respectively.
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<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
<S> <C> <C>
Goodwill $ 127,611 $ 125,427
Tradenames 71,265 70,291
Service contracts 2,530 473
Non-compete agreement 2,463 1,877
Patents 2,253 1,636
---------- ----------
$ 206,122 $ 199,704
========== ==========
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4. INCOME TAXES
The income tax expense for the three and six months ended June 30,
1999 is $696 and $921, respectively.
The Company has recorded a gross deferred tax asset of $100.6
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 June 30, 1999 is
$134.3 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, $35.7 million
will expire in the year 2018 and $11.7 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 six months of 1999, the Company increased its
valuation allowance by $2.3 million resulting in a net deferred tax asset
of $53.4 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 $53.4 million recorded at June 30, 1999, prior to expiration. The
7
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4. INCOME TAXES (CONTINUED)
amount of the deferred tax asset considered realizable, however, could be
reduced if estimates of future taxable income during the net operating
loss carryforward period are reduced.
5. CONTINGENCIES 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. Sudbury's patent expired in April 1998. As a
result, injunctive relief is no longer available to Sudbury. Pretrial
proceedings, including claim construction and dispositive motions are
continuing. A trial date in 2000 is likely.
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
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5. CONTINGENCIES AND CONCENTRATIONS OF RISK (CONTINUED)
CONTINGENCIES (CONT.)
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 subject to certain limitations.
The Company is a defendant in a number of additional lawsuits and
administrative proceedings, none of which will, in the opinion of
management, have a material adverse effect on the Company's consolidated
financial position or results of operations.
The Company does not believe that the ultimate resolution of the
litigation, administrative proceedings and environmental matters
described above in the aggregate will have a material adverse effect on
the Company's consolidated financial position or results of operations.
6. SUPPLEMENTAL 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".
9
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6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (CONTINUED)
The following are the supplemental consolidating statements of
operations for the three and six month periods ended June 30, 1998 and
1999, the supplemental consolidating balance sheet information as of
December 31, 1998 and June 30, 1999, and cash flow information for the
six month periods ended June 30, 1998 and 1999.
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DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
THREE MONTHS ENDED JUNE 30, 1998
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue from:
Product sales and rentals $ 49,435 $ 4,004 $ (1,867) $ 51,572
Contract manufacturing sales 11,545 --- --- 11,545
Support services 20,006 1,862 --- 21,868
---------- ---------- ---------- ----------
Total revenues 80,986 5,866 (1,867) 84,985
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales, rentals and support services 45,405 3,746 (2,194) 46,957
Selling and administrative 33,174 2,878 --- 36,052
Research and development 3,256 --- --- 3,256
Interest expense - net and other 9,323 770 --- 10,093
---------- ---------- ---------- ----------
Total costs and expenses 91,158 7,394 (2,194) 96,358
---------- ---------- ---------- ----------
Equity (loss) earnings (346) --- 346 ---
---------- ---------- ---------- ----------
(Loss) income before income taxes (10,518) (1,528) 673 (11,373)
Income tax (expense) benefit (187) 982 (133) 662
---------- ---------- ---------- ----------
Net (loss) income $ (10,705) $ (546) $ 540 $ (10,711)
========== ========== ========== ==========
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6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (CONTINUED)
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<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
THREE MONTHS ENDED JUNE 30, 1999
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue from:
Product sales and rentals $ 44,754 $ 6,536 $ (2,751) $ 48,539
Contract manufacturing sales 12,900 --- --- 12,900
Support services 21,841 2,380 --- 24,221
---------- ---------- ---------- ----------
Total revenues 79,495 8,916 (2,751) 85,660
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales, rentals and support services 44,304 4,835 (2,837) 46,302
Selling and administrative 25,447 2,201 --- 27,648
Research and development 2,442 --- --- 2,442
Interest expense - net and other 9,353 617 --- 9,970
---------- ---------- ---------- ----------
Total costs and expenses 81,546 7,653 (2,837) 86,362
---------- ---------- ---------- ----------
Equity earnings (loss) 468 --- (468) ---
---------- ---------- ---------- ----------
(Loss) income before income taxes (1,583) 1,263 (382) (702)
Income tax expense 23 638 35 696
---------- ---------- ---------- ----------
Net (loss) income $ (1,606) $ 625 $ (417) $ (1,398)
========== ========== ========== ==========
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6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
SIX MONTHS ENDED JUNE 30, 1998
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue from:
Product sales and rentals $ 96,323 $ 9,921 $ (5,025) $ 101,219
Contract manufacturing sales 23,492 --- --- 23,492
Support services 40,266 3,833 --- 44,099
---------- ---------- ---------- ----------
Total revenues 160,081 13,754 (5,025) 168,810
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales, rentals and support services 88,559 8,815 (5,405) 91,969
Selling and administrative 64,605 6,438 --- 71,043
Research and development 7,956 --- --- 7,956
Interest expense - net and other 17,641 1,423 --- 19,064
---------- ---------- ---------- ----------
Total costs and expenses 178,761 16,676 (5,405) 190,032
---------- ---------- ---------- ----------
Equity (loss) earnings (1,098) --- 1,098 ---
---------- ---------- ---------- ----------
(Loss) income before income taxes (19,778) (2,922) 1,478 (21,222)
Income tax (expense) benefit (1,360) 1,168 (142) (334)
---------- ---------- ---------- ----------
Net (loss) income $ (21,138) $ (1,754) $ 1,336 $ (21,556)
==========- ========== ========== ==========
</TABLE>
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<PAGE>
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
SIX MONTHS ENDED JUNE 30, 1999
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue from:
Product sales and rentals $ 89,530 $ 12,258 $ (5,021) $ 96,767
Contract manufacturing sales 23,248 --- --- 23,248
Support services 43,772 4,484 --- 48,256
---------- ---------- ---------- ----------
Total revenues 156,550 16,742 (5,021) 168,271
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales, rentals and support services 85,616 9,261 (5,125) 89,752
Selling and administrative 53,403 4,439 --- 57,842
Research and development 4,880 --- --- 4,880
Interest expense - net and other 18,839 1,601 --- 20,440
---------- ---------- ---------- ----------
Total costs and expenses 162,738 15,301 (5,125) 172,914
---------- ---------- ---------- ----------
Equity earnings (loss) 1,073 --- (1,073) ---
---------- ---------- ---------- ----------
(Loss) income before income taxes (5,115) 1,441 (969) (4,643)
Income tax expense 45 834 42 921
---------- ---------- ---------- ----------
Net (loss) income $ (5,160) $ 607 $ (1,011) $ (5,564)
========== ========== ========== ==========
</TABLE>
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<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>
14
<PAGE>
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION
JUNE 30, 1999
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,454 $ 895 $ --- $ 5,349
Accounts receivable, less allowances 79,888 9,633 (2,744) 86,777
Inventories 48,488 1,496 (187) 49,797
Other current assets 2,172 3,358 (247) 5,283
---------- ---------- ---------- ----------
Total current assets 135,002 15,382 (3,178) 147,206
Investments in subsidiaries 29,233 --- (29,233) ---
Property, plant and equipment, net 33,319 2,856 --- 36,175
Deferred financing costs, net 8,949 --- --- 8,949
Intangibles, net 186,903 12,801 --- 199,704
Other assets 54,733 3,754 323 58,810
---------- ---------- ---------- ----------
Total assets $ 448,139 $ 34,793 $ (32,088) $ 450,844
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable, interest payable
and accrued liabilities $ 50,340 $ 10,429 $ (3,668) $ 57,101
Advance billings 40,525 2,882 --- 43,407
Current portion of long-term debt 628 161 --- 789
---------- ---------- ---------- ----------
Total current liabilities 91,493 13,472 (3,668) 101,297
Long-term debt 349,945 17,190 (16,991) 350,144
Other liabilities 13,083 615 --- 13,698
Stockholders' equity (deficit) (6,382) 3,516 (11,429) (14,295)
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 448,139 $ 34,793 $ (32,088) $ 450,844
========== ========== ========== ==========
</TABLE>
15
<PAGE>
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
SIX MONTHS ENDED JUNE 30, 1998
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss $ (21,138) $ (1,754) $ 1,336 $ (21,556)
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities:
Depreciation and amortization 22,699 1,405 --- 24,104
Provision for deferred income taxes 1,150 (106) 142 1,186
Change in assets and liabilities:
Accounts receivable (3,475) 2,832 465 (178)
Inventories (2,153) 44 (380) (2,489)
Other current assets 949 (1,662) --- (713)
Accounts payable and accrued
liabilities (9,673) 339 (315) (9,649)
Advance billings 221 63 --- 284
Other assets and other (3,050) 301 (3,036) (5,785)
---------- ---------- ---------- ----------
Cash (used in) provided by investing
activities (14,470) 1,462 (1,788) (14,796)
---------- ---------- ---------- ----------
Investing activities:
Net investment in fixed assets (4,263) (339) --- (4,602)
Sale of building 14,000 --- --- 14,000
---------- ---------- ---------- ----------
Cash provided by (used in) investing
activities 9,737 (339) --- 9,398
---------- ---------- ---------- ----------
Financing activities:
Repayment under term loan facility (1,800) --- --- (1,800)
Borrowing from revolving credit facility 29,000 --- --- 29,000
Repayment under revolving credit facility (27,000) --- --- (27,000)
Other 915 (1,845) 1,788 858
---------- ---------- ---------- ----------
Cash provided by (used in) financing
activities 1,115 (1,845) 1,788 1,058
---------- ----------- ---------- ----------
Effect of exchange rate changes on cash --- (41) --- (41)
---------- ---------- ---------- ---------
Decrease in cash (3,618) (763) --- (4,381)
Cash and cash equivalents,
beginning of period 8,276 2,001 --- 10,277
---------- ---------- ---------- ---------
Cash and cash equivalents,
end of period $ 4,658 $ 1,238 $ --- $ 5,896
========== ========== ========== ==========
</TABLE>
16
<PAGE>
6. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
SIX MONTHS ENDED JUNE 30, 1999
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Operating activities:
Net (loss) income $ (5,160) $ 607 $ (1,011) $ (5,564)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 12,210 883 --- 13,093
Provision for deferred income taxes --- 47 --- 47
Change in assets and liabilities:
Accounts receivable (4,441) (2,765) (2,053) (9,259)
Inventories 2,178 1,478 (104) 3,552
Other current assets 1,890 (72) 42 1,860
Accounts payable and accrued
liabilities (2,884) (293) 1,913 (1,264)
Advance billings 3,231 551 --- 3,782
Other assets and other (6,609) (591) 1,213 (5,987)
---------- ---------- ---------- ----------
Cash provided by (used in) operating
activities 415 (155) --- 260
---------- ---------- ---------- ----------
Investing activities:
Net investment in fixed assets (6,039) (113) --- (6,152)
---------- ---------- ---------- ----------
Cash used in investing activities (6,039) (113) --- (6,152)
---------- ---------- ---------- ----------
Financing activities:
Sale of Preferred Stock 20,000 --- --- 20,000
Borrowing from revolving credit facility 17,250 --- --- 17,250
Repayment under revolving credit facility (36,750) --- --- (36,750)
Other (536) (415) --- (951)
---------- ---------- ---------- ----------
Cash used in financing activities (36) (415) --- (451)
---------- ---------- ---------- ----------
Effect of exchange rate changes on cash --- (35) --- (35)
---------- ---------- ---------- ----------
Decrease in cash (5,660) (718) --- (6,378)
Cash and cash equivalents,
beginning of period 10,114 1,613 --- 11,727
---------- ---------- ---------- ----------
Cash and cash equivalents,
end of period $ 4,454 $ 895 $ --- $ 5,349
========== ========== ========== ==========
</TABLE>
17
<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 and six months ending June
30, 1998 and 1999 consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ---------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (10,711) $ (1,398) $ (21,556) $ (5,564)
Foreign currency translation
adjustments (111) (55) (358) (169)
---------- ---------- ---------- ----------
Total comprehensive loss $ (10,822) $ (1,453) $ (21,914) $ (5,733)
========== ========== ========== ==========
</TABLE>
18
<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 June 30, 1999 $ 72,760 $ 12,900 $ 85,660
Three months ended June 30, 1998 73,420 11,565 84,985
Six months ended June 30, 1999 145,023 23,248 168,271
Six months ended June 30, 1998 145,318 23,492 168,810
Intersegment revenues
Three months ended June 30, 1999 --- 9,360 9,360
Three months ended June 30, 1998 --- 14,029 14,029
Six months ended June 30, 1999 --- 19,887 19,887
Six months ended June 30, 1998 --- 31,429 31,429
Segment profit (loss)
Three months ended June 30, 1999 (2,217) 1,515 (702)
Three months ended June 30, 1998 (12,148) 775 (11,373)
Six months ended June 30, 1999 (7,312) 2,669 (4,643)
Six months ended June 30, 1998 (23,065) 1,843 (21,222)
Segment assets
As of June 30, 1999 407,345 43,499 450,844
As of December 31, 1998 $ 410,522 $ 43,805 $ 454,327
</TABLE>
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ---------------------
1998 1999 1998 1999
---- ---- ---- ----
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Total revenue $ 85.0 $ 85.7 $ 168.8 $ 168.3
Cost of sales, rentals and support services 47.0 46.3 92.0 89.8
Selling and administrative expense (1) 36.0 27.6 71.0 57.8
Research and development 3.3 2.5 8.0 4.9
-------- --------- -------- ---------
Operating (loss) profit (1.3) 9.3 (2.2) 15.8
-------- --------- -------- ---------
Net interest expense and other 10.1 10.0 19.0 20.5
Income tax benefit (expense) 0.7 (0.7) (0.4) (0.9)
-------- --------- -------- ---------
Net loss $ (10.7) $ (1.4) $ (21.6) $ (5.6)
======== =========- ======== =========
EBITDA (2) $ 11.8 $ 15.6 $ 22.2 $ 27.6
======== ========= ======== =========
</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.
20
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ---------------------
1998 1999 1998 1999
---- ---- ---- ----
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue from:
Sales:
Integrated Voice Systems $ 11.5 $ 7.1 $ 24.0 $ 14.3
Integrated Health Systems 10.7 16.8 20.1 29.5
Communication Recording Systems 16.4 10.4 29.4 24.7
Customer Service Parts 4.7 4.0 9.1 7.9
International and Dealer Operations 7.9 9.9 18.0 19.7
Rentals 0.3 0.4 0.6 0.7
-------- --------- -------- ---------
Product Sales and Rentals 51.5 48.6 101.2 96.8
======== ========= ======== =========
Support service:
Customer Service 19.9 20.8 39.2 41.6
Application & Training Specialists 0.2 1.1 1.1 2.2
International and Dealer Operations 1.8 2.4 3.8 4.5
-------- --------- -------- ---------
Total support service 21.9 24.3 44.1 48.3
-------- --------- -------- ---------
Total System Products and Services 73.4 72.9 145.3 145.1
Contract Manufacturing 11.6 12.8 23.5 23.2
-------- --------- -------- ---------
Total revenue $ 85.0 $ 85.7 $ 168.8 $ 168.3
======== ========= ======== =========
</TABLE>
RESULTS OF OPERATIONS - SECOND QUARTER 1999 VS. SECOND QUARTER 1998
Total revenue increased 0.8% to $85.7 million in the second quarter of
1999 from $85.0 million in the second quarter of 1998. This increase is
attributable to higher product sales revenue from Integrated Health Systems
("I.H.S."), higher support service revenue from Customer Service and Application
and Training Specialists ("A.T.S.") and higher revenue from International and
Dealer Operations and Contract Manufacturing, offset in part, by lower product
sales revenue from Integrated Voice Systems ("I.V.S.") and Communications
Recording Systems ("C.R.S.").
I.V.S. revenue declined 38.3% to $7.1 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.H.S. revenue increased 56.0% to $16.8 million from $10.7 million due
to the continued growth of Enterprise Express(TM) sales. I.H.S. orders in the
second quarter of 1999 increased 66.4% to $22.3 million from $13.4 million in
the second quarter of 1998. C.R.S. revenue declined 36.7% to $10.4 million from
$16.4 million due to lower Prolog(TM)/Guardian(TM) sales. C.R.S. orders in the
second quarter of 1999 declined 2.9% to $15.8 million from $16.3 million in the
second quarter of 1998. Customer Service revenue (including sale of parts)
increased 0.5% to $24.8 million from $24.6 million due to increased installation
and warranty revenue partially offset by reduced proprietary product service
contract revenue. A.T.S. revenue increased by $1.0 million due to increased
training provided in support of system products. Sales and support service
revenue from International and Dealer Operations increased 25.8% to $12.3
million from $9.7 million due primarily to increased system, C.R.S., desktop and
portable and service revenue derived from the Company's Canadian operations and
increased C.R.S. and service revenue derived from its European operations.
Orders for International and Dealer Operations in the second quarter of 1999
increased 56.3% to $10.3 million from $6.6 million in the second quarter of
1998. Contract Manufacturing revenue increased 11.5% to $12.8 million from $11.6
million in the second quarter of 1998 due to growth from existing customers.
21
<PAGE>
Cost of sales, rentals and support services declined 1.4% to $46.3
million (54.1% of revenue) in the second quarter of 1999 from $47.0 million
(55.3% of revenue) in the second quarter of 1998. This decline in cost of sales
is attributable to lower Customer Service field overhead, technical and support
costs.
Selling and administrative expenses (including amortization of
intangibles) declined 23.3% to $27.6 million (32.3% of revenue) in the second
quarter of 1999 from $36.0 million (42.4% of revenue) in the second quarter of
1998. This decrease is attributable to lower amortization expense related to
intangibles, lower I.V.S. selling expenses associated with sales force
reductions and related overhead expenses and lower international operating
expenses.
Research and development expenses of $2.5 million (5.0% of product sales
and rental revenue) declined 25.0% from $3.3 million (6.3% of product sales and
rental revenue), reflecting reduced staffing and a more focused development
effort consistent with the requirements of major projects under development.
The Company recorded an operating profit of $9.3 million (10.8% of
revenue) during the second quarter of 1999 compared to an operating loss of $1.3
million (1.5% of revenue) for the second quarter of 1998. Excluding the impact
of reduced amortization expense, operating profit would have increased by $6.0
million due to higher revenue, lower costs and reduced operating expenses.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1999 VS. SIX MONTHS ENDED
JUNE 30, 1998
Total revenue for the first six months of 1999 of $168.3 million remained
relatively constant with the prior period. The Company experienced lower product
sales revenue from I.V.S. and C.R.S. and lower revenue from Contract
Manufacturing, partially offset by increased product sales revenue from I.H.S.,
higher support service revenue from Customer Service and A.T.S. and higher
revenue from International and Dealer Operations.
I.V.S. revenue declined 40.5% to $14.3 million in response to actions
described previously which were taken by the Company in the fourth quarter of
1998. I.V.S. order backlog at June 30, 1999 increased 18.1% to $5.5 million
versus order backlog at December 31, 1998. I.H.S. revenue increased 46.3% to
$29.5 million from $20.1 million due to the continued growth of Enterprise
Express(TM) sales. I.H.S. orders for the first six months of 1999 increased
80.6% to $36.2 million from $20.0 million for the first six months of 1998.
I.H.S. order backlog at June 30, 1999 increased 44.3% to $21.0 million versus
order backlog at December 31, 1998. C.R.S. revenue declined 16.0% to $24.7
million due to lower Prolog(TM)/Guardian(TM) sales. C.R.S. orders for the first
six months of 1999 increased 1.1% to $28.9 million from $28.6 million for the
first six months of 1998. C.R.S. order backlog at June 30, 1999 increased 83.3%
to $9.3 million versus order backlog at December 31, 1998. Customer Service
revenue (including sale of parts) increased 2.5% to $49.5 million from $48.3
million due to increased warranty, installation and hourly revenue. A.T.S.
revenue increased $1.1 million due to increased customer training provided in
support of system products. Sales and support service revenue from International
and Dealer Operations increased 11.0% to $24.2 million due to increased Canadian
system, desktop and portable, C.R.S. and service revenue. International and
Dealer Operations orders for the first six months of 1999 increased 27.8% to
$20.2 million from $15.8 million for the first six months of 1998. Order backlog
for International and Dealer Operations at June 30, 1999 increased 42.6% to $2.4
million versus order backlog at December 31, 1998. Contract Manufacturing
revenue declined 1.0% to $23.2 million from $23.5 million for the first six
months of 1998.
22
<PAGE>
Cost of sales, rentals and support services declined 2.4% to $89.8
million (53.3% of revenue) for the first six months of 1999 from $92.0 million
(54.5% of revenue) for the first six months of 1998. This decline in cost of
sales expressed as a percentage of revenue is attributable to lower Customer
Service field overhead, technical and support costs, improved Canadian margins
and higher I.H.S. price realization.
Selling and administrative expenses (including amortization of
intangibles) declined 18.6% to $57.8 million (34.4% of revenue) for the first
six months of 1999 from $71.0 million (42.1% of revenue) for the first six
months of 1998. This decrease is attributable to lower amortization expense,
lower selling expenses associated with I.V.S. sales force reductions and related
overhead expenses and lower international operating expenses.
Research and development expenses of $4.9 million (5.0% or product sales
and rental revenue) declined 38.7% from $8.0 million (7.9% of product sales and
rental revenue), reflecting reduced staffing and a more focused development
effort.
The Company recorded an operating profit of $15.8 million (9.4% of
revenue) during the first six months of 1999 compared to an operating loss of
$2.2 million (1.3% of revenue) for the first six months of 1998. Excluding the
impact of reduced amortization expense, operating profit would have increased by
$8.7 million due to lower costs and reduced operating expenses.
The Company has recorded a gross deferred tax asset of $100.6 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 June 30, 1999 is $134.3 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, $35.7
million will expire in the year 2018 and $11.7 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 by $24.1
million against the deferred tax assets. During 1998, the Company increased its
valuation allowance by $20.8 million. During the first six months of 1999, the
Company increased its valuation allowance by $2.3 million resulting in net
deferred tax asset of $53.4 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 $53.4
million recorded at June 30, 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 consists primarily of scheduled
payments of principal and interest on its indebtedness, working capital needs
and capital expenditures. At June 30, 1999, the Company had outstanding Term
Loans of $131.6 million, a $19.0 million loan outstanding under the $40.0
million Revolving Credit Facility and the Notes. Availability under the
Revolving Credit Facility at June 30, 1999 was $21.0 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
23
<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 was
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 $66.0 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 of Notes outstanding as of June 30, 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 June 30, 1999, the fair value
of the Notes was favorable $64.0 million based on dealer quotes.
Capital expenditures for the first six months of 1999 totaled $6.2
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
24
<PAGE>
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 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 six months 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 continue to
focus on cash flows from operating activities. 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, product 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 the close of the 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 the close of the third quarter
1999.
25
<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, has
developed and communicated the necessary remediations to the Company's customers
and is installing such remediations at customer sites. Installations of
remediations will continue throughout 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.
26
<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 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 being 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. Contingency planning efforts will continue throughout
1999, and will continue to be updated and revised to reflect the most current
information on the Company's state of readiness, and the state of readiness of
the Company's suppliers and customers.
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 interest rate risk.
27
<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
There were no Reports on Form 8-K filed by the Company
during the three months ended June 30, 1999.
28
<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: August 12, 1999 DICTAPHONE CORPORATION
--------------------------------------------
(Registrant)
By: /S/ JOHN H. DUERDEN
--------------------------------------------
Name: John H. Duerden
Title: Chairman, Chief Executive Officer and President
(Principal Executive Officer)
By: /S/ JOSEPH D. SKRZYPCZAK
--------------------------------------------
Name: Joseph D. Skrzypczak
Title: Chief Operating Officer, Chief Financial Officer
and Director
(Principal Financial and Accounting Officer)
29
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBITS DESCRIPTION NUMBERED PAGE
- -------- ----------- -------------
27 -- Financial Data Schedule.
30
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet of Dictaphone Corporation at June 30, 1999
and the condensed consolidated statement of operations for the six months ended
June 30, 1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,349
<SECURITIES> 0
<RECEIVABLES> 89,125
<ALLOWANCES> 2,348
<INVENTORY> 49,797
<CURRENT-ASSETS> 147,206
<PP&E> 72,853
<DEPRECIATION> 36,678
<TOTAL-ASSETS> 450,844
<CURRENT-LIABILITIES> 101,297
<BONDS> 350,144
46,625
0
<COMMON> 130
<OTHER-SE> (61,050)
<TOTAL-LIABILITY-AND-EQUITY> 450,844
<SALES> 120,015
<TOTAL-REVENUES> 168,271
<CGS> 89,752
<TOTAL-COSTS> 152,474
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,063
<INCOME-PRETAX> (4,643)
<INCOME-TAX> (921)
<INCOME-CONTINUING> (5,564)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,564)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
