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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 33-93464
DICTAPHONE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-0992637
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3191 Broadbridge Avenue, Stratford, CT 06614
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 381-7000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 24, 2000 was $0.00.
As of March 24, 2000, there were 12,934,000 shares of the registrant's common
stock, $.01 par value (the "Common Stock"), outstanding. There is no established
trading market for the Common Stock.
Documents Incorporated by Reference. None
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TABLE OF CONTENTS
Page
Referenced
Item Number Form 10-K
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PART I
ITEM 1. BUSINESS........................................... 1
ITEM 2. PROPERTIES......................................... 7
ITEM 3. LEGAL PROCEEDINGS.................................. 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS............................................ 8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................. 9
ITEM 6. SELECTED FINANCIAL DATA............................. 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................. 11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK......................................... 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......... 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................. 49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.. 49
ITEM 11. EXECUTIVE COMPENSATION.............................. 52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.......................................... 59
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...... 60
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K................................. 62
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Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained herein which express "belief,"
"anticipation," "expectation," or "intention" or any other projection, including
statements concerning the launch of new products, future Company performance and
capital expenditures, insofar as they may apply prospectively and are not
historical facts, are "forward-looking" statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Because such statements include risks and uncertainties, actual results
may differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements include, but are
not limited to, the risk factors identified in Dictaphone's Registration
Statement on Form S-1 and in other documents filed by Dictaphone with the
Securities and Exchange Commission. Because the Company wishes to take advantage
of the "safe harbor" provisions of the Private Securities and Litigation Reform
Act of 1995, readers are cautioned to consider, among others, the risk factors
described in Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
PART I
ITEM 1. BUSINESS
General
On April 25, 1995, Dictaphone Acquisition Corporation ("Successor
Company", also referred to herein as the "Company" or "Dictaphone") entered into
a Stock and Asset Purchase Agreement, as amended August 11, 1995 (the
"Acquisition Agreement") with Pitney Bowes Inc. ("Pitney Bowes") for the purpose
of acquiring (the "Acquisition") Dictaphone Corporation, the United States
Dictaphone Subsidiary of Pitney Bowes, and certain foreign affiliates as set
forth in the Acquisition Agreement (collectively, the "Predecessor Company"). On
August 11, 1995, the Acquisition was consummated and the Company acquired the
Predecessor Company. Subsequent to the Acquisition, the Company changed its name
to "Dictaphone Corporation", and the Predecessor Company changed its name to
"Dictaphone Corporation (U.S.)". In January 1998, Dictaphone Corporation was
merged into Dictaphone Corporation (U.S.), whereupon the surviving corporation
changed its name to "Dictaphone Corporation".
The Company is the successor to a business begun by Alexander Graham
Bell in 1876. Today, the Company is a leader (in certain vertical markets) in
the development, manufacture, marketing, service and support of Integrated Voice
and Data Management ("IVDM"(TM)) systems and software, which include dictation,
voice processing, voice response, unified messaging, records management, call
center monitoring systems and communications recording. The Company has two
operating segments, System Products and Services and Contract Manufacturing. The
System Products and Services segment consists of the sale and service of
system-related products to dictation and voice management and communications
recording system customers in selected vertical markets. The Contract
Manufacturing segment consists of the manufacturing operations of the Company
which provide outside electronics manufacturing services ("EMS") to original
equipment manufacturers ("OEMs") in the telecommunications, data management,
computer and electronics industries.
The Company's dictation and voice management products ("Integrated
Voice Systems", or "I.V.S." and "Integrated Health Systems", or "I.H.S.") sales
of which represented 36% of the Company's 1999 total revenue, consist of
portable and desktop dictation products, and voice management and voice
processing systems used primarily by professionals such as physicians, attorneys
and business executives, and by enterprises such as hospitals, governmental
agencies, financial institutions, courts, insurance agencies and law firms.
Voice processing systems are generally larger, more sophisticated versions of
dictation products designed to accommodate multiple users. The Company's
communications recording systems ("Communications Recording Systems" or
"C.R.S.") sales of which represented 19% of the Company's 1999 total revenue,
consist primarily of multi-channel archiving recorders and emergency message
repeaters used primarily by police departments, fire departments, air traffic
controllers and other public safety agencies, as well as by financial services
firms and other businesses. These products perform continuous, reliable
recording of multiple telephone or other communications lines, such as radio
channels, to protect customers who face potentially severe financial or safety
risks posed by lost or misinterpreted telephone conversations or voice
broadcasts. The Company's communications recording systems products also include
quality monitoring, productivity and training
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products used primarily by call centers. Dictaphone's service business, revenue
from which represented 33% of the Company's 1999 total revenue, provides its
customers with service hardware and software support, expedited repairs and
remote diagnostics. Many Dictaphone customers, including those purchasing large
systems, purchase Company service contracts at the time of product purchase.
Recent Developments
On March 7, 2000, the Company entered into a definitive agreement to be
acquired by Lernout & Hauspie Speech Products, N.V. ("Lernout & Hauspie").
Lernout & Hauspie is a global leader in advanced speech and language solutions
for vertical markets, computers, automobiles, telecommunications, embedded
products, consumer goods and the Internet.
Under the terms of the merger agreement, each of the Company's common
shares will be exchanged for approximately .3 shares of Lernout & Hauspie common
stock. The transaction, which is expected to be completed during the second
quarter of 2000, is intended to be a tax-free exchange and is subject to closing
conditions, including the ability of Lernout & Hauspie to obtain financing for
approximately $425 million of the Company's debt and other obligations, and
other customary conditions. Stonington Capital Appreciation 1994 Fund, L.P., the
beneficial owner of approximately 96% of the Company's outstanding common stock,
has agreed to vote all its shares in favor of the transaction, thereby
guaranteeing Company shareholder approval.
Dictation and Voice Management
The dictation products market consists of (i) the professional and
commercial market and (ii) the consumer market. The voice management market also
consists primarily of the professional and commercial market. Customers in the
professional and commercial market include professionals such as physicians,
attorneys and business executives, and enterprises that require swift and
efficient document creation such as hospitals, governmental entities, insurance
agencies, financial institutions and law firms. Customers in this market
typically purchase products through direct sales or dealer representatives of
established companies that can provide reliable, long-term service through their
service networks. Dictation products marketed to customers in the professional
and commercial segment are generally more expensive than those sold in the
consumer segment because they represent more durable construction for longer
product life and provide special features geared to office and transcription
use. The consumer segment consists of customers who typically purchase lower
priced desktop and portable machines through retail, catalog and mail order
establishments.
The Company believes that dictation products in its markets are
purchased primarily by existing industry customers. According to the Company's
market surveys, approximately 70% of the purchasing activity in the marketplace
is from existing customers who are expanding and upgrading their equipment, 15%
is from users changing brands, and 15% is from non-users making their first
purchase.
Dictation products consist of desktop and portable products and
dictation systems (also referred to as voice processing systems). Desktop and
portable dictation products, the traditional products of this industry,
typically use analog magnetic tape recording methods to store and replay voice.
The Company has recently introduced digital recording products to store and
replay voice. In 1998, the Company introduced Walkabout(TM) Express, a portable
digital recording device designed specifically for mobile medical dictation, and
Boomerang 2.0(TM), a Windows(R) 95-based voice messaging and dictation system
that incorporates the IBM Via Voice Transcription(TM) speech recognition
software. Many portable products are designed to be compatible with Dictaphone
desktops in terms of features and appearance.
Voice processing systems are generally larger, more sophisticated
versions of dictation products designed to accommodate multiple users. Voice
processing systems equipment usually consists of one or more centralized
dictation units, which include the equipment which records and replays voice
data, and a series of telephones or similar devices, which connect with the
dictation units to record voice data and access previously recorded data. This
equipment permits users to transmit voice data to transcriptionists without
requiring the user to physically transport the data. Digital dictation systems
currently offer many advantages over their analog predecessors including higher
reliability, random
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and simultaneous accessibility to work, remote access and playback over
telephone lines, and the ability to handle multiple software applications, such
as dictation, voice mail and voice response. Digital dictation systems also
permit feature customization and may interface with other customer systems, such
as local area network systems.
In 1996, the Company acquired the rights to a dictation, transcription
and information management software system which utilizes a Microsoft(R) Windows
NT(R) operating system platform. This system, called the Enterprise Express(TM)
System, which was launched by the Company in the first half of 1997, represents
the Company's latest voice processing system. The Enterprise Express(TM) System
went into production in June 1997 and has seen significant growth since then.
The Enterprise Express(TM) System replaces the Digital Express(TM) 7000 Voice
Processing System which was introduced in 1988 and has a worldwide installed
base of over 1,600 systems as well as the Records Express(TM) Transcription
System.
In 1998, Dictaphone introduced the Enterprise 125(TM) Voice System, a
Windows NT(R) operating system platform intended for use by smaller single-site
healthcare providers, which offers productivity advantages comparable to the
Company's larger Enterprise Express(TM) System. The Enterprise 125(TM) Voice
System replaces the Digital Express(R) 4000 and Digital Express(R) 2500 voice
processing systems which were introduced in 1993 and have a worldwide installed
base of over 2,000 systems.
In January 2000, the Company announced plans to use the Internet to
leverage its customer base, pursuant to which the Company would offer solutions
in web-based transcription, reimbursement coding services, speech
recognition/natural language processing and clinical data mining services.
From time to time, the Company introduces products sourced from third
party developers. The Company has also contracted with third party developers of
continuous speech recognition software such as Philips and IBM, in order to
integrate continuous speech recognition products into the Company's I.H.S. and
I.V.S. marketplace.
Communications Recording Systems
The safety and/or liability communications recording systems market
consists primarily of multi-channel continuous archiving recorders and emergency
message repeaters. Communications recording systems are designed to perform
continuous, reliable recording of multiple telephone or communications lines to
protect customers who face potentially severe financial or safety risks posed by
lost or misinterpreted telephone conversations or voice broadcasts.
Multi-channel archiving recorders, also called "telephone loggers" or "loggers",
are sophisticated systems that capture large volumes of voice data transmitted
over multiple telephone or other communication lines, such as radio channels,
and allow the user to retrieve and play back specific conversations. Emergency
message repeaters, sometimes referred to as "Call Checks", are much smaller
machines that attach to telephone lines or other communications devices to
capture a smaller volume of voice data.
Customers of safety and liability communications recording systems
include public safety agencies, such as police departments, fire departments and
air traffic control departments, financial services firms, such as traders and
brokers, call centers and other businesses. Dictaphone believes that many of
these customers rely heavily on these systems as an integral part of their
operations, particularly in the case of governmental safety agencies and
financial institutions.
In the early 1990's, the communications recording systems market began
to experience technological change as analog reel-to-reel recorders began to be
displaced by analog VHS-based products and, more frequently, digital products
including those based on magnetic disk, optical disk or digital audio tape. For
example, in the case of Dictaphone, revenue from sales of communications
recording products based on digital technology has increased as a percentage of
product sales revenue from all communications recording products from only 13%
in 1992 to 100% in 1999. These technological changes both improved product
flexibility and, in the case of digital recording platforms, increased data
capacity and network integration.
The Company's multi-channel continuous archive recorders consist of the
Symphony CTI(TM) system, ProLog(TM), Guardian(TM), Sentinel(TM), daVinci(TM) and
Freedom(TM) models. In the first quarter of 1999, the Company introduced
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daVinci(TM), the Company's next generation communications recording product.
Later in the year, the Company introduced daVinci QMS(TM), a quality monitoring
system based on industry-standard Windows NT(R) and Oracle(R) software which
provides call centers with customer-focused quality monitoring technology
combined with advanced customer service evaluation tools and training programs.
In the third quarter of 1999, the Company introduced Freedom(TM), an open
architecture communications recording system for public safety applications.
In the second half of 1997, the Company introduced the Symphony CTI(TM)
system, a product designed to engage the computer telephony integration market.
The Symphony CTI(TM) system provides for an advanced call retrieval capability,
enabling integration with telephone switches and other systems and databases to
capture more information related to each phone call. Prolog(TM), which was
introduced in 1993, was the Company's most powerful C.R.S. product before the
introduction of Symphony CTI(TM). The Company's midsized Guardian(TM) model,
introduced in 1994, has been designed to provide many of the services provided
by ProLog(TM) to customers requiring fewer features or to those who prefer a
single unit that does not include a stand-alone personal computer ("PC")
workstation.
The Company's Sentinel(TM) digital logger product is geared toward
smaller capacity and price sensitive customers. The Company began shipments of
the Sentinel(TM) in the third quarter of 1995. The Sentinel(TM) logger replaced
the Model 9800, Dictaphone's first digital logger, which was partially sourced
from an outside supplier.
Dictaphone's emergency message repeater products include the Series
5700, 5900 and 6600. The vast majority of these units are installed in public
safety organizations, where they are used extensively for replaying emergency
telephone calls.
Dictaphone believes it has a number of significant opportunities in
marketing its products, including, for example, the continuing transition of the
user base from analog to digital technology, expansion of the Company's efforts
in Europe, Asia and Latin America and leveraging the Company's distribution
strengths into adjacent market opportunities.
Service
The Company has an extensive service organization. The Company has
approximately 490 service representatives in over 150 locations in North
America. The United States service organization is supported by approximately
245 employees in service support, diagnostic center and repair services, and
distribution. In addition, Dictaphone has service locations in the United
Kingdom, Ireland and Continental Europe and sales and service representation
through dealers in approximately 63 other countries in Europe, South America and
Asia. See "-- Sales and Marketing".
Dictaphone's service business provides its customers with service
support, expedited repairs and remote diagnostics. Service revenue includes
sales of "Assured Performance Plans" and "Software Maintenance Agreements",
which are long term warranties and support agreements sold in one year
increments and frequently purchased by the Company's systems customers, and
revenue from repair of systems software and hardware not under warranty as well
as sales of parts. Dictaphone also receives revenue from service contracts which
provide for higher levels of technical support, such as its "SOS Alert" and
"Response Network" services, for dispatching maintenance in advance of a product
shut down and for services providing 24-hour system protection. Many Dictaphone
customers, including those purchasing large systems, purchase Dictaphone service
support contracts at the time of product purchase. In 1996, Dictaphone
instituted a mail-in service program for its desktop and portable products.
Under this program, desktop and portable products are sent by overnight mail to
a central service facility in Melbourne, Florida for rapid turnaround or
replacement. As a result of this program, desktops and portables are no longer
required to be serviced in U.S. field offices. In 1999, additional products such
as MVP(TM) and Straight Talk(TM) were added to this repair program.
In addition to the repair of its own proprietary product, the Company
also provides service support, expedited repairs and remote diagnostics to other
companies through its third party contract service business. As Dictaphone's
service network expands its expertise in digital and other advanced
technologies, the Company believes there will be increasing opportunities to
obtain service contracts from companies in the telecommunications, cable and
other related industries which utilize these complex technologies.
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Manufacturing Operations
Dictaphone's vertically integrated manufacturing process and non-union
manufacturing workforce enable it to respond quickly and cost-effectively to
changing markets and customer requirements. The Company's flexible manufacturing
enables it to offer its customers a variety of product models.
The Company's primary manufacturing facility is located in Melbourne,
Florida. Manufacturing currently employs approximately 600 personnel. The
manufacturing team consists of four production departments: fabrication, wire
and cable, printed circuit assembly and final assembly.
Management assures manufacturing and raw material quality through
formal operator certification training classes, roving quality auditors and a
formal "Supplier Certification System", which is used to continually monitor the
supplier base. The manufacturing facility is currently ISO 9002 certified.
The Company currently purchases from approximately 500 suppliers,
although 80% of the annual dollar volume is procured from 60 suppliers. Most
agreements with major suppliers are expressed in letters of intent or blanket
purchase orders covering one year or less. The Company is not materially
dependent on any single supplier.
Approximately 50% of all items processed at the Melbourne, Florida
facility are Dictaphone products, with the remainder comprised of contract
manufacturing. The Company's contract manufacturing program provides electronics
design and manufacturing capabilities for customers unaffiliated with the
Company. In 1999, revenue from contract manufacturing was $44.3 million.
New Products
The Company is continually evaluating its product line both with
respect to feature content and development. The Company intends to continue to
develop and enhance its product line and introduce new products, some of which
may be sourced through third parties.
Customers
Although no single customer, other than Pitney Bowes and CNA Insurance,
represents more than 1% of the Company's sales, customers for each of
Dictaphone's product categories are concentrated in certain industries.
Dictaphone receives approximately 90% of its United States dictation products
revenue from medical, legal, insurance and financial firms, educational entities
and government agencies. This industry-oriented user concentration enables
Dictaphone to focus on customizing solutions for specific user needs and
applications.
Communications recording systems customers are predominately public
safety agencies, financial services entities and call centers. Approximately 56%
of U.S. Communications Recording Systems revenue is derived from financial
services and insurance firms and governmental agencies.
Although approximately 86% of Dictaphone's revenues are generated in
the United States, the Company has a significant customer base outside the
United States. Dictaphone's international customers are in many of the same
industries that the Company serves domestically, such as medical, legal and
financial firms and governmental agencies.
Sales and Marketing
The wide geographic coverage of the Company's sales and service offices
in the United States permits Dictaphone to sell its products to customers of all
sizes and in virtually all United States locations. Consequently, less than 1%
of all United States sales are through dealers. The placement of service and
sales offices throughout the United States also provides a system for the rapid
distribution and service of the Company's products. See "-- Service".
Distribution of Dictaphone products is handled mostly through the Company's
distribution facility in Melbourne, Florida and branch and district locations.
The Company also anticipates the expanded use of alternative channels, such as
catalogs, on-line internet stores and mass marketers for the distribution of
certain of its desktop and portable products.
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Outside of North America, the Company has shifted from direct to indirect
channels, such as dealers and distributors for the sale and distribution of
products.
Warranties. Every product sold by Dictaphone, new or previously owned,
has a minimum limited warranty for parts and labor that is 90 days in duration;
many of the Company's more sophisticated products, however, are currently being
sold with one (1) year parts and 90 day labor warranties. Upon purchase of a new
or previously owned Dictaphone product, a customer may purchase an "Assured
Performance Plan" and "Software Maintenance Agreements". See "-- Service". If a
Dictaphone customer decides not to purchase a service support agreement,
Dictaphone may repair its products at an hourly service rate, in addition to
parts.
Advertising. The focus of Dictaphone's advertising and marketing
communications over the past few years reflects a shift away from broad based
major publication advertising to an approach targeting dictation and
communications recording intensive markets where product use and applications
are the greatest. Dictaphone currently uses nationwide corporate direct mail
programs, field generated programs, print advertising, product trade shows, user
group communications, telemarketing and other publicity to market, advertise and
promote its products.
Leased Sales. Dictaphone provides its customers with flexible lease
programs through Fleetwood Financial ("Fleetwood"), Mellon First United Leasing
("First United"), Pitney Bowes Credit Corporation ("PBCC") and other finance
companies. These companies provide customers of the Company with lease financing
and Dictaphone with a source of used equipment, available through terminations
or defaults, that may be repurchased and remarketed by the Company.
Research and Development
During the last few years, the Company's research and development
organization has evolved from one with a hardware engineering orientation to one
in which software engineering dominates. The Company employs software engineers,
test engineers and other engineers to develop software for its products as well
as to perform SMT printed circuit board designs and mechanical designs and to
work closely with its Melbourne, Florida factory and service operation to
implement these designs. The research and development organization also creates
application-specific integrated circuit designs. As of December 31, 1999, the
Company's research and development staff consisted of 146 personnel (including
temporary employees).
Intellectual Property
The Company has approximately 85 patents protecting features and
methods covering Integrated Voice Systems, Integrated Health Systems and
Communications Recording Systems product lines. The Company believes that there
is no single patent or group of related patents the loss of which would have a
material adverse effect on its business. The Company also has approximately 105
U.S. trademarks, including the well known "Dictaphone(R)" registered trademark,
in use throughout the world.
Competition
The markets in which the Company competes are highly competitive. The
Company competes with large and established national and multinational
companies, as well as smaller startup companies, in all of its operations.
Furthermore, as products sold in the Company's markets evolve toward software
and digital technology, new competitors with expertise in these areas are
entering the industry. Some of these competitors have, and new competitors may
have, greater resources than the Company.
In the dictation market, the Company faces systems product competition
from Lanier Corporation ("Lanier"), Digital Voice Inc. ("DVI"), Sudbury Systems,
Inc. ("Sudbury") and a number of smaller competitors. Philips Electronics N.V.
and Sony Corporation represent competitors for desktop and portable products.
Dictaphone is a leading participant in the communications recording
product market in North America. Some of Dictaphone's North American competitors
include Racal Recorders Limited, Eyretel, TEAC Corporation of America, Nice
Systems Ltd. (loggers and quality monitoring), Teknekron Infoswitch (quality
monitoring) Witness Systems, Inc.
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(quality monitoring) and Comverse Technology, Inc. (loggers). Dictaphone expects
that, with the increasing prevalence of digital recording technology in this
market, a large number of product oriented companies will attempt to enter this
marketplace in both North America and Europe. The Company believes that while
these companies may have difficulty in entering the communications recording
systems market in the United States due to the lack of customer base and the
absence of a direct sales and service network, their entry will increase
competitive pressure. The Company also anticipates that its existing and
potential competitors will be introducing new and enhanced products, especially
in the call center marketplace.
Employees
As of December 31, 1999, the Company had 2,364 employees worldwide, of
which 2,105 were based in the United States. As of December 31, 1999, less than
1% of the Company's workers were unionized. Two union contracts, one in New
York, New York covering 8 employees and one in Toronto, Ontario, Canada covering
6 employees, expire on September 1, 2001, and January 15, 2001, respectively.
The Company believes its relations with employees are satisfactory.
ITEM 2. PROPERTIES
The following is information concerning the major facilities owned by
the Company:
Facility Purpose Square Footage
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Melbourne, Florida Manufacturing 120,160
Melbourne, Florida Customer Service/Distribution 118,000
The Company operates a manufacturing and service/distribution center
facility in Melbourne, Florida, in addition to its numerous sales and service
offices. The Company leases its executive offices located in Stratford,
Connecticut (138,000 square feet). In addition, the Company leases sales,
service and distribution offices in certain countries in which it has
operations, including 149 offices in the United States, 15 offices in Canada, 5
offices in the United Kingdom and 2 offices in Germany. In general, the Company
believes that its properties are in good condition and are adequate to meet its
current and anticipated needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On February 14, 1995, Pitney Bowes filed a complaint against Sudbury in
the United States District Court for the District of Connecticut alleging
intentional and wrongful interference with Pitney Bowes's plans to sell the
Company. The complaint seeks damages and a declaratory judgment relating to the
validity of a patent owned by Sudbury entitled "Rapid Simultaneous Multiple
Access Information Storage and Retrieval System" and the alleged infringement
thereof by the Company. Sudbury responded by answering the complaint and filing
a third-party complaint against the Company alleging patent infringement and
seeking preliminary and permanent injunctive relief and treble damages.
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. As these proceedings are at a
preliminary stage, it is impossible to reasonably estimate the potential costs
of remediation, the timing and extent of remedial actions which may be required
by governmental authorities, and the amount of the liability, if any, of the
Company alone or in relation to that of any other responsible parties. When it
is possible to make a reasonable estimate of the Company's liability with
respect to
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such a matter, a provision will be made as appropriate. Additionally, the
Company has settled and paid its liability at three other third party disposal
sites. At a fourth site, the Company has paid approximately $11 thousand for its
share of the costs of the first phase of the clean up of the site and management
believes that it has no continuing material liability for any later phases of
the cleanup. Consequently, management believes that its future liability, if
any, for these four sites is not material. In addition, regardless of the
outcome of such matters, Pitney Bowes has agreed to indemnify the Company in
connection with retained environmental liabilities and for breaches of the
environmental representations and warranties contained in the 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.
In July, 1999, Bruce Hilt d/b/a Integrated Resources, Inc. filed a
complaint in the Middle District of Alabama against the Company and Pitney Bowes
Credit Corporation. Plaintiff commenced this action in Alabama State Court as a
purported class action for similarly situated persons within the State of
Alabama. Plaintiff alleges that the Company's recording system he leases from
Pitney Bowes Credit Corporation is not Y2K compliant and will not function after
December 31, 1999. The complaint seeks damages of less than $74,000 per class
member and alleges that there are hundreds of potential class members. In
August, 1999, the Company and Pitney Bowes removed the action to Federal Court,
in part based on the new Federal Y2K Act, 15 U.S.C. ss. 6601, et seq. (the "Y2K
Act"). Plaintiff has filed a motion to remand the case to State Court, which is
fully briefed and before the Court.
Plaintiff to date has not moved to certify the case as a class action.
In October, 1999, the Company and Pitney Bowes filed a motion to dismiss the
action. Plaintiff has not yet responded to the motion to dismiss, and no hearing
date has been set by the Court.
The Company intends to continue to vigorously defend this action.
Although the litigation is in its preliminary stages, the Company believes that
it has meritorious defenses to this case, especially in light of a remedy that
has been offered to plaintiff, and does not believe that a class should be
certified.
The Company is a defendant in a number of additional lawsuits and
administrative proceedings, none of which will, in the opinion of management,
have a material adverse effect on the Company's consolidated financial position
or results of operations.
The Company does not believe that the ultimate resolution of the
litigation, administrative proceedings and environmental matters described above
in the aggregate will have a material adverse effect on the Company's
consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
8
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is currently no established trading market for the Company's
common stock, $.01 par value per share (the "Common Stock"). As of March 15,
2000 there were 9 holders of record of the Common Stock.
Under the terms of the Company's Credit Agreement, dated August 7,
1995, as modified by five amendments to Credit Agreement, dated June 28, 1996,
June 27, 1997, July 21, 1997, November 14, 1997 and December 31, 1998
(collectively, the "Credit Agreement"), with a syndicate of financial
institutions for whom Bankers Trust Company is the Administrative Agent and
NationsBank, N.A. (Carolinas) is the Documentation Agent, the Company is
restricted from paying dividends on its capital stock. In addition, under the
terms of an Indenture (the "Note Indenture") between the Company and State
Street Bank and Trust, relating to the Company's $200.0 million of 11-3/4%
Senior Subordinated Notes Due 2005 (the "Notes"), the Company and certain of its
subsidiaries are restricted from paying dividends on their capital stock. In
addition, as a holding company, the Company's ability to pay cash dividends is
also dependent on the earnings and cash flows of its subsidiaries and the
ability of its subsidiaries to make funds available to the Company for such
purpose.
The Company presently intends to retain earnings to fund working
capital and for general corporate purposes, and, therefore, does not intend to
pay any cash dividends on shares of Common Stock in the foreseeable future. The
payment of future cash dividends, if any, would be made only from assets legally
available therefore, and would also depend on the Company's financial condition,
results of operations, current and anticipated capital requirements,
restrictions under outstanding preferred stock and under then-existing
indebtedness and other factors deemed relevant by the Company's Board of
Directors.
In January 1999, the Company sold 2.0 million shares of its 12%
Convertible Pay-in-Kind Preferred Stock to Stonington Capital Appreciation 1994
Fund, L.P. ("Stonington"). This sale was effected in reliance upon the exemption
from the registration requirements provided by Section 4(2) of the Securities
Act of 1933, as amended, on the basis that such transaction did not involve a
public offering. There were no underwriters employed in connection with such
sale. The proceeds derived from this sale were used by the Company to repay
amounts outstanding under the Company's Revolving Credit Facility (as defined
below), and for the semi-annual interest payment on the Notes.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is the selected consolidated financial data of
Dictaphone Corporation at December 31, 1999, December 31, 1998, December 31,
1997 and December 31, 1996, and for the years then ended, and for the twenty
week period ended December 31, 1995. Also set forth below is the selected
combined financial data of Dictaphone Corporation (Predecessor Company) for the
thirty two week period ended August 11, 1995.
The selected financial data should be read in conjunction with "Item 7.
- -- Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes included elsewhere in this
Report.
The capital structure and accounting basis of the assets and
liabilities of the Company as of August 12, 1995 and thereafter differ from
those of the Predecessor Company in prior periods as a result of the
Acquisition. Financial data of the Predecessor Company for periods prior to
August 12, 1995 are presented on a historical cost basis. Financial data of the
Company as of August 12, 1995 and thereafter reflect the Acquisition under the
purchase method of accounting, under which the purchase price has been allocated
to assets and liabilities based upon their estimated fair values. Accordingly,
amounts for the years ended 1999, 1998, 1997 and 1996 and twenty week period
ended December 31, 1995, should not be compared to the prior period.
9
<PAGE>
<TABLE>
<CAPTION>
Predecessor
Company Successor Company
----------- ----------------------------------------------------------------------------
32 Weeks 20 Weeks Year Year Year Year
Ended Ended Ended Ended Ended Ended
August 11, December 31, December 31, December 31, December 31, December 31,
1995 1995 1996 1997 1998 1999
----------- ------------ ------------ ------------ ------------ ------------
Statement of Operations Data: (Dollar amounts in millions)
<S> <C> <C> <C> <C> <C> <C>
Total revenue $202.1 $150.6 $332.5 $340.0 $332.3 $353.7
Cost of sales, rentals and support
services 107.6 90.1(b) 181.1(b) 194.4(b) 188.7(b) 189.2(b)
Selling and administrative 60.4 62.4(c) 149.2(c) 155.5(c) 139.9(c) 122.6(c)
Research and development (net of
software capitalization) 7.0 4.6 14.2 14.7 17.1 9.8
Operating profit (loss) 27.1 (6.5) (12.0) (24.6) (13.4) 32.1
Net interest (income) expense and
other (1.4) 16.1(d) 41.6(d) 44.7(d) 39.4(d) 40.0(d)
Net income (loss) 17.1 (13.9) (34.7) (68.2) (53.7) (8.9)
Stock dividend on PIK Preferred
Stock --- .8 2.3 2.7 3.1 5.8
Net loss applicable to Common
Stock --- (14.7) (37.0) (70.9) (56.8) (14.7)
Other Data:
Adjusted EBITDA(a) $32.0 $ 32.3 $ 54.2 $ 48.2 $ 30.6 $ 60.3
Depreciation and amortization 4.9 39.1 65.8 62.2 38.2 28.2
Capital expenditures 5.5 .8 6.3 6.9 8.9 12.3
Software capitalization 2.5 1.7 4.7 6.2 10.3 10.1
Adjusted EBITDA margin (a) 15.8% 21.5% 16.3% 14.2% 9.2% 17.0%
Balance Sheet Data
(at end of period):
Working capital $ 43.3 $ 33.0 $ 51.2 $ 50.8 $ 50.4
Total assets 550.7 504.8 470.0 454.3 461.1
Long term debt 350.0 352.6 343.6 370.5 354.2
Total liabilities 456.2 445.4 444.8 482.9 478.7
Stockholders' equity (deficit) 94.5 59.4 25.2 (28.6) (17.6)
- --------------------
</TABLE>
(a) Adjusted 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 which for the years
ended December 31, 1996, 1997, 1998 and 1999 totalled $(0.9) million,
$10.8 million, $5.5 million and ($0.1) million, respectively. 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.
Adjusted EBITDA margin is defined as adjusted EBITDA as a percent of
revenue.
(b) Cost of sales, rentals and support services for the twenty weeks ended
December 31, 1995 and years ended December 31, 1996, 1997, 1998 and 1999
includes $14.7 million, $8.8 million, $2.4 million, $0.4 million and $0.3
million, respectively, of charges related to the amortization of
inventory write-up and depreciation associated with purchase accounting
adjustments.
(c) Selling and administrative for the twenty weeks ended December 31, 1995
and years ended December 31, 1996, 1997, 1998 and 1999 includes $21.8
million, $46.2 million, $41.5 million, $23.2 million and $11.4 million,
respectively, of non-cash purchase accounting charges.
(d) Includes $.9 million, $5.3 million, $6.3 million, $1.7 million and $1.9
million of non-cash interest expense from amortization of deferred
financing fees for the twenty weeks ended December 31, 1995 and years
ended December 31, 1996, 1997, 1998 and 1999, respectively.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following discussion should be read in conjunction with the
financial statements and accompanying notes included in "Item 8. -- Financial
Statements and Supplementary Data." Certain amounts have been reclassified to
conform to current year presentation.
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------------
1997 1998 1999
---- ---- ----
(in millions)
<S> <C> <C> <C>
Total revenue................................................... $340.0 $332.3 $353.7
Cost of sales, rentals and support services..................... 194.4 188.7 189.2
Selling and administrative expense (1).......................... 155.5 139.9 122.6
Research and development........................................ 14.7 17.1 9.8
------ ------ ------
Operating (loss) profit.................................. (24.6) (13.4) 32.1
------ ------ ------
Net interest expense and other.................................. 44.7 39.4 40.0
Income tax (benefit) provision.................................. (1.1) 0.9 1.0
------ ------ ------
Net loss ....................................................... $(68.2) $(53.7) $ (8.9)
====== ====== ======
(1) Includes amortization of intangibles.
Year Ended
December 31,
-----------------------------------
1997 1998 1999
---- ---- ----
(in millions)
Revenue:
Sales:
Integrated Voice Systems................................... $ 45.7 $ 41.4 $ 32.5
Integrated Health Systems.................................. 37.4 44.8 71.7
------ ------ ------
Total U.S. Voice Systems............................... 83.1 86.2 104.2
Communications Recording Systems........................... 59.3 61.0 48.4
Customer Service Parts..................................... 18.0 17.4 18.8
International and Dealer Operations........................ 40.7 31.3 40.9
Rentals .................................................. 1.8 1.4 1.4
------ ------ ------
Product sales and rentals.............................. 202.9 197.3 213.7
====== ====== ======
Support service:
Customer Service........................................... 81.3 77.2 80.6
Application and Training Specialists....................... 2.6 3.1 6.0
International and Dealer Operations........................ 10.4 7.6 9.1
------ ------ ------
Total support service.................................. 94.3 87.9 95.7
------ ------ ------
Total System Products and Services......................... 297.2 285.2 309.4
Contract Manufacturing..................................... 42.8 47.1 44.3
------ ------ ------
Total revenue .................................................. $340.0 $332.3 $353.7
====== ====== ======
</TABLE>
11
<PAGE>
Results of Operations
1999 Compared to 1998
Total revenue increased 6.4% to $353.7 million in 1999 from $332.3
million in 1998. System Products and Services revenue increased 8.5% to $309.4
million in 1999 from $285.2 million in 1998. This increase is attributable to
increased product sales revenue from I.H.S., higher revenue from Customer
Service, Application and Training Specialists ("A.T.S.") and International and
Dealer Operations, offset in part by lower product sales revenue from I.V.S. and
C.R.S. Contract Manufacturing revenue declined 5.9% to $44.3 million in 1999
from $47.1 million in 1998.
I.V.S. revenue declined 21.5% to $32.5 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. order backlog declined 37.8% during 1999 to $2.9 million. I.H.S.
revenue increased 60.0% to $71.7 million due to higher Enterprise Express(TM)
installations. I.H.S. order growth of 44.6% to $69.8 million is also
attributable to Enterprise Express(TM). I.H.S. order backlog declined 17.6%
during 1999 to $12.0 million. C.R.S. revenue declined 20.7% to $48.4 million due
to lower digital logger sales and the $2.1 million one-time sale of
Prolog(TM)/Guardian(TM) "Year 2000" related software upgrades recorded in 1998.
C.R.S. orders declined 9.4% to $53.2 million. C.R.S. order backlog, reflecting
the 1999 introductions of daVinci(TM) and Freedom(TM) communications recorders,
increased 93.8% in 1999 to $9.8 million. Customer Service revenue (including
sale of parts) increased 5.1% to $99.4 million due to increased installation and
warranty revenue. A.T.S. revenue increased 93.7% to $6.0 million due to
increased customer training provided in support of I.H.S. products. Sales and
service revenue from International and Dealer Operations increased 28.5% to
$50.0 million resulting primarily from increased system, desktop and portable
and CRS product sales, and higher service revenue in Canada, as well as from
increased system and C.R.S. revenue in Europe. Orders from International and
Dealer Operations increased 33.0% to $39.8 million. The decline in Contract
Manufacturing reflects lower turnkey manufacturing of electronic products from
existing customers.
Cost of sales, rentals and support services increased to $189.2 million
(53.5% of revenue) versus $188.7 million (56.8% of revenue) for 1998. The
decline in cost of sales, rentals and support services expressed as a percentage
of revenue is attributable to lower C.R.S. and Customer Service costs and
improved margins from International and Dealer Operations and the $5.0 million
provision for excess Boomerang(TM), FTR(TM), Synergy(TM) and Insight(TM)
inventory recorded in 1998.
Selling and administrative expenses (including amortization of
intangibles) declined 12.3% to $122.6 million (34.7% of revenue) from $139.9
million (42.1% of revenue) for 1998. Excluding additional depreciation and
amortization expense associated with purchase accounting adjustments related to
the Acquisition of $11.4 million and $23.2 million for 1999 and 1998,
respectively, selling and administrative expenses expressed as a percentage of
revenue would have declined by 3.6 percentage points. This decline is
attributable to $2.0 million of severance-related charges recorded in 1998 and
reduced I.V.S. and C.R.S. selling expenses, partially offset by increased I.H.S.
selling expenses and higher employee benefit costs.
Research and development expenses of $9.8 million (4.6% of product
sales and rental revenue) declined from $17.1 million (8.7% of product sales and
rental revenue), reflecting reduced staffing and a more focused development
effort.
The Company recorded an operating profit of $32.1 million (9.1% of
revenue) in 1999 compared to an operating loss of $13.4 million (4.0% of
revenue) for 1998. Excluding the impact of purchase accounting adjustments from
both 1999 and 1998 discussed above, operating profit would have increased by
$33.6 million due to higher revenue, lower costs and lower operating expenses.
Interest expense of $40.1 million increased 0.9% from $39.7 million
reflecting higher outstanding loan balances.
12
<PAGE>
1998 Compared to 1997
Total revenue declined 2.3% to $332.3 million in 1998 from $340.0
million in 1997. System Products and Services revenue declined 4.0% to $285.2
million in 1998 from $297.2 million in 1997. This decline is attributable to
lower product sales revenue from I.V.S. and lower revenue from Customer Service
and International and Dealer Operations, offset in part by increased product
sales revenue from I.H.S. and C.R.S., and increased revenue from Application and
Training Specialists ("A.T.S."). Contract Manufacturing revenue increased 9.8%
to $47.1 million in 1998 from $42.8 million in 1997.
I.V.S. revenue declined 9.5% to $41.4 million due to lower sales of the
Company's Straight Talk(TM), Synergy(TM) and desktop and portable products.
I.V.S. orders declined 7.2% to $45.3 million. I.V.S. order backlog declined
27.2% during 1998 to $4.7 million. I.H.S. revenue increased 19.9% to $44.8
million due to higher Enterprise Express(TM) installations. I.H.S. order growth
of 18.5% to $48.3 million is also attributable to Enterprise Express(TM). I.H.S.
order backlog increased 22.8% during 1998 to $14.5 million. C.R.S. revenue
increased 3.0% to $61.0 million due to the one-time sale of
Prolog(TM)/Guardian(TM) software upgrades. C.R.S. orders declined slightly
(0.9%) to $58.7 million. C.R.S. order backlog declined 32.4% in 1998 to $5.1
million. Customer Service revenue (including sale of parts) declined 4.7% to
$94.6 million due to lower proprietary product service contract, installation,
integration and third party maintenance revenue. A.T.S. revenue increased 17.6%
to $3.1 million due to increased customer training provided in support of I.H.S.
products. Sales and service revenue from International and Dealer Operations
declined 23.7% to $38.9 million resulting primarily from lower desktop, portable
and CRS product sales revenue in Canada as well as from lower desktop, portable,
system and C.R.S. product sales and lower service revenue in Europe. Orders from
International and Dealer Operations declined 27.1% to $29.9 million. Order
backlog for International and Dealer Operations declined 16.3% during 1998 to
$1.7 million. Contract Manufacturing growth reflects turnkey manufacturing of
electronic products from existing customers as well as the addition of new
Contract Manufacturing accounts.
Cost of sales, rentals and support services declined 2.9% to $188.7
million (56.8% of revenue) versus $194.4 million (57.2% of revenue) for 1997.
Excluding additional depreciation and amortization expenses associated with
purchase accounting adjustments related to the Acquisition, cost of sales,
rentals and support services as a percentage of revenue would have increased by
0.2 percentage points to 56.7% due primarily to increased Customer Service
costs, the provision for excess Boomerang(TM), FTR(TM), Synergy(TM) and
Insight(TM) inventory, a higher content of low margin Contract Manufacturing
revenue and unfavorable manufacturing cost adjustments, partially offset by 1997
charges for excess inventory associated with Digital Express(TM) and Records
Express(TM) products.
Selling and administrative expenses (including amortization of
intangibles) declined 10.0% to $139.9 million (42.1% of revenue) from $155.5
million (45.7% of revenue) in 1997. Excluding additional depreciation and
amortization expense associated with purchase accounting adjustments related to
the Acquisition of $23.2 million and $41.5 million for 1998 and 1997,
respectively, selling and administrative expenses expressed as a percentage of
revenue would have increased by 1.6 percentage points. This increase is
attributable to $1.9 million of additional severance associated with continuing
efforts to reduce the Company's cost structure, increased C.R.S. selling
expenses, Year 2000 and information system implementation costs. Partially
offsetting these expense increases were lower I.V.S. and I.H.S. selling
expenses.
Research and development expenses of $17.1 million (8.7% of product
sales and rental revenue) increased 16.5% from $14.7 million (7.2% of product
sales and rental revenue), reflecting increased staffing and compensation.
The Company recorded an operating loss of $13.4 million (4.0% of
revenue) in 1998 compared to an operating loss of $24.6 million (7.2% of
revenue) for 1997. Excluding the impact of purchase accounting adjustments from
both 1998 and 1997 discussed above, operating profit would have declined by
47.1% to $10.2 million due to lower revenue, higher costs, the provision for
severance and increased operating expenses.
Interest expense of $39.7 million declined 10.6% from $44.4 million
reflecting lower amortization of deferred financing fees.
13
<PAGE>
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 December 31, 1999, the Company had outstanding term
loans of $130.9 million (the "Term Loans") and loans of $23.0 million
outstanding under the $40.0 million revolving credit facility (the "Revolving
Credit Facility") and the Notes. Availability under the Revolving Credit
Facility at December 31, 1999 was $17.0 million ($14.9 million after deducting
outstanding letters of credit). Scheduled annual principal payments will be $0.6
million in 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 year.
On December 31, 1998, the Company and the lenders executed a fifth
amendment to the Credit Agreement. Under the terms of this amendment, the
lenders agreed to waive compliance by the Company with the financial covenants
as of December 31, 1998 and for the four-Fiscal Quarter period then ended. Other
changes effected by the amendment were (i) modifications to the covenants and
related definitions in respect of certain asset sales and the utilization of the
proceeds from such asset sales, (ii) modifications to the required Maximum
Leverage, Minimum EBITDA and Minimum Interest Coverage Ratio covenants (as
defined in the Credit Agreement), (iii) a change in the maturity date of the
Tranche C Term Loans (the "Tranche C Loans") to be equal to that of the Tranche
B Term Loans (the "Tranche B Loans"), and (iv) an increase in the interest rate
on the Tranche B Loans to be equal to that of the Tranche C Loans.
In January 1999, the Company sold 2.0 million shares of its 12%
Convertible Pay-in-Kind Preferred Stock to Stonington for $20 million. In
February 1999, $11.75 million was used for the semi-annual interest payment on
the Notes. Proceeds from 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 maturing on February 16, 1999. The swap effectively converted that
portion of the Company's Term Loans to a fixed rate component of 5.8%, thus
reducing the impact of changes in interest rates, converting the total effective
interest rate on fifty percent of the initial outstanding Term Loans to 9.55%.
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,
limiting the effective interest rate on fifty percent of the currently
outstanding Term Loans to 9.25%. The fair value of the interest rate caps as of
December 31, 1999 was favorable $0.7 million based on dealer quotes.
In addition, the Credit Agreement contains covenants that significantly
limit or prohibit, among other things, the ability of the Company to incur
indebtedness, make prepayments of certain indebtedness, pay dividends on Common
Stock, make investments, engage in transactions with stockholders and
affiliates, create liens, sell assets and engage in mergers and consolidations
and requires that the Company maintain certain financial ratios.
The Company had $200.0 million aggregate principal amount of Notes
outstanding as of December 31, 1999. The Notes are subordinated to the Credit
Agreement and other senior indebtedness, as defined in the Note Indenture. The
Notes contain similar types of covenants to the Credit Agreement and provide for
each noteholder to have the right to require that the Company repurchase the
Notes at 101% of the principal amount upon a change of control (as defined in
the Note Indenture). The Notes bear interest of 11-3/4% per annum, payable
semi-annually on each February 1 and August 1. The Notes mature on August 1,
2005. The fair value of the Notes at December 31, 1999 was favorable $52
million, based upon dealer quotes.
Capital expenditures for 1999 totaled $12.3 million. The Company does
not expect that the limitation on capital expenditures contained in the Credit
Agreement will limit, in any material respects, the Company's ability to fund
capital expenditures.
The Company's quarterly and annual revenues and other operating results
have been and will continue to be affected by a wide variety of factors that
could have a material adverse effect on the Company's financial performance
14
<PAGE>
during any particular quarter or year. Such factors include, but are not limited
to, the level of orders that are received and shipped by the Company in any
given quarter, the rescheduling and cancellation of orders by customers,
availability and cost of materials, the Company's ability to enhance its
existing products and to develop, manufacture, and successfully introduce and
market new products, new product developments by the Company's competitors,
market acceptance of products of both the Company and its competitors,
competitive pressures on prices, the ability to attract and maintain qualified
technical personnel, significant damage to or prolonged delay in operations at
the Company's manufacturing facility, and interest rate and foreign exchange
fluctuations. The Company has introduced a number of new products in its target
markets in 1997, 1998 and 1999 which are expected to enhance future revenues and
liquidity of the Company. However, there can be no assurance 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.
As of December 31, 1999, the Company has recorded a gross deferred tax
asset of $102.5 million included in other assets reflecting the benefit of net
operating loss carryforwards and various book tax temporary differences. The net
operating loss carryforward for federal income tax purposes as of December 31,
1999 is approximately $148.1 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, $37.0 million will expire
in the year 2018 and $24.2 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 carryforward. In
1997, the Company established a valuation allowance of $24.1 million against the
deferred tax assets. During 1998, the Company increased its valuation allowance
by $20.8 million. During 1999, the Company increased its valuation allowance by
$3.9 million, resulting in a net deferred tax asset of $53.8 million. Including
a deferred tax liability of $13.9 million, the net deferred tax asset at
December 31, 1999 totalled $39.9 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 $53.8
million recorded at December 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.
On March 7, 2000, the Company entered into a definitive agreement to be
acquired by Lernout & Hauspie. The transaction is subject to closing conditions
including the ability of Lernout & Hauspie to obtain financing for approximately
$425 million of the Company's debt and other obligations and other customary
conditions.
Year 2000 Impact
The entire computer industry faced a challenge at the turn of the
century due to a common industry practice employed since the 1960's of
representing a year with just two digits rather than four digits. The potential
problems associated with this industry practice, commonly referred to as Year
2000 issues, were not restricted to system hardware components, but could have
been manifested within many operating systems, firmware, application software
and equipment used throughout an organization.
In 1998, the Company initiated a program to address its Year 2000
exposure. The Company established a Year 2000 Project Office which 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 program was
substantially completed on schedule in 1999.
15
<PAGE>
The Company experienced no material adverse effects related to the
arrival of 2000. However, there remains the possibility of latent Year 2000
problems that could still occur and cause failures in the Company's systems or
products. The Company's Year 2000 Project Office continues to monitor its
products, systems, suppliers and customers in an effort to minimize any
potential impact of this possible but unlikely scenario.
Costs of the Year 2000 program approximated $13.0 million, of which
$9.0 million represented new software and hardware purchased for internal
Company systems which were accelerated in connection with the Year 2000 issue.
These costs were funded from normal operating cash flows of the business.
Estimated future costs related to the Year 2000 program are insignificant.
The Company may, from time to time, provide estimates as to future
performance. Such estimates would be "forward-looking" statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Because such statements include risks and
uncertainties, actual results may differ materially from those estimates
provided. The Company undertakes no duty to update such forward looking
statements. Because the Company wishes to take advantage of the "safe harbor"
provision of the Private Securities and Litigation Reform Act of 1995, readers
are cautioned to consider, among others, those risks previously discussed
herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk represents the risk of loss that may impact the
consolidated financial position, results of operations or cash flows of the
Company. The Company is exposed to market risk associated with change in
interest rates and foreign currency exchange rates.
Interest Rates
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's debt obligations. The Company has no cash
flow exposure on the $200.0 million of 11.75% fixed interest rate Notes;
however, the Company does have cash flow exposure on the Term Loans and loans
outstanding under the Revolving Credit Facility associated with variable
interest rates, as adjusted by the impact of the interest rate cap agreements.
Accordingly, a 1 percent point change in variable interest rates would result in
interest expense fluctuation of approximately $1.5 million.
Foreign Exchange Risk
The Company is exposed to foreign exchange risk to the extent of
adverse fluctuations in the Canadian dollar, the British pound, the German mark
and Japanese yen. The company does not believe that reasonably possible near
term change in those currencies will result in a material effect on future
earnings, financial position or cash flows of the Company.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly Results of Operations (Unaudited) (In thousands)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1999
-----
Total revenue................ $ 82,611 $ 85,660 $ 95,861 $ 89,602
Cost of sales, rentals and support
services.................... 43,450 46,302 51,505 47,938
Net loss .................... (4,166) (1,398) 883 (4,262)
Net loss applicable to
Common Stock................ $ (5,397) $ (2,877) $ (644) $ (5,840)
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
------------- ------------- ------------- -------------
1998
----
Total revenue................ $ 83,825 $ 84,985 $ 85,876 $ 77,632
Cost of sales, rentals and support
services.................... 45,012 46,957 45,131 51,588
Net loss .................... (10,845) (10,711) (5,384) (26,750) (a)
Net loss applicable to
Common Stock................ $ (11,574) $ (11,466) $ (6,166) $ (27,558)
- ------------------------
</TABLE>
(a) Net loss includes after tax charges of $3.1 million for product
obsolescence, $2.7 million for severance and restructuring charges and
a $11.1 million increase to the deferred tax valuation allowance.
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Dictaphone Corporation
Stratford, Connecticut
We have audited the accompanying consolidated balance sheets of Dictaphone
Corporation and Subsidiaries (the "Company") as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1999. Our audits also included the financial statement schedule as
of and for each of the three years in the period ended December 31, 1999 listed
in the Index as Item 14. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the financial statement schedule as of and for each of the three years
in the period ended December 31, 1999, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Hartford, Connecticut
February 11, 2000
(March 7, 2000 as to Note 14)
18
<PAGE>
DICTAPHONE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS December 31, 1998 December 31, 1999
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,727 $ 6,190
Accounts receivable, less allowance of
$968 and $1,801, respectively 77,432 100,834
Inventories 53,362 49,759
Other current assets 7,259 6,152
----------- -----------
Total current assets 149,780 162,935
Property, plant and equipment, net 32,425 37,489
Deferred financing costs, net of accumulated
amortization of $14,246 and $16,145, respectively 9,920 8,141
Intangibles, net of accumulated amortization of $122,595
and $133,964, respectively 206,122 194,865
Deferred tax asset 39,765 39,934
Other assets 16,315 17,774
----------- -----------
Total assets $ 454,327 $ 461,138
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,778 $ 11,755
Interest payable 10,067 9,965
Accrued liabilities 31,433 30,928
Advance billings 39,586 49,100
Current portion of long-term debt 795 790
----------- -----------
Total current liabilities 90,659 102,538
Long-term debt 369,737 353,443
Accrued pension liability 8,352 9,953
Other liabilities 14,141 12,806
----------- -----------
Total liabilities 482,889 478,740
----------- -----------
Commitments, contingencies and concentration of risks (Note 10)
Stockholders' equity:
Preferred stock ($.01 par value; 7,500,000 shares authorized; 2,391,500 and
2,742,400 shares of 14% PIK perpetual preferred stock issued and
outstanding, liquidation values of $23,915 and $27,424 at December 31,
1998 and 1999, respectively) 23,915 27,424
Preferred stock ($.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 $22,306 at
December 31, 1999) --- 22,306
Common stock ($.01 par value; 30,000,000 shares
authorized; 12,934,000 shares issued
at December 31, 1998 and 1999, respectively) 130 130
Notes receivable from stockholders (741) (741)
Additional paid-in capital 120,955 115,140
Treasury stock, at cost (66,000 shares at
December 31, 1998 and 1999, respectively) (660) (660)
Accumulated deficit (170,417) (179,360)
Accumulated other comprehensive loss (1,744) (1,841)
----------- -----------
Total stockholders' equity (deficit) (28,562) (17,602)
----------- -----------
Total liabilities and stockholders' equity $ 454,327 $ 461,138
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues:
Product sales and rentals $ 202,894 $ 197,330 $ 213,773
Contract manufacturing sales 42,864 47,063 44,288
Support services 94,284 87,925 95,673
----------- ----------- -----------
Total revenue 340,042 332,318 353,734
----------- ----------- -----------
Costs and expenses:
Cost of sales, rentals and support
services 194,432 188,688 189,195
Selling and administrative 114,263 116,716 111,308
Amortization of intangibles 41,262 23,156 11,369
Research and development 14,705 17,128 9,761
----------- ----------- -----------
Operating (loss) profit (24,620) (13,370) 32,101
Interest expense 44,438 39,715 40,062
Other expense (income) - net 224 (273) (55)
----------- ----------- -----------
Loss before income taxes (69,282) (52,812) (7,906)
Income tax benefit (expense) 1,060 (878) (1,037)
----------- ----------- -----------
Net loss (68,222) (53,690) (8,943)
Stock dividends on PIK Preferred Stock 2,699 3,074 5,815
----------- ----------- -----------
Net loss applicable to Common Stock $ (70,921) $ (56,764) $ (14,758)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Operating activities:
Net loss $ (68,222) $ (53,690) $ (8,943)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 68,515 39,895 30,115
Provision for deferred income taxes (1,767) (227) (160)
Non-cash charge for product obsolescence 14,902 4,999 ---
Changes in assets and liabilities:
Accounts receivable (18,869) (5,749) (23,285)
Inventories (4,528) (9,735) 3,605
Other current assets (1,876) 4,690 1,010
Accounts payable and accrued liabilities 5,896 4,922 4,130
Advance billings 2,502 2,523 9,464
Other assets and other (10,996) (16,051) (11,503)
----------- ---------- -----------
Net cash (used in) provided by operating activities (14,443) (28,423) 4,433
----------- ----------- -----------
Investing activities:
Net investment in fixed assets (5,899) (8,851) (12,333)
Proceeds from sale of building --- 14,000 ---
---------- --------- ----------
Net cash (used in) provided by investing activities (5,899) 5,149 (12,333)
---------- --------- ----------
Financing activities:
Borrowings under term loan facility 62,750 --- ---
Repayment under term loan facility (71,000) (2,427) (628)
Proceeds from sale of common stock 35,000 --- ---
Proceeds from sale of preferred stock --- --- 20,000
Borrowings under revolving credit facility 88,600 79,000 42,500
Repayments under revolving credit facility (88,600) (49,500) (58,000)
International borrowing, net (717) (150) (159)
Payment of deferred financing costs (2,927) (749) (120)
Repayment under capital lease obligations (266) (1,355) (1,120)
Repayment of management loans 221 90 ---
Payments to acquire treasury stock (280) (180) ---
Other --- 29 (83)
---------- --------- ----------
Net cash provided by financing activities 22,781 24,758 2,390
---------- --------- ----------
Effect of exchange rate changes on cash (89) (34) (27)
---------- --------- ----------
(Decrease) increase in cash 2,350 1,450 (5,537)
Cash and cash equivalents, beginning of period 7,927 10,277 11,727
---------- --------- ----------
Cash and cash equivalents, end of period $ 10,277 $ 11,727 $ 6,190
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 38,372 $ 38,001 $ 38,326
========== ========== ==========
Income taxes paid $ 1,039 $ 432 $ 209
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1997, 1998 and 1999
(Dollars in thousands)
Notes Accumulated
Receivable Additional Other Comprehensive Total
Preferred Common from Treasury Paid-in Accumulated Comprehensive Earnings Equity
Stock Stock Stockholders Stock Capital Deficit Income (Loss) (Loss) (Deficit)
--------- ------- ------------- --------- ---------- ----------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 18,142 95 (1,052) (200) 91,763 (48,534) (836) 59,378
Net loss --- --- --- --- --- (68,222) --- (68,222) (68,222)
Preferred stock
dividends 2,699 --- --- --- (2,699) --- --- --- ---
Sale of common stock --- 35 --- --- 34,965 --- --- --- 35,000
Repayment of
management loans --- --- 221 --- --- --- --- --- 221
Stock repurchase --- --- --- (280) --- --- --- --- (280)
Translation loss --- --- --- --- --- --- (836) (836) (836)
------- ----- -------- -------- -------- --------- --------- -------- --------
Comprehensive loss $(69,058)
========
Balance at
December 31, 1997 20,841 130 (831) (480) 124,029 (116,756) (1,672) 25,261
Net loss --- --- --- --- --- (53,690) --- (53,690) (53,690)
Preferred stock
dividends 3,074 --- --- --- (3,074) --- --- --- ---
Repayment of
management loans --- --- 90 --- --- --- --- --- 90
Stock repurchase --- --- --- (180) --- --- --- --- (180)
Translation loss --- --- --- --- --- --- (72) (72) (72)
Disposal of Dictaphone
Netherlands BV --- --- --- --- --- 29 --- 29 29
------- ----- -------- -------- -------- --------- --------- -------- --------
Comprehensive loss $(53,733)
========
Balance at
December 31, 1998 23,915 130 (741) (660) 120,955 (170,417) (1,744) (28,562)
Net loss --- --- --- --- --- (8,943) --- (8,943) (8,943)
Sale of preferred
stock 20,000 --- --- --- --- --- --- --- 20,000
Preferred stock
dividends 5,815 --- --- --- (5,815) --- --- --- ---
Translation loss --- --- --- --- --- --- (97) (97) (97)
------- ----- -------- -------- -------- --------- --------- -------- --------
Comprehensive loss $ (9,040)
========
Balance at
December 31, 1999 $49,730 $ 130 $ (741) $ (660) $115,140 $(179,360) $ (1,841) $(17,602)
======= ===== ======== ======= ======== ========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
DICTAPHONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share amounts)
1. NATURE OF OPERATIONS
Dictaphone Corporation (the "Company") is engaged principally
in the design, manufacture, marketing and service of integrated voice
and data management systems and software. The Company has two operating
segments, System Products and Services and Contract Manufacturing. The
System Products and Services segment consists of the sale and service
of system-related products to dictation and voice management and
communications recording system customers in selected vertical markets.
Dictaphone markets these products worldwide with 86% of its revenue
generated from the U.S. market. The Contract Manufacturing segment
consists of manufacturing operations which provide outside electronic
manufacturing services to original equipment manufacturers in the
telecommunications, data management, computer and electronics
industries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Certain prior period amounts
have been reclassified to conform to the current year presentation.
Consolidation. The consolidated financial statements include
the Company and all majority-owned subsidiaries as follows: Dictaphone
Corporation U.S. ("Dictaphone U.S."), Dictaphone Canada Ltd/Ltee
("Dictaphone Canada"), Dictaphone Company Ltd. ("Dictaphone U.K."),
Dictaphone Deutschland GmbH ("Dictaphone Germany") and Dictaphone
International A.G. ("Dictaphone Switzerland"). All intercompany
accounts and transactions have been eliminated.
Cash and cash equivalents. Cash equivalents include
short-term, highly liquid investments with a maturity of three months
or less from the date of acquisition.
Inventory valuation. Inventories are valued at the lower of
cost or market. Cost is determined on the first-in, first-out (FIFO)
method.
Computer software development costs. The Company capitalizes
certain software costs ($6,225, $10,249 and $10,086 for the years ended
December 31, 1997, 1998 and 1999, respectively) in accordance with the
provisions of Statement of Financial Accounting Standard ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed." Such amounts are amortized as the related
products are sold. Amortization expense in 1997, 1998 and 1999 related
to the capitalized amounts was $5,821, $5,542 and $8,720, respectively.
Fixed assets and depreciation. Property, plant and equipment
are stated at cost and depreciated using the straight line method over
the useful lives of the various assets ranging from three to twelve
years for machinery and equipment and up to 35 years for buildings.
Major improvements which add to productive capacity or extend the life
of an asset are capitalized while repairs and maintenance are charged
to expense as incurred. Rental equipment and other depreciable assets
are depreciated using the straight line method over the related useful
lives.
23
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangibles. Patents and non-compete agreement are amortized
on a straight line basis over five and three years, respectively.
Service contracts were amortized using a systematic method based on
expected rate of nonrenewals over four years. All other intangibles are
being amortized on a straight line basis over 40 years. The Company
periodically evaluates the recoverability of goodwill and other
intangible assets by assessing whether the unamortized intangible asset
can be recovered over its remaining useful life through future
operating cash flows on an undiscounted basis.
Deferred financing costs. Deferred financing costs are
amortized over the terms of the related debt using the effective
interest method.
Rental arrangements and advance billings. The Company rents
equipment to its customers under short-term rental agreements,
generally for periods of three to five years. Maintenance contracts
(support services) are billed in advance; the related revenue is
included in advance billings and amortized ratably into income as
earned.
Revenue. Revenue is recognized when earned. In accordance with
American Institute of Certified Public Accountants Statements of
Position 97-2 "Software Revenue Recognition" and related amendments,
for products with a significant software element, the Company records
revenue attributable to the hardware and software elements upon
shipment and defers revenue attributable to undelivered elements
(principally installation and training) to the periods in which the
related obligations are performed. Revenue for all other products is
recognized upon shipment or when service is performed.
Costs and expenses. Operating expenses of field sales and
service offices which represent the cost of support services revenue
are included in cost of sales.
Income taxes. Income taxes are based upon reported results of
operations and reflects the impact of temporary differences between the
amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. The Company does
not currently provide for U.S. Federal taxes on the undistributed
earnings of foreign subsidiaries.
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 consolidated statements of cash flows. The Company is
required to implement the Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Financial Instruments and Hedging
Activities" in the first quarter of 2001. The Company believes the
impact of the new pronouncement on the financial statements will be
immaterial.
Translation of foreign currencies. Assets and liabilities of
subsidiaries are translated at the rate of exchange in effect on the
balance sheet date; income and expenses are translated at the average
rates of exchange prevailing during the period. The related translation
adjustments are reflected in the accumulated other comprehensive income
(loss) within the stockholders' equity section of the consolidated
balance sheet. Foreign currency gains and losses resulting from
transactions are included in results of operations.
Stock-Based Compensation. Statement of Financial Accounting
Standards Number 123, "Accounting For Stock-Based Compensation" ("SFAS
123") encourages, but does not require, companies to record at fair
value compensation cost of stock-based employee compensation plans.
Dictaphone has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting For Stock Issued to
Employees" ("APB No. 25") and related interpretations. Under the
intrinsic value based method, compensation cost is the excess, if any,
of the quoted
24
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
market price of the stock at grant date over the exercise price of the
option. Typically, grants of stock options pursuant to the Company's
stock option plans have no intrinsic value at grant date, and
accordingly, no compensation cost has been recognized by Dictaphone.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Raw materials and work in process $ 15,799 $ 23,376
Supplies and service parts 15,376 11,083
Finished products 22,187 15,300
----------- -----------
Total inventories $ 53,362 $ 49,759
=========== ===========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Land $ 1,058 $ 1,076
Buildings 10,030 10,197
Machinery and equipment 56,100 66,611
----------- -----------
Subtotal 67,188 77,884
Accumulated depreciation (34,763) (40,395)
----------- -----------
Property, plant and equipment, net $ 32,425 $ 37,489
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1997,
1998 and 1999 was $7,739, $7,898 and $8,098, respectively.
In May 1998, the Company entered into a sale/leaseback
agreement for the sale of its Stratford, CT land and headquarters
facility for total proceeds of $14 million. The Company realized a gain
on the sale of $1.8 million. The gain has been deferred and is being
recognized over the term of the operating lease of 20 years.
5. INTANGIBLES
The following summarizes intangible assets, net of accumulated
amortization and writedowns of $122,595 and $133,964, for the years
ended December 31, 1998 and 1999, respectively. Amortization expense
for the years ended December 31, 1997, December 31, 1998 and December
31, 1999 was $41,262, $23,156 and $11,369, respectively.
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Goodwill $ 127,611 $ 123,737
Tradenames 71,265 69,318
Service contracts 2,530 ---
Non-compete agreement 2,463 1,041
Patents 2,253 769
----------- -----------
$ 206,122 $ 194,865
=========== ===========
</TABLE>
25
<PAGE>
6. DEBT
The following summarizes the debt structure of the Company:
<TABLE>
<CAPTION>
December 31, December 31
1998 1999
------------ ------------
<S> <C> <C>
Current portion of long-term debt $ 795 $ 790
----------- -----------
Long-term debt:
Senior debt:
Term loans:
Tranche B 69,450 69,450
Tranche C 61,495 60,867
Revolving credit loans 38,500 23,000
International debt 292 126
Subordinated notes 200,000 200,000
----------- -----------
Total long-term debt 369,737 353,443
----------- -----------
Total debt $ 370,532 $ 354,233
=========== ===========
</TABLE>
In connection with the financing of the Acquisition, the
Company entered into a Credit Agreement, dated August 7, 1995, as
amended by five amendments to Credit Agreement, dated June 28, 1996,
June 27, 1997, July 21, 1997, November 14, 1997 and December 31, 1998
(collectively, the "Credit Agreement") with a syndicate of financial
institutions for whom Bankers Trust Company ("Bankers Trust") is the
Administrative Agent and NationsBank, N.A. (Carolinas) ("Nations") is
the Documentation Agent.
At December 31, 1999, the Company had Term Loans of $130,945
and loans of $23,000 outstanding under the Revolving Credit Facility.
The maturity schedule relating to the $130,945 of outstanding Term
Loans is as follows:
2000 $ 628
2001 36,328
2002 93,989
----------
$ 130,945
==========
The Company will be required to make certain prepayments,
subject to certain exceptions, on the Facilities with 75% of Excess
Cash Flow (as defined in the Credit Agreement) and with the proceeds
from certain asset sales, issuances of debt and equity securities and
any pension plan reversion. Such prepayments will be applied first to
required principal payments of the Tranche B Term Loan and thereafter
to amounts outstanding under the Revolving Credit Facility.
There are no scheduled reductions in the Revolving Credit
Facility over its term. The Revolving Credit Facility terminates March
31, 2001. Availability under the Revolving Credit Facility at December
31, 1999 was $17,000. The Company had outstanding letters of credit of
$2,070 as of December 31, 1999, which reduced availability to $14,930.
Borrowings under the Revolving Credit Facility bear interest
at a rate per annum equal to, at the Company's option, the higher of
(1) Bankers Trust's Prime Rate or (2) the rate which is 1/2 of 1% in
excess of the Federal Funds effective rate (together the "Base Rate")
plus 1.75% or the reserve Eurodollar Rate (as defined in the Credit
Agreement) plus 2.75%. The Tranche B Loan bears interest at a rate per
annum equal to, at the Company's option, the Base Rate plus 2.75% or
the reserve Eurodollar Rate plus 3.75%. The Tranche C Loan bears
interest at a rate per annum equal to, at the Company's option, the
Base Rate plus 2.75% or the reserve Eurodollar Rate plus 3.75%. In
addition, the Company is required to pay Bankers Trust a quarterly
26
<PAGE>
6. DEBT (Continued)
commitment fee of .50% per annum on the daily average unused portion of
the Revolving Credit Facility. The carrying amount of the Facilities
approximates fair value as the interest rate reprices quarterly and is
reflective of currently available market rates. The Company entered
into an interest rate swap contract in November 1995, effective
February 16, 1996, with an aggregate notional principal amount
equivalent to $75,000 which matured on February 16, 1999. The swap
effectively converted that portion of the Company's Term Loans to a
fixed rate component of 5.8%, thus reducing the impact of changes in
interest rates, converting the total effective interest rate on fifty
percent of the initial outstanding Term Loans to 9.55%. 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, limiting the effective
interest rate on fifty percent of the currently outstanding Term Loans
to 9.25%. The fair value of the interest rate cap agreements as of
December 31, 1999 was favorable $0.7 million, based upon dealer quotes.
The effective interest rate for the year ended December 31, 1999 was
9.12%, 9.10% and 8.05% on the Tranche B Loan, Tranche C Loan and the
Revolving Credit Facility, respectively.
Dictaphone Non-U.S. is not a guarantor of the Company's
obligations under the Facilities. The Company's obligations and the
guarantees of its domestic subsidiaries are secured by substantially
all existing and acquired personal property of the Company and its
domestic subsidiaries, including a pledge of 100% of the stock of each
of the Company's domestic subsidiaries and 66% of the stock of each of
the Company's first-tier foreign subsidiaries. The Company's
obligations are also secured by liens on certain real property of the
Company and its domestic subsidiaries.
In addition, the Credit Agreement contains covenants that
significantly limit or prohibit, among other things, the ability of the
Company to incur additional indebtedness, make prepayments of certain
indebtedness, pay dividends on Common Stock (as hereinafter defined),
make investments, engage in transactions with stockholders and
affiliates, create liens, sell assets and engage in mergers and
consolidations and requires that the Company maintain certain financial
ratios.
The Acquisition was also financed through the issuance of
$200,000 senior subordinated notes (the "Notes"). The Notes are
subordinated to the Credit Agreement financing and other senior
indebtedness as defined in the indenture pursuant to which the Notes
were issued (the "Note Indenture"). The Notes bear interest of 11-3/4%
per annum, payable semiannually on each February 1 and August 1. The
Notes mature on August 1, 2005. The fair value of the Notes at December
31, 1999 was favorable $52 million, based on dealer quotes. The Notes
are fully and unconditionally guaranteed by Dictaphone U.S. The Notes
contain similar types of covenants to the Facilities and provides for
each noteholder to have the right to require that the Company
repurchase the Notes at 101% of the principal amount upon a change of
control as defined in the Note Indenture.
7. EQUITY AND STOCK OPTIONS
Common Stock
On December 31, 1999, the Company had 30 million shares of
common stock, $.01 par value ("Common Stock") authorized of which
12,934,000 shares were issued to Stonington Capital Appreciation 1994
Fund, L.P. ("Stonington"), an affiliate of a limited partner of
Stonington, and by management of the Company. (See Note 9).
At December 31, 1998 and 1999, the Company had 66,000 shares
of treasury stock, respectively.
27
<PAGE>
7. EQUITY AND STOCK OPTIONS (Continued)
Preferred Stock and Warrant
The Company is authorized to issue up to 17,500,000 shares of
preferred stock, $.01 par value, in one or more series as authorized by
the Board of Directors and to fix the terms, rights, restrictions and
qualifications of shares of each series. In connection with the
acquisition, the Company issued 1.5 million shares of 14% Pay-In-Kind
Perpetual Preferred Stock ("PIK Preferred Stock"). The PIK Preferred
Stock is nonvoting and has a stated value and liquidation preference of
$10 per share and carries a cumulative pay-in-kind dividend of 14% per
year payable quarterly in arrears from September 30, 1995 until July
31, 2006, and thereafter the annual dividend rate will increase by 200
basis points every twelve months (but in no event will exceed 24%). The
PIK Preferred Stock ranks pari passu with the Convertible PIK Preferred
(as hereinafter defined) and ranks senior to all other classes and
series of stock of the Company with respect to dividend rights and
rights on liquidation, winding up and dissolution of the Company. The
PIK Preferred Stock is redeemable at the option of the Company or in
certain limited circumstances at the option of the holder upon the
occurrence of certain events. The Company accrued the 14% pay-in-kind
dividend and charged additional paid-in capital $2,699, $3,074 and
$3,509 for the years ended December 31, 1997, 1998 and 1999,
respectively, as a result of the required dividends representing
269,900, 307,400 and 350,900 shares of the PIK Preferred Stock,
respectively. Such shares of PIK Preferred Stock were declared and
issued as of December 31, 1999.
In connection with a January 1999 equity infusion of $20.0
million from Stonington, the Company issued 2,000,000 shares of newly
issued 12% Convertible Pay-In-Kind Preferred Stock ("Convertible PIK
Preferred"). The Convertible PIK Preferred is non-voting and has a
stated value and liquidation preference of $10 per share and carries a
cumulative pay-in-kind dividend of 12% per year payable quarterly in
arrears from January 28, 1999 until July 31, 2006, and thereafter the
annual dividend rate will increase by 200 basis points every twelve
months (but in no event will exceed 24 percent). The Convertible PIK
Preferred has the same redemption rights as the PIK Preferred. The
Convertible PIK Preferred is convertible into Common Stock on a one to
one basis, subject to adjustments as described in the certificate of
designation for the Company's Convertible PIK Preferred. The Company
accrued the 12% pay-in-kind dividend and charged additional
paid-in-capital $2,306 for the year ended December 31, 1999, as a
result of the required dividends representing 230,600 shares of
Convertible PIK Preferred Stock.
Together with the issuance of the PIK Preferred Stock, the
Company issued a warrant to purchase 350,000 shares of Common Stock at
a price of $10 per share (the "Warrant") representing the fair value of
Common Stock on the date of issuance. The Warrant may not be
transferred or exchanged, in whole or in part, separately from, but may
be transferred or exchanged only together with, an equivalent
proportion of such PIK Preferred Stock.
The Warrant expires on August 11, 2005 and is currently
exercisable. The Company has reserved 350,000 shares of its Common
Stock for issuance upon exercise of the Warrant. As set forth in the
related agreement (the "Warrant Agreement"), the Warrant is subject to
certain antidilution provisions related to the future adjustments to
the Company's capital stock or the issuance of its Common Stock or
rights, options or warrants to purchase such Common Stock at a price
below the current market price as defined in the Warrant Agreement.
Management Stock Option Plan
At the date of Acquisition, the Company adopted a Management
Stock Option Plan (the "Plan") and issued options to purchase 713,000
shares of Common Stock at an exercise price of $10.00 per share
(estimated fair value of the Common Stock at date of grant) to
officers, key employees and non-employee directors of the Company. The
Plan provides that one-half of the options (service-based options)
granted under the Plan will vest automatically over a five year period
and the other one-half (performance-based options) became eligible for
vesting as to 10% on April 15, 1996, as to 20% on April 15, 1997, as to
20% on April 15, 1998, as to 20%
28
<PAGE>
7. EQUITY AND STOCK OPTIONS (Continued)
Management Stock Option Plan (cont.)
on April 15, 1999, and the remaining options become eligible for
vesting as to an additional 20% on April 15, 2000, with the remaining
10% becoming eligible for vesting on April 15, 2001, if the Company
attains certain predetermined financial performance goals, or in any
case no later than the tenth anniversary of the Acquisition. Based upon
the Company's performance in 1995, 1996, 1997, 1998 and 1999, the
Company's Board of Directors determined that the following eligible
performance-based options would vest: 60% on April 15, 1996, 0% on
April 15, 1997, 0% on April 15, 1998, 0% on April 15, 1999 and 0% on
April 15, 2000. The options expire ten years from the date of grant or
earlier in certain circumstances. In the event of a Sale or an IPO (as
defined in the Plan) of the Company, all outstanding unvested
service-based options and performance-based options will become
immediately vested and exercisable prior to the effective date of such
Sale or IPO. At the date of the Acquisition, the Company reserved
850,000 shares of its Common Stock for issuances under the Plan.
Effective August 1, 1997, the number of shares reserved for issuances
under the Plan was increased to 1,200,000. Effective July 28, 1999, the
number of shares reserved for issuances under the Plan was increased by
300,000. A summary of options outstanding is as follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Outstanding, beginning of year 650,000 1,096,500 1,067,000
Granted 551,500 141,500 440,000
Cancelled (105,000) (171,000) (44,250)
----------- ----------- -----------
Outstanding, end of year 1,096,500 1,067,000 1,462,750
=========== =========== ===========
Exercisable, end of year 161,470 295,473 469,117
=========== =========== ===========
</TABLE>
The exercise price for all options was $10.00
Statement of Financial Accounting Standards Number 123,
"Accounting For Stock-Based Compensation" ("SFAS 123") encourages, but
does not require, companies to record at fair value compensation cost
of stock-based employee compensation plans. Dictaphone has elected to
continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting For Stock Issued to Employees" ("APB No. 25") and related
interpretations. Under the intrinsic value based method, compensation
cost is the excess, if any, of the quoted market price of the stock at
grant date over the exercise price of the option. Typically, grants of
stock options pursuant to the Company's stock option plans have no
intrinsic value at grant date, and accordingly, no compensation cost
has been recognized by Dictaphone. Had compensation cost for the stock
option been determined based on the fair value of the option at a date
of grant consistent with the requirements of SFAS No. 123, Dictaphone's
net loss would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C> <C>
Net loss As reported $(70,921) $(56,764) $(14,758)
Pro Forma $(71,503) $(57,051) $(15,406)
</TABLE>
29
<PAGE>
7. EQUITY AND STOCK OPTIONS (Continued)
Management Stock Option Plan (cont.)
The fair value of each stock option has been estimated at the
date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate 5.72% 4.56% 6.36%
Expected life 5 years 5 years 5 years
Expected volatility --- --- ---
Expected dividend yield --- --- ---
</TABLE>
8. INCOME TAXES
The (benefit) provision for income taxes for the years ended
December 31, 1997, 1998 and 1999 consists of the following:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Current:
Federal $ --- $ --- $ ---
State --- --- ---
Foreign 707 1,105 1,206
---------- ---------- ----------
Total $ 707 1,105 1,206
---------- ---------- ----------
Deferred:
Federal $ 1,059 $ 929 $ ---
State (2,203) 221 ---
Foreign (623) (1,377) (169)
---------- ---------- ----------
Total (1,767) (227) (169)
---------- ---------- ----------
Total $ (1,060) $ 878 $ 1,037
========== ========== ==========
</TABLE>
The difference between the Company's effective income tax rate
and the United States statutory rate for the years ended December 31,
1997, 1998 and 1999 is reconciled below:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
United States statutory rate 35.00% 35.00% 35.00%
State income taxes, net of Federal
income tax benefit 4.32% 4.17% 5.44%
Effect of foreign operations (0.17%) (3.55%) (8.02%)
Miscellaneous (2.83%) (1.73%) (2.00%)
Net operating loss carryforwards
with no anticipated benefit (34.79%) (35.54%) (43.53%)
-------- -------- --------
Total 1.53% (1.65%) (13.11%)
======= ======= ========
</TABLE>
See Footnote 11 for disaggregated information as to domestic
and foreign income before taxes.
30
<PAGE>
8. INCOME TAXES (Continued)
Deferred tax assets and liabilities arise from the impact of
temporary differences between the amount of assets and liabilities
recognized for financial reporting purposes and such amounts recognized
for tax purposes and resulted from the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 48,725 $ 60,030
Amortization - identifiable intangibles 25,646 22,578
Postretirement and pension benefits 5,185 5,502
Inventory 5,130 2,598
Depreciation 4,809 5,075
Other 5,824 6,764
--------- ----------
Total gross deferred tax assets 95,319 102,547
--------- ----------
Less: valuation allowance (44,868) (48,779)
--------- ----------
Net deferred tax assets $ 50,451 $ 53,768
========= ==========
Deferred tax liabilities:
Amortization - goodwill $ (5,481) $ (7,080)
Capitalized software costs (4,209) (5,135)
Other (996) (1,619)
--------- ----------
Total deferred tax liabilities $ (10,686) $ (13,834)
========= ==========
</TABLE>
As of December 31, 1999, the Company has recorded a gross
deferred tax asset of $102.5 million included in other assets
reflecting the benefit of net operating loss carryforwards and various
book tax temporary differences. The net operating loss carryforward for
federal income tax purposes as of December 31, 1999 is approximately
$148.1 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, $37.0
million will expire in the year 2018 and $24.2 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 1999, the Company increased its valuation
allowance by $3.9 million resulting in a net deferred tax asset of
$53.8 million. Including a deferred tax liability of $13.9 million, the
net deferred tax asset at December 31, 1999 totalled $39.9 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 $53.8
million recorded for December 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.
9. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Stonington Capital Appreciation 1994 Fund, L.P.
In the first quarter of 1999, the Company received an
additional $20.0 million from the sale of 2,000,000 shares of
Convertible PIK Preferred Stock to Stonington.
31
<PAGE>
9. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
Transactions with Stonington Capital Appreciation 1994 Fund, L.P.
(cont.)
Stonington, together with an affiliate of a limited partner of
Stonington, owns 99.0% of the outstanding Common Stock of the Company,
has the power to determine the composition of the Board of Directors of
the Company and otherwise control the business and affairs of the
Company. Four of the seven members of the Board of Directors of the
Company are employees of an affiliate of Stonington and serve as
representatives of Stonington.
Transactions with Management
In connection with the Acquisition, the Company sold 197,000
shares of Common Stock to certain members of the Company's management
(the "Management Investors") for $1,970, the fair value of the Common
Stock at the date of sale (the "Management Placement"). The Company
financed $1,273 of the Management Placement with non-recourse loans
bearing interest at a rate equal to the Adjusted Eurodollar Rate in
effect for the Revolving Credit Facility under the Credit Agreement
plus 2.75%. Interest was due annually starting in August 1998. Unless
prepaid, all principal, accrued and unpaid interest is due and payable
on August 7, 2005. The obligations under the management notes are
secured by a pledge of the proportionate number of shares of Common
Stock pursuant to a Stockholder's Agreement.
Under the terms of the Stockholders Agreement relating to the
Management Placement, for a period of five years from August 11, 1995,
unless the Company has completed an initial public offering, Management
Investors will not be permitted to sell, transfer or otherwise dispose
of their shares of Common Stock, except to (i) a "Permitted Transferee"
or (ii) to the Company pursuant to certain put and call arrangements
set forth in the Stockholders' Agreement (the "Puts and Calls"). A
"Permitted Transferee" includes certain beneficiaries, trusts and
family members. The Puts and Calls provide for the sale of shares of
Common Stock to the Company upon the termination of employment. The
purchase price for shares purchased pursuant to the Stockholders
Agreement is based upon the original per share purchase price Adjusted
Book Value (as defined in the Stockholders Agreement), cost, or Fair
Market Value (as defined).
The Stockholders Agreement provides that in the event that,
after August 11, 2000, an initial public offering has not occurred,
Management Investors will be permitted to sell Common Stock to third
parties after first giving the Company and other Management Investors a
right of first refusal for the same number of shares of Common Stock at
the same price.
10. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK
Concentrations of Risks
A substantial portion of the Company's revenues are derived
from the sale of products manufactured at the Company's manufacturing
facility which is located in Melbourne, Florida. This manufacturing
facility is subject to the normal hazards of any such facility that
could result in damage to the facility. Any such damage to this
facility or prolonged delay in the operations of this facility for
repairs or other reason would have a materially adverse effect on the
Company's financial position and results of operations.
Commitments
The Company leases certain factory and office facilities under
lease agreements extending from one to twenty-five years. In addition
to factory and office facilities leased, the Company leases computer
and information processing equipment under lease agreements extending
from three to five years.
32
<PAGE>
10. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK (Continued)
Commitments (cont.)
Future minimum lease payments for operating leases as of
December 31, 1999 are as follows:
Years ending December 31,
2000 $ 5,430
2001 4,066
2002 2,883
2003 2,550
2004 2,125
Later years 23,307
-----------
Total minimum lease payments $ 40,361
===========
Rental expense under operating leases was $5,073, $4,952 and
$6,285 for the years ended December 31, 1997, 1998 and 1999,
respectively.
Contingencies
On February 14, 1995, Pitney Bowes, Inc. ("Pitney Bowes")
filed a complaint against Sudbury Systems, Inc. ("Sudbury") in the
United States District Court for the District of Connecticut alleging
intentional and wrongful interference with Pitney Bowes's plans to sell
the Company. The complaint seeks damages and a declaratory judgment
relating to the validity of a patent owned by Sudbury entitled "Rapid
Simultaneous Multiple Access Information Storage and Retrieval System"
and the alleged infringement thereof by the Company. Sudbury responded
by answering the complaint and filing a third-party complaint against
the Company alleging patent infringement and seeking preliminary and
permanent injunctive relief and treble damages. 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. As these proceedings are at a preliminary stage, it is
impossible to reasonably estimate the potential costs of remediation,
the timing and extent of remedial actions which may be required by
governmental authorities, and the amount of the liability, if any, of
the Company alone or in relation to that of any other responsible
parties. When it is possible to make a reasonable estimate of the
Company's liability with respect to such a matter, a provision will be
made as appropriate. Additionally, the Company has settled and paid its
liability at three other third party disposal sites. At a fourth site,
the Company has paid approximately $11 thousand for its share of the
costs of the first phase of the clean up of the site and management
believes that it has no continuing material liability for any later
phases of the cleanup. Consequently, management believes that its
future liability, if any, for these four sites is not material. In
addition, regardless of the outcome of such matters, Pitney Bowes has
agreed to indemnify the Company in connection with retained
environmental liabilities and for breaches of the environmental
representations and warranties 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.
33
<PAGE>
10. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK (Continued)
Contingencies (cont.)
In July, 1999, Bruce Hilt d/b/a Integrated Resources, Inc.
filed a complaint in the Middle District of Alabama against the Company
and Pitney Bowes Credit Corporation. Plaintiff commenced this action in
Alabama State Court as a purported class action for similarly situated
persons within the State of Alabama. Plaintiff alleges that the
Company's recording system he leases from Pitney Bowes Credit
Corporation is not Y2K compliant and will not function after December
31, 1999. The complaint seeks damages of less than $74,000 per class
member and alleges that there are hundreds of potential class members.
In August, 1999, the Company and Pitney Bowes removed the action to
Federal Court, in part based on the new Federal Y2K Act, 15 U.S.C. ss.
6601, et seq. (the "Y2K Act"). Plaintiff has filed a motion to remand
the case to State Court, which is fully briefed and before the Court.
Plaintiff to date has not moved to certify the case as a class
action. In October, 1999, the Company and Pitney Bowes filed a motion
to dismiss the action. Plaintiff has not yet responded to the motion to
dismiss, and no hearing date has been set by the Court.
The Company intends to continue to vigorously defend this
action. Although the litigation is in its preliminary stages, the
Company believes that it has meritorious defenses to this case,
especially in light of a remedy that has been offered to plaintiff, and
does not believe that a class should be certified.
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.
11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION
Dictaphone Corporation has fully and unconditionally
guaranteed the repayment of the Notes. Dictaphone Non-U.S. is not a
guarantor of the Notes. Separate financial statements of Dictaphone
U.S. are not presented because management has determined that they
would not be meaningful to investors in the Notes.
34
<PAGE>
11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
The following are the supplemental consolidating statement of
operations and cash flow information for the years ended December 31,
1997, 1998 and 1999, and the supplemental consolidating balance sheet
information as of December 31, 1998 and 1999.
<TABLE>
<CAPTION>
Dictaphone Corporation
Supplemental Condensed Consolidating Statement of Operations Information
Year Ended December 31, 1997
Dictaphone Dictaphone Consolidating
Corporation Non-U.S. Adjustments Consolidated
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Revenue from:
Product sales and rentals $ 183,200 $ 32,356 $ (12,662) $ 202,894
Contract manufacturing sales 42,864 --- --- 42,864
Support services 83,918 10,366 --- 94,284
---------- ---------- ---------- ----------
Total revenues 309,982 42,722 (12,662) 340,042
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales, rentals and support
services 180,501 27,064 (13,133) 194,432
Selling and administrative 141,749 13,776 --- 155,525
Research and development 14,705 --- --- 14,705
Interest expense - net and other 42,111 2,551 --- 44,662
---------- ---------- ---------- ----------
Total costs and expenses 379,066 43,391 (13,133) 409,324
---------- ---------- ---------- ----------
Equity (loss) earnings (11,382) --- 11,382 ---
---------- ---------- ---------- ----------
(Loss) income before income taxes (80,466) (669) 11,853 (69,282)
Income tax benefit (expense) 1,163 87 (190) 1,060
---------- ---------- ---------- ----------
Net (loss) income $ (79,303) $ (582) $ 11,663 $ (68,222)
========== ========== ========== ==========
</TABLE>
35
<PAGE>
11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
<TABLE>
<CAPTION>
Dictaphone Corporation
Supplemental Condensed Consolidating Statement of Operations Information
Year Ended December 31, 1998
Dictaphone Dictaphone Consolidating
Corporation Non-U.S. Adjustments Consolidated
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Revenue from:
Product sales and rentals $ 189,818 $ 17,355 $ (9,843) $ 197,330
Contract manufacturing sales 47,063 --- --- 47,063
Support services 80,330 7,595 --- 87,925
---------- ---------- ---------- ----------
Total revenues 317,211 24,950 (9,843) 332,318
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales, rentals and support
services 183,066 16,002 (10,380) 188,688
Selling and administrative 126,691 13,174 7 139,872
Research and development 17,128 --- --- 17,128
Interest expense - net and other 36,482 2,960 --- 39,442
---------- ---------- ---------- ----------
Total costs and expenses 363,367 32,136 (10,373) 385,130
---------- ---------- ---------- ----------
Equity (loss) earnings (4,496) --- 4,496 ---
---------- ---------- ---------- ----------
(Loss) income before income taxes (50,652) (7,186) 5,026 (52,812)
Income tax (expense) benefit (1,405) 732 (205) (878)
---------- ---------- ---------- ----------
Net (loss) income $ (52,057) $ (6,454) $ 4,821 $ (53,690)
========== ========== ========== ==========
</TABLE>
36
<PAGE>
11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
<TABLE>
<CAPTION>
Dictaphone Corporation
Supplemental Condensed Consolidating Statement of Operations Information
Year Ended December 31, 1999
Dictaphone Dictaphone Consolidating
Corporation Non-U.S. Adjustments Consolidated
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue from:
Product sales and rentals $ 201,798 $ 26,888 $ (14,913) $ 213,773
Contract manufacturing sales 44,288 --- --- 44,288
Support services 86,575 9,098 --- 95,673
---------- ---------- ---------- ----------
Total revenues 332,661 35,986 (14,913) 353,734
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales, rentals and support
services 182,520 21,674 (14,999) 189,195
Selling and administrative 112,269 10,408 --- 122,677
Research and development 9,761 --- --- 9,761
Interest expense - net and other 37,675 2,332 --- 40,007
---------- ---------- ---------- ----------
Total costs and expenses 342,225 34,414 (14,999) 361,640
---------- ---------- ---------- ----------
Equity earnings (loss) 1,580 --- (1,580) ---
---------- ---------- ---------- ----------
(Loss) income before income taxes (7,984) 1,572 (1,494) (7,906)
Income tax (expense) benefit (87) (915) (35) (1,037)
---------- ---------- ---------- ----------
Net (loss) income $ (8,071) $ 657 $ (1,529) $ (8,943)
========== ========== ========== ==========
</TABLE>
37
<PAGE>
11. 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 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 $ 44,748 $ 11,111 $ (5,581) $ 50,278
Advance billings 37,294 2,292 --- 39,586
Current portion of long-term debt 628 167 --- 795
---------- ---------- ---------- ----------
Total current liabilities 82,670 13,570 (5,581) 90,659
Long-term debt 369,445 17,783 (17,491) 369,737
Accrued pension liability 8,352 --- --- 8,352
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>
38
<PAGE>
11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
<TABLE>
<CAPTION>
Dictaphone Corporation
Supplemental Condensed Consolidating Balance Sheet Information
December 31, 1999
Dictaphone Dictaphone Consolidating
Corporation Non-U.S. Adjustments Consolidated
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,595 $ 1,595 $ --- $ 6,190
Accounts receivable, less allowances 92,608 10,822 (2,596) 100,834
Inventories 47,765 2,199 (205) 49,759
Other current assets 3,351 2,718 83 6,152
---------- ---------- ---------- ----------
Total current assets 148,319 17,334 (2,718) 162,935
Investments in subsidiaries 30,883 --- (30,883) ---
Property, plant and equipment, net 34,444 3,045 --- 37,489
Deferred financing costs 8,141 --- --- 8,141
Intangibles, net 182,241 12,624 --- 194,865
Other assets 53,333 4,375 --- 57,708
---------- ---------- ---------- ----------
Total assets $ 457,361 $ 37,378 $ (33,601) $ 461,138
========== ========== =========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable, interest payable
and accrued liabilities $ 43,915 $ 11,329 $ (2,596) $ 52,648
Advance billings 46,571 2,529 --- 49,100
Current portion of long-term debt 628 162 --- 790
---------- ---------- ---------- ----------
Total current liabilities 91,114 14,020 (2,596) 102,538
Long-term debt 353,317 17,117 (16,991) 353,443
Accrued pension expense 9,953 --- --- 9,953
Other liabilities 12,270 536 --- 12,806
Stockholders' equity (deficit) (9,293) 5,705 (14,014) (17,602)
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 457,361 $ 37,378 $ (33,601) $ 461,138
========== ========== ========== ==========
</TABLE>
39
<PAGE>
11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
<TABLE>
<CAPTION>
Dictaphone Corporation
Supplemental Consolidating Statement of Cash Flows Information
Year Ended December 31, 1997
Dictaphone Dictaphone Consolidating
Corporation Non-U.S. Adjustments Consolidated
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss $ (66,646) $ (582) $ (994) $ (68,222)
Adjustments to reconcile net
loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 65,115 3,400 --- 68,515
Provision for deferred income taxes (1,334) (623) 190 (1,767)
Non-recurring charge for digital
product obsolescence 13,426 1,476 --- 14,902
Change in assets and liabilities:
Accounts receivable (14,811) (1,165) (2,893) (18,869)
Inventories (8,442) 4,385 (471) (4,528)
Other current assets (1,907) 31 --- (1,876)
Accounts payable and
accrued liabilities 6,821 (3,815) 2,890 5,896
Advance billings 3,006 (504) --- 2,502
Other assets and other (12,323) 169 1,158 (10,996)
---------- ---------- ---------- ----------
Net cash (used in) provided by
operating activities (17,095) 2,772 (120) (14,443)
----------- ---------- ----------- ----------
Investing activities:
Net investment in fixed assets (4,962) (937) --- (5,899)
---------- ---------- ---------- ----------
Net cash used for investing activities (4,962) (937) --- (5,899)
---------- ---------- ---------- ----------
Financing activities:
Borrowing under term loan facility 62,750 --- --- 62,750
Repayment under term loan facility (71,000) --- --- (71,000)
Proceeds from sale of common stock 35,000 --- --- 35,000
Borrowings under revolving credit
facility 88,600 --- --- 88,600
Repayments under revolving credit
facility (88,600) --- --- (88,600)
Other (2,986) (1,103) 120 (3,969)
----------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities 23,764 (1,103) 120 22,781
---------- ---------- ---------- ----------
Effect of exchange rate changes on cash --- (89) --- (89)
---------- ---------- ---------- ----------
Increase in cash 1,707 643 --- 2,350
Cash and cash equivalents,
beginning of period 6,569 1,358 --- 7,927
---------- ---------- ---------- ----------
Cash and cash equivalents,
end of period $ 8,276 $ 2,001 $ --- $ 10,277
========== ========== ========== ==========
</TABLE>
40
<PAGE>
11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
<TABLE>
<CAPTION>
Dictaphone Corporation
Supplemental Consolidating Statement of Cash Flows Information
Year Ended December 31, 1998
Dictaphone Dictaphone Consolidating
Corporation Non-U.S. Adjustments Consolidated
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss $ (52,057) $ (6,461) $ 4,828 $ (53,690)
Adjustments to reconcile net
loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 36,987 2,908 --- 39,895
Provision for deferred income taxes 1,150 (1,377) --- (227)
Non-recurring charge for product
obsolescence 4,999 --- --- 4,999
Change in assets and liabilities:
Accounts receivable (10,563) 1,661 3,153 (5,749)
Inventories (9,703) 505 (537) (9,735)
Other current assets 3,807 678 205 4,690
Accounts payable and
accrued liabilities 3,978 4,731 (3,787) 4,922
Advance billings 3,042 (519) --- 2,523
Other assets and other (10,488) 87 (5,650) (16,051)
---------- ---------- ---------- ----------
Net cash (used in) provided by
operating activities (28,848) 2,213 (1,788) (28,423)
----------- ---------- ----------- ----------
Investing activities:
Net investment in fixed assets (8,224) (627) --- (8,851)
Proceeds from sale of building 14,000 --- --- 14,000
---------- ---------- ---------- ----------
Net cash provided by (used in) investing
activities 5,776 (627) --- 5,149
---------- ---------- ---------- ----------
Financing activities:
Repayment under term loan facility (2,427) --- --- (2,427)
Borrowings under revolving credit
facility 79,000 --- --- 79,000
Repayments under revolving credit
facility (49,500) --- --- (49,500)
Other (2,163) (1,940) 1,788 (2,315)
----------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities 24,910 (1,940) 1,788 24,758
---------- ---------- ---------- ----------
Effect of exchange rate changes on cash --- (34) --- (34)
---------- ---------- ---------- ----------
Increase (decrease) in cash 1,838 (388) --- 1,450
Cash and cash equivalents,
beginning of period 8,276 2,001 --- 10,277
---------- ---------- ---------- ----------
Cash and cash equivalents,
end of period $ 10,114 $ 1,613 $ --- $ 11,727
========== ========== ========== ==========
</TABLE>
41
<PAGE>
11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
<TABLE>
<CAPTION>
Dictaphone Corporation
Supplemental Consolidating Statement of Cash Flows Information
Year Ended December 31, 1999
Dictaphone Dictaphone Consolidating
Corporation Non-U.S. Adjustments Consolidated
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss $ (8,071) $ 657 $ (1,529) $ (8,943)
Adjustments to reconcile net
loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 28,444 1,671 --- 30,115
Provision for deferred income taxes --- (483) 323 (160)
Non-recurring charge for product
obsolescence --- --- --- ---
Change in assets and liabilities:
Accounts receivable (17,161) (3,923) (2,201) (23,285)
Inventories 2,901 790 (86) 3,605
Other current assets 711 587 (288) 1,010
Accounts payable and
accrued liabilities 519 626 2,985 4,130
Advance billings 9,277 187 --- 9,464
Other assets and other (13,613) (753) 2,863 (11,503)
---------- ---------- ---------- ----------
Net cash provided by (used in)
operating activities 3,007 (641) 2,067 4,433
---------- ---------- ---------- ----------
Investing activities:
Net investment in fixed assets (11,457) (876) --- (12,333)
---------- ---------- ---------- ----------
Net cash used for investing
activities (11,457) (876) --- (12,333)
---------- ---------- ---------- ----------
Financing activities:
Repayment under term loan facility (628) --- --- (628)
Proceeds from sale of preferred stock 20,000 --- --- 20,000
Borrowings under revolving credit
facility 42,500 --- --- 42,500
Repayments under revolving credit
facility (58,000) --- --- (58,000)
Other (941) 1,526 (2,067) (1,482)
---------- ---------- ----------- -----------
Net cash provided by (used in) financing
activities 2,931 1,526 (2,067) 2,390
---------- ---------- ---------- ----------
Effect of exchange rate changes on cash --- (27) --- (27)
---------- ---------- ---------- ----------
Decrease in cash (5,519) (18) --- (5,537)
Cash and cash equivalents,
beginning of period 10,114 1,613 --- 11,727
---------- ---------- ---------- ----------
Cash and cash equivalents,
end of period $ 4,595 $ 1,595 $ --- $ 6,190
========== ========== ========== ==========
</TABLE>
42
<PAGE>
12. 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 Information
System
Products & Contract
Services Manufacturing Total
------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenue from external customers 1999 $ 309,446 $ 44,288 $ 353,734
1998 285,255 47,063 332,318
1997 297,178 42,864 340,042
Intersegment revenues 1999 --- 37,664 37,664
1998 --- 54,411 54,411
1997 --- 55,919 55,919
Interest expense, net 1999 39,882 --- 39,882
1998 39,570 --- 39,570
1997 44,241 --- 44,241
Depreciation and amortization 1999 28,675 1,440 30,115
1998 38,240 1,655 39,895
1997 66,534 1,981 68,515
Segment profit (loss) 1999 (13,335) 5,429 (7,906)
1998 (57,424) 4,612 (52,812)
1997 (76,036) 6,754 (69,282)
Segment assets 1999 456,938 44,615 501,553
1998 444,979 43,805 488,784
1997 459,607 51,050 510,657
Expenditures for segment assets 1999 (10,985) (1,348) (12,333)
1998 (8,503) (348) (8,851)
1997 (5,754) (145) (5,899)
</TABLE>
43
<PAGE>
12. DISCLOSURES ABOUT SEGMENTS ON AN ENTERPRISE AND RELATED
INFORMATION (Continued)
Geographic Information
<TABLE>
<CAPTION>
Long-lived
Revenues Assets
------------- -------------
<S> <C> <C> <C>
United States 1999 $ 303,682 $ 309,042
1998 293,321 312,280
1997 288,906 340,312
Canada 1999 20,596 4,909
1998 11,641 5,320
1997 16,659 5,439
Europe 1999 20,508 15,135
1998 19,492 15,467
1997 25,156 15,468
Latin America 1999 4,057 ---
1998 3,625 ---
1997 3,674 ---
Far East 1999 4,891 ---
1998 4,239 ---
1997 5,647 ---
Adjustments 1999 --- (30,883)
1998 --- (28,520)
1997 --- (33,847)
Total 1999 353,734 298,203
1998 332,318 304,547
1997 340,042 327,372
Revenue Reconciliation
Total revenue for reportable segments 1999 $ 391,398
1998 386,729
1997 395,961
Elimination of intersegment revenues 1999 (37,664)
1998 (54,411)
1997 (55,919)
Total consolidated revenues 1999 353,734
1998 332,318
1997 340,042
</TABLE>
44
<PAGE>
12. DISCLOSURES ABOUT SEGMENTS ON AN ENTERPRISE AND RELATED
INFORMATION (Continued)
Asset Reconciliation
<TABLE>
<CAPTION>
<S> <C> <C>
Total assets for reportable segments 1999 $ 501,553
1998 488,784
1997 510,657
Adjustments 1999 (40,415)
1998 (34,457)
1997 (40,615)
Consolidated total 1999 461,138
1998 454,327
1997 470,042
</TABLE>
13. PENSION AND OTHER POSTRETIREMENT BENEFITS
Effective with the Acquisition on August 11, 1995, the Company
established a defined benefit pension plan for all active U.S.
employees. Responsibility for retired U.S. employees was retained by
Pitney Bowes. Certain employees in other countries are covered under
contributory and non-contributory defined benefit pension plans. The
Dictaphone Plan ("Dictaphone Plan") provides for benefits based on
employees' compensation and years of service. Company contributions are
determined based on the funding requirements of the Employee Retirement
Income Security Act of 1974 and other governmental laws and
regulations. The Plan's investments consist primarily of listed common
stocks, bonds and government obligations.
The Company sponsors a defined contribution plan (401K) for
domestic employees. In 1999, the Company matched 50% of employee
contributions up to 4% of eligible compensation, subject to certain
limitations. Total Company contributions were $840, $1,181 and $1,179
for the years ended December 31, 1997, 1998 and 1999, respectively.
The Company provides certain postretirement health care and
life insurance benefits for qualifying employees in the United States
and Canada. Substantially all of these employees may become eligible
for coverage. Most retirees outside the United States and Canada are
covered by government sponsored and administered programs.
The following table sets forth the amounts recognized in the
Company's balance sheet at December 31, 1998 and 1999 for Company
sponsored defined benefit pension plans and postretirement benefit
plans.
45
<PAGE>
13. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
------------------------ -------------------------
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Reconciliation of Projected Benefit Obligation
----------------------------------------------
Projected benefit obligation at beginning of year $ 50,182 $ 57,969 $ 10,946 $ 6,057
Service cost 2,393 2,820 668 301
Interest cost 3,499 3,723 353 202
Benefits paid (1,778) (1,330) (289) (470)
Plan change --- --- --- (2,710)
Actuarial (gain) or loss 3,683 (8,396) (5,621) (493)
Foreign exchange (10) 28 --- ---
--------- --------- --------- ---------
Projected benefit obligation at end of year 57,969 54,814 6,057 2,887
--------- --------- --------- ---------
Reconciliation of Assets
------------------------
Assets at beginning of year 51,954 57,775 --- ---
Actual return on plan assets 7,632 2,629 --- ---
Employer contributions 372 212 289 470
Employee contributions --- 135 --- ---
Benefits paid (1,778) (1,330) (289) (470)
Foreign exchange (405) (57) --- ---
--------- --------- --------- ---------
Fair value of plan assets at end of year 57,775 59,364 --- ---
--------- --------- --------- ---------
Actuarial Present Value of Benefit Obligations
----------------------------------------------
Vested benefit obligation 45,652 43,957 --- ---
Accumulated benefit obligation 49,525 47,382 6,057 2,887
Projected benefit obligation 57,969 54,814 --- ---
Plan assets at fair value 57,775 59,364 --- ---
Projected benefit obligation (in excess of) or less than plan assets (194) 4,550 (6,057) (2,887)
Unrecognized net (gain) or loss (4,072) (10,070) (3,692) (5,834)
Unrecognized net obligation (asset) existing at year end (769) (557) --- ---
--------- --------- --------- ---------
Prepaid benefit cost (liability) recognized in the
statement of financial position (5,035) (6,077) (9,749) (8,721)
--------- --------- --------- ---------
Net periodic benefit cost included in the following components:
Service cost - benefits earned during the year 2,393 2,820 668 301
Interest on projected benefit obligation 3,499 3,723 353 202
Expected return on assets (4,682) (4,582) --- ---
Amortization of transitional assets at beginning of year (204) (201) --- ---
Amortization of prior service cost at beginning of year --- --- --- (455)
Amortization of (gain)/loss at beginning of year (80) (578) (656) (605)
--------- --------- --------- ---------
Net periodic benefit cost $ 926 $ 1,182 $ 365 $ (557)
--------- --------- --------- ---------
Discount rate for net periodic benefit cost 6.78% 6.45% 7.00% 6.75%
Discount rate for disclosure information 6.73% 7.27% 6.75% 7.75%
Salary increase assumption 4.56% 4.53% 4.75% 4.75%
Long term rate of return on assets 8.87% 8.90% --- ---
1 Percentage 1 Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest cost components -- 1999 N/A N/A
-- 1998 $ 61 $ (54)
Effect on postretirement benefit obligation -- 1999 N/A N/A
-- 1998 252 (244)
</TABLE>
46
<PAGE>
14. SUBSEQUENT EVENT
On March 7, 2000, the Company entered into a definitive
agreement to be acquired by Lernout & Hauspie. The transaction is
subject to closing conditions, including the ability of Lernout &
Hauspie to obtain financing for approximately $425 million of the
Company's debt and other obligations, and other customary conditions.
47
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
DICTAPHONE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance
Beginning Costs and at End of
Description of Period Expenses Deductions Period
----------- --------- -------- ---------- ------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Allowance for doubtful accounts $ 968 $ 2,461 $ 1,628 $ 1,801
Year ended December 31, 1998
Allowance for doubtful accounts 810 1,872 1,714 968
Year ended December 31, 1997
Allowance for doubtful accounts 1,339 72 601 810
</TABLE>
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
persons who are members of the Board of Directors or were executive officers of
the Company as of March 15, 2000.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
John H. Duerden .................... 59 Chairman, Chief Executive Officer and President
Joseph D. Skrzypczak................ 44 Chief Operating Officer and Director
Albert J. Fitzgibbons, III.......... 54 Director
Emil F. Jachmann.................... 53 Director
Alexis P. Michas.................... 42 Director
Scott M. Shaw .................... 37 Director
Peter P. Tong .................... 58 Director
Joseph Delaney .................... 54 Senior Vice President, Customer Support
Ronald A. Elwell.................... 39 Senior Vice President and General Manager, Communications
Recording Systems and International Operations
Daniel P. Hart .................... 41 Senior Vice President, General Counsel and Secretary
Thomas C. Hodge .................... 54 Senior Vice President, Manufacturing and Logistics
Robert G. Schwager.................. 46 Senior Vice President and General Manager, Voice Systems
</TABLE>
The business experience of each of the directors and executive officers
during the past five years is as follows:
John H. Duerden has served as Chairman, Chief Executive Officer and
President of the Company since August 1995. Mr. Duerden served as Joint
President and Chief Operations Officer of the Reebok Brands division of Reebok
International Limited, with responsibility for global sales, finance, operations
and production from October 1994 to February 1995. He was a Director of Reebok
International Limited from June 1991 until April 1995. Mr. Duerden was
previously President of Worldwide Operations for Reebok, from January 1994 to
September 1994 and, before that, President of the Reebok International
Operations group of the Reebok Brands division from October 1992 until January
1994. Prior to that, Mr. Duerden was President and Chief Executive Officer of
the Reebok Brands division from February 1990 to September 1992 and President of
Reebok International Operations from October 1988 to February 1990. Prior to
joining Reebok, Mr. Duerden was employed by Xerox Corporation for 20 years in a
variety of corporate and international management positions. In February 1997,
Mr. Duerden became a limited partner of Stonington Partners, L.P. ("SPLP"). Mr.
Duerden is a director of Sunglass Hut International, Inc. and is on the Board of
Advisors of Outward Bound U.S.A.
49
<PAGE>
Joseph D. Skrzypczak has been a Director of the Company since August
1995. Mr. Skrzypczak has served as Chief Operating Officer and Chief Financial
Officer since October 1998. Prior to being elected Chief Operating Officer, Mr.
Skrzypczak served as Senior Vice President and Chief Financial Officer from
October 1997 to October 1998 and served as Vice President and Chief Financial
Officer from May 1994 to October 1997. While serving in such capacity prior to
the Acquisition, Mr. Skrzypczak's responsibilities covered Pitney Bowes Office
Systems, which included the Company, Copier Systems, and Facsimile Systems, in
which capacity he was directly responsible for all financial and administrative
activities of the Company. In May 1989, Mr. Skrzypczak was appointed Vice
President, Finance, Facsimile Systems, from which time his role expanded to
include finance responsibilities for Copier Systems and Dictaphone. Mr.
Skrzypczak joined Pitney Bowes in 1981 and held various management positions.
Prior to joining Pitney Bowes, Mr. Skrzypczak worked for Price Waterhouse. He is
a certified public accountant.
Albert J. Fitzgibbons, III has served as a Director of the Company
since August 1995. Mr. Fitzgibbons is a Partner and a Director of Stonington
Partners, Inc. ("Stonington Partners"), a position that he has held since 1993
and a Partner and a Director of Stonington Partners, Inc. II ("Stonington II"),
a position he has held since 1994. Mr. Fitzgibbons has also been a Director of
Merrill Lynch Capital Partners, Inc. ("MLCP"), a private investment firm
associated with Merrill Lynch & Co., since 1988. He was a Partner of MLCP from
1993 to 1994 and Executive Vice President of MLCP from 1988 to 1993. Mr.
Fitzgibbons was also a Managing Director of the Investment Banking Division of
Merrill Lynch & Co. from 1978 to July 1994. Mr. Fitzgibbons is also a Director
of Burns International Services Corporation, Merisel, Inc. and United Artists
Theater Circuit, Inc.
Emil F. Jachmann has served as a Director of the Company since August
1995. Mr. Jachmann is President and Chief Executive Officer of Zen Research
Inc., which develops and markets high performance optical disc drive technology,
primarily advanced detection optics and chip sets. He has held these positions
since January 1995. Mr. Jachmann was President of EFJ Associates from June 1994
to January 1995. From June 1991 until June 1994, he was President of the
Shipping and Weighing Systems Division of Pitney Bowes. Mr. Jachmann was also
President of Dictaphone Canada Ltd. from June 1990 to June 1991. Mr. Jachmann is
a Director of several privately held companies.
Alexis P. Michas has served as Director of the Company since August
1995. Mr. Michas is the Managing Partner and a Director of Stonington Partners,
a position that he has held since 1993. Mr. Michas is also the Managing Partner
and a Director of Stonington II, a position he has held since 1994. Mr. Michas
has also been a Director of MLCP since 1989, he was a Partner of MLCP from 1993
to 1994 and Senior Vice President of MLCP from 1989 to 1993. Mr. Michas was also
a Managing Director of the Investment Banking Division of Merrill Lynch & Co.
from 1991 to July 1994 and a Director in the Investment Banking Division of
Merrill Lynch & Co. from 1990 to 1991. Mr. Michas is also a Director of
Borg-Warner Automotive, Inc., Burns International Services Corporation, Goss
Graphics Systems, Inc., Packard BioScience Company and several privately held
companies.
Scott M. Shaw has served as a Director of the Company since August
1995. Mr. Shaw is a Partner of Stonington Partners, a position that he has held
since February 1999. Prior to being elected Partner, Mr. Shaw had been a
Principal of Stonington Partners since 1993. Mr. Shaw was an Associate of MLCP
from 1991 to July 1994 and an Analyst of MLCP from 1986 to 1989. Mr. Shaw was
also a Vice President of the Investment Banking Division of Merrill Lynch & Co.
from January to July 1994, an Associate of the Investment Banking Division of
Merrill Lynch & Co. from 1991 to 1994, and an Analyst of the Investment Banking
Division of Merrill Lynch & Co. from 1986 to 1989. Mr. Shaw is also a Director
of United Artists Theater Circuit, Inc. and a privately held company.
Peter P. Tong has served as a Director of the Company since February
1997. Mr. Tong is a Management Partner of Stonington Partners and is the
President of Mandarin Partner LLC, an investment partnership. Mr. Tong was a
private investor from 1996 to 1997. From January 1996 to May 1996, Mr. Tong
served as Co-President of Marquette Electronics, Inc., a manufacturer of medical
equipment. From 1991 to 1996, he served as President, Chairman and Chief
Executive Officer of E for M Corporation. Mr. Tong is a Director of Packard
BioScience Company, Obagi Medical Products, Inc., United States Manufacturing
Company, University of Wisconsin Industrials Council, University of Wisconsin
Foundation and several privately held, start-up technology companies.
Joseph Delaney has served as Senior Vice President, Customer Support
since October 1998. From October 1997 to October 1998, Mr. Delaney served as
Senior Vice President, Customer Service Operations and from June 1997 to October
1997 served as Vice President, Customer Service Operations. From January to June
1997, Mr. Delaney
50
<PAGE>
served as acting Vice President of Customer Service Operations. Mr. Delaney
joined Dictaphone Corporation in December 1968 as a service representative in
Detroit, Michigan. Since that time he has held various positions of
responsibility with Dictaphone. Mr. Delaney served as District Service Manager
in Detroit, Michigan from June 1976 to October 1990 and served as Regional
Service Director, Southern Region from November 1990 to January 1997.
Ronald A. Elwell has served as Senior Vice President and General
Manager, Communications Recording Systems and International Operations since
October 1998. From October 1997 to October 1998, Mr. Elwell served as Senior
Vice President and General Manager, Communications Recording Systems, and from
August 1997 to October 1997 as Vice President and General Manager,
Communications Recording Systems. From April 1996 to August 1997, he served as
Vice President, Marketing and Product Development for the Company and served as
Vice President, Product Development and Engineering for Dictaphone from January
1996 to April 1996. Mr. Elwell joined Dictaphone Corporation in December 1983.
Since that time he has held various positions of responsibility with Dictaphone.
Mr. Elwell served as District Manager in Harrisburg, Pennsylvania from 1988 to
1992 and served as General Manager of Dictaphone Canada from 1992 to November
1995. From November 1995 to January 1996, he was a Vice President in the
Company's Marketing department.
Daniel P. Hart has served as Senior Vice President and General Counsel
of the Company since October 1997 and Vice President, General Counsel from
November 1995 to October 1997. Mr. Hart is also responsible for the Company's
human resources department and business development activities. Mr. Hart has
served as Secretary of the Company since November 1995. From 1993 to 1994, Mr.
Hart served as General Counsel of Brooke Group Ltd. and certain of its
affiliates and from 1988 to 1993 served as Associate General Counsel of such
companies. Mr. Hart was a consultant and private investor from 1994 to 1995.
Thomas C. Hodge has served as Senior Vice President, Manufacturing and
Logistics since October 1997. From June 1989 to October 1997, Mr. Hodge served
as Vice President, Operations Manufacturing for the Company's facility in
Melbourne, Florida. Prior to June 1989, Mr. Hodge held various positions
throughout the manufacturing facility. Mr. Hodge joined Dictaphone Corporation
in October 1978 as the Production Control Manager.
Robert G. Schwager has served as Senior Vice President and General
Manager, Voice Systems since October 1998. Mr. Schwager served as Senior Vice
President and General Manager, Integrated Health Systems from October 1997 to
October 1998, and from August 1997 to October 1997 as Vice President and General
Manager, Integrated Health Systems. From October 1995 to August 1997, Mr.
Schwager served as Vice President, Sales Operations, North America, and served
as Vice President, Sales for Communications Recording Systems from February 1994
to October 1995. Mr. Schwager joined Dictaphone Corporation in 1978 as a Sales
Representative in the Milwaukee District Office. He progressed through various
sales management positions to that of Regional Sales Vice President in 1988. In
1989, Mr. Schwager joined the Company's headquarters staff as the Vice
President, Marketing. Mr. Schwager was also responsible for the Company's
international operations from September 1992 to March 1996.
Messrs. Fitzgibbons, Michas and Shaw serve as members of the Audit
Committee and the Compensation Committee (the "Compensation Committee"). Each of
Messrs. Fitzgibbons, Michas and Shaw is an employee of Stonington Partners and
serves on the Board of Directors of the Company as a representative of
Stonington.
The Company's directors are elected to serve until their successors
have been elected and qualified. Other than Mr. Jachmann and Mr. Tong who earned
a $25,000 fee in 1999, no member of the Board received any annual retainer or
meeting fees. All members of the Board of Directors are reimbursed for
out-of-pocket expenses incurred in connection with meeting attendance. Each
officer of the Company serves at the pleasure of the Board of Directors, subject
the terms of any existing employment agreement.
There are no family relationships among any of the directors or
executive officers of the Company.
51
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to each person who
served as the Company's President and Chief Executive Officer during 1999 and
the four other most highly compensated executive officers of the Company, whose
aggregate cash and cash equivalent compensation exceeded $100,000 (the "named
executives") during 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
----------------------------------------------- ---------------------------
Awards Payouts
----------- --------------
Other Securities Long-term
Name and Annual Underlying Incentive Plan All Other
Principal Position Year Salary ($) Bonus ($) Compensation(1)($) Options (#) Payouts ($) Compensation ($)
- ------------------ ---- ---------- --------- ------------------ ----------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
John H. Duerden 1999 $ 995,000 $995,000 $ 97,096 --- --- $156,034(3)
Chairman, President 1998 1,033,269 497,500 199,844 --- --- 285,893
and Chief Executive 1997 985,981 497,500 95,713 325,000 --- 172,540
Officer
Joseph D. Skrzypczak, 1999 347,756 385,250 90,398 87,500 --- 94,913(3)
Chief Operating 1998 298,269 395,000(2) 41,863 20,000 --- 45,067
Officer 1997 239,171 137,500 12,455 --- --- 17,047
Robert G. Schwager, 1999 279,616 327,750 --- 62,500 --- 5,101(3)
Senior VP & General 1998 259,616 277,787 --- --- --- 3,579
Manager, Voice 1997 199,796 77,500 --- --- --- 837
Systems
Daniel P. Hart, 1999 256,087 287,500 --- 67,500 --- 4,302(3)
Senior VP and 1998 228,462 65,000 --- 3,000 --- 4,188
General Counsel 1997 172,669 77,000 --- 7,000 --- 2,690
Joseph Delaney, 1999 202,308 230,000 --- 15,000 --- 2,662(3)
Senior VP, Customer 1998 181,731 --- --- 1,000 --- 3,340
Support 1997 162,747 54,250 --- 35,000 --- 1,906
</TABLE>
- --------------------------------
(1) The amounts reported in this column for 1999, 1998 and 1997 for each of
Messrs. Duerden and Skrzypczak reflect tax gross ups made by the
Company. The aggregate value of the perquisites and other personal
benefits received by each of Messrs. Duerden, Skrzypczak, Schwager,
Hart and Delaney in 1999, 1998 and 1997, have not been reflected
because the amount was below the Securities and Exchange Commission's
(the "Commission") threshold for disclosure (i.e., the lesser of
$50,000 or 10% of the total of annual salary and bonus for such
officer).
(2) Includes a one time payment in the amount of $250,000 paid in
connection with the termination of prior employment agreements. See
"Employment and Consulting Agreements".
(3) The compensation reflected in this column for 1999 is comprised of
Company contributions to the Company's Deferred Savings Plan,
supplemental contributions under supplemental benefits arrangements and
Company paid life insurance premiums. Specifically, these amounts for
fiscal 1999 were $0, $105,694 and $50,340 for Mr. Duerden; $2,511,
$92,302 and $100 for Mr. Skrzypczak; $5,001, $0 and $100 for Mr.
Schwager; $4,202, $0 and $100 for Mr. Hart; and $2,072, $0 and $100 for
Mr. Delaney.
Stock Option Grants
The following table sets forth information regarding grants of options
to purchase Common Stock during the fiscal year ended December 31, 1999 to each
of the named executives. No stock appreciation rights were granted during 1999.
52
<PAGE>
<TABLE>
<CAPTION>
Option Grants in 1999
Individual Grants
-------------------------------------------------------------------
Potential Realizable Value
at Assumed Annual
Number of Percent of Rates of Stock Price
Securities Total Options Appreciation For
Underlying Granted to Exercise Option Term (3)
Options Employees in Price ($/ Expiration --------------------------
Granted(#) 1999(1) Share)(2) Date (5%) (10%)
------------ --------------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Name
- ----
John Duerden......... --- --- --- --- --- ---
Joseph D. Skrzypczak. 87,500(4) 8% $10.00 7/28/09 $1,425,283 $2,269,525
Robert G. Schwager... 62,500(4) 6% 10.00 7/28/09 1,018,059 1,621,089
Daniel P. Hart....... 67,500(4) 6% 10.00 7/28/09 1,099,504 1,750,776
Joseph Delaney....... 15,000(4) 1% 10.00 7/28/09 244,334 389,061
</TABLE>
- --------------------------------
(1) The Company granted options to purchase a total of 440,000 shares of
Common Stock in 1999.
(2) Each of the Company's stock options were granted at the fair market
value on the date of grant. The fair market value of the Common Stock
on December 31, 1999 was $10.00 (as determined by the Company's Board
of Directors).
(3) Amounts reported in these columns represent amounts that may be
realized upon exercise of options immediately prior to the expiration
of their term assuming the specified compounded rates of appreciation
(5% and 10%) on the Common Stock over the term of the options. These
assumptions are based on rules promulgated by the Commission and do not
reflect the Company's estimate of future stock price appreciation.
Actual gains, if any, on the stock option exercises and common stock
holdings are dependent on the timing of such exercise and the future
performance of the underlying common stock. There can be no assurance
that the rates of appreciation assumed in this table can be achieved or
that the amounts reflected will be received by the option holder.
(4) One-half of the options granted vest automatically over a five year
period and, of the other half, 6% were retroactively vested on April
15, 1996, 0% were vested on April 15, 1997, 1998 and 1999, 0% will be
vested on April 15, 2000 and the remaining will become eligible for
vesting on April 15, 2001 if the Company attains certain predetermined
financial performance goals.
53
<PAGE>
Option Exercises and Year-End Value Table
The following table sets forth information regarding the exercise of
stock options during fiscal 1999 and the number and year end value of
unexercised options held at December 31, 1999 by each of the named executives.
No stock appreciation rights were exercised by the named executives during
fiscal 1999.
<TABLE>
<CAPTION>
Aggregate Option Exercises in Fiscal 1999
and Fiscal 1999 Option Values
Value of Unexercised
Number of Securities In-the-Money(1)
Shares Underlying Unexercised (Options)
Acquired on Value Options at Fiscal Year-End (#) at Fiscal Year-End ($)
Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
------------ ------------- ------------------------------ -------------------------
<S> <C> <C> <C> <C>
Name
- ----
John H. Duerden........... --- --- 306,967 / 228,033 (2) $0/$0 (4)
Joseph D. Skrzypczak...... --- --- 21,350 / 131,150 (2) 0/0 (4)
Robert G. Schwager........ --- --- 19,425 / 88,075 (2) 0/0 (4)
4,000 $197,690 0/0 (3) 0/0
Daniel P. Hart............ --- --- 16,100 / 91,400 (2) 0/0 (4)
Joseph Delaney............ --- --- 8,920 / 46,080 (2) 0/0 (4)
</TABLE>
- -----------------------------
(1) Options are "in-the-money" if the fair market value of the underlying
securities exceeds the exercise price of the options.
(2) Represents options granted under the Company's Management Stock Option
Plan.
(3) Represents options granted under the Pitney Bowes Stock Option Plan
during the period 1985 through 1996. The numbers have been adjusted to
give effect to the 1986, 1992 and 1998 two-for-one stock splits of
Pitney Bowes stock.
(4) The amounts set forth represent the difference between $10.00 per
share, the fair market value of the Common Stock issuable upon exercise
of options at December 31, 1999 (as determined by the Board of
Directors), and the exercise price of the option, multiplied by the
applicable number of options.
Pension Plans
The Company currently maintains a non-contributory pension plan for all
employees (the "Pension Plan"). As of December 31, 1999, the estimated pension
benefits payable to the named executives are as set forth below. The Pension
Plan provides monthly benefits at age 65 equal to the sum of (i) for service
before January 1, 1988, 0.75% of the participant's average annual earnings from
1983 through 1987 up to $18,000 plus 1.25% of the participant's average annual
earnings from 1983 to 1987 above $18,000 multiplied by the participant's years
of credited service before January 1, 1988 and (ii) for each year of service
after January 1, 1988, 1% of the participant's annual earnings for each year up
to the Social Security Wage Base (as defined) for that year plus 1.5% of annual
earnings above the Social Security Wage Base for that year. Annual earnings
includes overtime pay, incentive pay and bonuses, but excludes reimbursements of
other expense allowances, fringe benefits or moving expenses. Employees' pension
rights vest after five years of service. Benefits are also available under the
Pension Plan upon early or deferred retirement. The projected annual benefit
under the qualified pension plan at age 65 assuming no future increases in pay,
the social
54
<PAGE>
security wage base and Internal Revenue Code (the "Code") Section 401(a)(17)
limits and with no provision for the Supplemental Executive Retirement Plan
("SERP") for the named executives is as follows: Mr. Duerden - $20,327; Mr.
Skrzypczak - $53,757; Mr. Schwager - $73,152; Mr. Hart - $56,854; and Mr.
Delaney - $48,928. The projected annual benefit under the qualified pension plan
at age 65 assuming a 3% future increase in pay, the Social Security Wage Base
and Code Section 401(a)(17) limits and with no provision for the SERP for the
named executives is as follows: Mr. Duerden - $21,840; Mr. Skrzypczak - $72,655;
Mr. Schwager - $88,329; Mr. Hart - $82,000; and Mr. Delaney - $54,777.
The following table sets forth the estimated annual benefits, based on
the indicated credited years of service and the indicated average compensation
used in calculating benefits, assuming a normal retirement at age 65, no future
increases in pay, the Social Security Wage Base and Code Section 401(a)(17)
limits and with no provision for the SERP implemented by the Company.
<TABLE>
<CAPTION>
RETIREMENT PLAN TABLE
Years of Service
--------------------------------------------------------------
Average Annual Compensation 15 20 25 30 35
- --------------------------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
$ 130,000.................................. $23,805 $31,740 $39,675 $47,610 $55,545
160,000.................................. 30,555 40,740 50,925 61,110 71,295
</TABLE>
Supplemental Executive Retirement Plan
The Company adopted the SERP for certain executive officers during the
first quarter of 1997 with benefits determined on a retroactive basis as of
January 1, 1996. Benefits under the SERP accrue without regard to limitations
imposed by Code Sections 401(a)(17) and 415 and are offset by any benefit
accrued under the Pension Plan. Participants rights vest after five years of
service.
Employment and Consulting Agreements
On August 9, 1995, the Company entered into an employment agreement
with John Duerden pursuant to which Mr. Duerden agreed to serve as Chairman,
President and Chief Executive Officer of the Company for an initial employment
term of two years (which term is automatically extended for additional two-year
terms unless affirmatively terminated by either the Company or Mr. Duerden).
Pursuant to an amendment to Mr. Duerden's employment agreement, dated January 1,
1997 (as amended, the "Employment Agreement"), effective as of such date his
annual base salary was increased to $995,000. In addition, Mr. Duerden is
eligible to receive an annual cash bonus ranging from $497,500 to $995,000 based
upon the attainment of certain personal and budgeted performance objectives for
the Company as determined by the Board of Directors.
Mr. Duerden's Employment Agreement also provides that if he terminates
his employment without Good Cause (as defined therein) he will not, for two
years either (i) directly or indirectly, in any capacity, engage or participate
in, or become employed by or under advisory or consulting or other services in
connection with any Prohibited Business (as hereinafter defined) or (ii) make
any financial investment, whether in the form of equity or debt, or own any
interest, directly or indirectly, in any Prohibited Business. Notwithstanding
the foregoing, Mr. Duerden is not restricted from making any investment in any
company whose stock is listed on an American securities exchange or actively
traded in the over-the-counter market and has sales in excess of $500 million;
provided that (i) such investment does not give Mr. Duerden the right or ability
to control or influence the policy decisions of any Prohibited Business, and
(ii) such investment does not create a conflict of interest between Mr.
Duerden's duties under the Employment Agreement and his interest in such
investment. For purposes of the Employment Agreement "Prohibited Business" means
any dictation product or communications recording systems business located
within, or providing service to any area located within, any state or other
jurisdiction to which the Company (or any of its subsidiaries) provides
dictation products or communications recording systems services, or located
within, or providing service to any area located within, any other area within
the United States.
55
<PAGE>
Pursuant to the Employment Agreement, if Mr. Duerden is terminated by
the Company without Cause or if he resigns for Good Reason (as defined therein)
during the term of the agreement, Mr. Duerden is entitled to receive a lump sum
payment equal to two times his base salary. Mr. Duerden is not entitled to
receive severance in connection with a termination for Cause or resignation for
other than Good Reason. Upon a termination of employment due to death or
Disability (as defined therein), the Company is required to pay Mr. Duerden or
his estate, as the case may be, an amount equal to the sum of the accrued annual
base salary as of the date of death or Disability and the accrued unpaid annual
bonus, if any, for the fiscal year prior to the date of death or Disability and
a pro-rata portion of the annual bonus accrued to the date of such death or
Disability.
Mr. Duerden's Employment Agreement also includes a provision requiring
the Company to establish an annual deferred annuity bonus arrangement (the
"Deferred Annuity Bonus Arrangement") on his behalf. The Company finalized the
Deferred Annuity Bonus Arrangement in February 1997. The intended annual benefit
to Mr. Duerden under the terms of the Deferred Annuity Bonus Arrangement is an
amount which is estimated to be equal to two-thirds of his average base salary
over the final three years of his employment (reduced by amounts receivable by
him from certain other pensions, profit sharing accounts and Social Security).
Benefits under the Deferred Annuity Bonus Arrangement are payable to Mr. Duerden
annually and are to be utilized by him for the purchase of an annuity contract
chosen and owned by him. As the owner of the annuity contract, Mr. Duerden has
the sole power to direct the investment funds held. The actual benefits under
the annuity contract are dependent upon Mr. Duerden's investment decision. Mr.
Duerden's entitlement to benefits under the Deferred Annuity Bonus Arrangement
vest in increments of one-twelfth for each full year of employment from his date
of hire.
As part of his employment arrangement, Mr. Duerden agreed to purchase
70,000 shares of the Company's Common Stock. Mr. Duerden purchased such shares
on August 11, 1995 with funds provided by the Company pursuant to an
interest-bearing non-recourse loan in the amount of $350,000. Mr. Duerden also
received 210,000 options under the Plan (as hereinafter defined). See
"Management Stock Option Plan". The 1995 options granted to, and Common Stock
purchased by, Mr. Duerden are subject to the same conditions as apply to other
Management Investors (as hereinafter defined), as described in the "Stockholders
Agreement" (as hereinafter defined). Pursuant to the January 1, 1997 amendment
to the Employment Agreement, the Company granted Mr. Duerden an additional
325,000 stock options which options were granted on August 1, 1997 and which
vest in one-third increments on the first three anniversaries of the date of
grant. These options, which have an exercise price of $10.00 per share, are
subject to the Plan.
The Company has entered into employment agreements (the "Executive
Employment Agreements") with each of Messrs. Skrzypczak, Schwager and Hart. The
Executive Employment Agreements are for two year terms ending June 1, 2001, and
provide for automatic renewal unless a termination of employment event has
occurred. In the event of an involuntary termination by the Company without
cause (as defined) or a termination by executive for good reason (as defined),
the executive is entitled to salary continuation for twenty-four months, plus
thirty percent. In such circumstances, the executive would also be entitled to
receive any earned and unpaid annual bonus amounts, including a pro-rated amount
in respect of the year in which termination of employment occurs. In the event
of a change of control (as defined), the amounts payable to executives under the
Executive Employment Agreements in the event of a termination without cause or a
termination by executive for good reason would be an amount equal to three times
(a) executive's base salary and (b) an amount of executive's base salary equal
to the highest percentage bonus payment made to executive in the three years
prior to such termination. The Executive Employment Agreements also provide that
one year after the occurrence of a change of control, executive may terminate
his employment for good reason. Salary continuation benefits under the Executive
Employment Agreements are not subject to reduction in the event that executive
secures other employment.
Mr. Delaney is a party to a letter employment agreement with the
Company. This agreement has no fixed term of employment. Upon an involuntary
termination of employment by the Company for any reason other than for cause or
substantial underperformance, Mr. Delaney would be entitled to receive salary
continuation for a minimum of one year after such termination of employment. At
the conclusion of the first year of salary continuation, if Mr. Delaney has not
secured other employment, the Company has agreed to extend, for a maximum of
twelve additional months, such salary continuation on a month by month basis, as
long as Mr. Delaney, using reasonable efforts, has not secured other employment.
In addition, the Company's practice and policy is that, if a Senior Vice
President such as Mr. Delaney's
56
<PAGE>
employment is terminated without cause, such officer would also be entitled to
receive any earned and unpaid annual bonus amounts, including a pro-rated amount
in respect of the year in which termination occurs.
Each of Messrs. Skrzypczak, Schwager, Hart and Delaney are also
entitled to receive senior executive outplacement services from a nationally
recognized outplacement firm and are entitled to continue to participate in
medical, dental and life insurance plans, under the same terms and conditions as
when they were employed by the Company, until the earlier of the commencement of
new employment or the twelve month anniversary of the date of termination of
employment. Messrs. Skrzypczak, Schwager, Hart and Delaney are entitled to elect
to receive a cash amount equal to the cost of the above mentioned outplacement
services in lieu thereof. Each of Messrs. Skrzypczak, Schwager, Hart and Delaney
are also entitled to an additional six-month period of medical insurance
coverage as required under Section 498B of the Code.
The Company has entered into a supplemental compensation arrangement
with Mr. Skrzypczak. The arrangement provides benefits under a supplemental
executive retirement arrangement without regard to any limitations under Code
Sections 401(a)(17) and 415 and will be reduced by amounts receivable by Mr.
Skrzypczak from certain other pensions. Mr. Skrzypczak is 100% vested in his
benefits under this arrangement.
In November 1995, the Company entered into a consulting agreement with
Mr. Jachmann, a Director of the Company. Pursuant to the terms of the agreement,
Mr. Jachmann agreed to act as a consultant to the Company for an original term
of one year, August 11, 1995 through August 11, 1996. Although a new consulting
agreement has not been executed, the Company has continued to utilize Mr.
Jachmann's services on a month-by-month basis. In consideration for his
consulting services, Mr. Jachmann receives $3,000 per day. During 1999, Mr.
Jachmann received $15,000 for consulting services. Mr. Jachmann is also entitled
to receive $25,000 for services as a Director.
In April 1997, the Company entered into a consulting agreement with Mr.
Tong, a Director of the Company. In consideration for his consulting services,
Mr. Tong receives $1,500 per day. During 1999, Mr. Tong received no income for
consulting services. Mr. Tong is also entitled to receive $25,000 for services
as a Director.
Management Stock Option Plan
On August 11, 1995, the Company adopted the Management Stock Option
Plan, which was amended on April 27, 1996 and on August 1, 1997 (collectively,
the "Plan"), pursuant to which officers, key employees and non-employee
directors of the Company (the "Participants") may be granted options to purchase
shares of Common Stock. The Compensation Committee of the Board of Directors of
the Company (the "Committee") has the discretion to select those to whom options
are granted (from among those eligible) and to determine the exercise price, the
duration and other terms and conditions of the options. The Plan also allows the
Committee to determine whether options granted are to be "Service Options" (as
hereinafter defined). The Committee has the authority to interpret and construe
the Plan and any interpretation or construction of the provisions of the Plan or
of any options granted under the Plan by the Committee are final and conclusive.
The Plan provides that Service Options will vest automatically over a
five-year period (20% of the options vesting each year) and the Performance
Options will vest as to specified percentages over a five-year period based on
predetermined financial performance goals. As to all outstanding Performance
Options granted prior to 1996, 10% were eligible for vesting on April 15, 1996,
20% were eligible for vesting on each of April 15, 1997, April 15, 1998 and
April 15, 1999 and the remaining options become eligible for vesting as to an
additional 20% on April 15, 2000, with the remaining 10% becoming eligible for
vesting on April 15, 2001. For all subsequent Performance Option grants, 20% are
eligible for vesting on each April 15, based on the Company's prior year
performance, in any case, no later than August 11, 2005, provided that the
applicable Participant continues to be employed or continues as a member of the
Board. Based on the Company's performance in 1995, 1996, 1997, 1998 and 1999,
the Company's Board of Directors determined that the following eligible
Performance Options would vest: 60% on April 15, 1996, 0% on April 15, 1997, 0%
on April 15, 1998 and 0% on April 15, 1999. In addition, the Board has
determined that 0% of eligible Performance Options will vest on April 15, 2000.
Performance Options which are not vested on each of the April 15 vesting dates
remain eligible for future vesting by the Board if the Company reaches certain
enterprise values. In the event of a Sale or an IPO (as defined therein) of the
Company, all outstanding unvested Service and Performance Options will become
immediately vested and exercisable prior to the effective date of such Sale or
IPO and appropriate provisions will be
57
<PAGE>
required to be made by the Company to permit the holders of options to realize
the value of his or her options in connection with such Sale or IPO to the same
extent as if he or she had exercised such options in full immediately prior to
the effective date of such Sale or IPO and participated therein.
The terms and conditions of an option grant are set forth in a related
option agreement (the "Option Agreement"). Options granted under the Plan will
terminate upon the earliest to occur of (a) the tenth anniversary of the date of
the Option Agreement; (b) the date on which the Company acquires any shares of
Common Stock or options held by the Participant in connection with the exercise
of a Put or Call Right (as defined in the Stockholders Agreement); (c) the
six-month anniversary of the date of death of the Participant; (d) unless
otherwise provided in an agreement between the Participant and the Company, the
thirty-day anniversary of the date of the Participant's Retirement or Disability
(as defined therein); and (e) immediately upon a Participant's termination of
employment or directorship other than due to death, Retirement or Disability;
provided that the term of the option may be extended in the event of a
termination of an option under (c), (d) or (e) above if the Participant
exercises a Put Right prior to the time the option would otherwise terminate
under (c), (d) or (e) above and a Restriction (as defined in the Stockholders
Agreement) prevents the Company from purchasing the options pursuant to the Put
Right. Payment of the option exercise price may be made in cash or Common Stock
which has been held by the Participant for more than six months. The Board or
Compensation Committee may also, in its sole discretion, cancel the vested
portion of an option or options held by a Participant whose employment or
directorship has terminated in exchange for a cash payment equal to the excess
of the Fair Value Price (as defined in the Plan) of the option over the option
exercise price, multiplied by the number of shares of Common Stock subject to
such cancelled options, or may cancel any outstanding options in exchange for a
cash payment to a Participant equal to the excess of the Fair Value Price (as
defined in the Plan) of the option over the option exercise price, multiplied by
the number of shares of Common Stock subject to such cancelled options, or may
cancel any outstanding options in exchange for a cash payment to a Participant
equal to the excess of the fair market value of the consideration received for
Stonington Shares by the Stonington Investor (each as defined in the
Stockholders Agreement) in any sale of all of the then issued and outstanding
Stonington Shares over the exercise price of the option multiplied by the number
of shares of Common Stock subject to such cancelled options.
The maximum number of shares of Common Stock that are available for
options under the Plan is currently 1,500,000 shares. If options granted under
the Plan expire or terminate without having been exercised in full or cancelled
in exchange for a cash or other payment, the shares covered by such option will
again be available for grant under the Plan. In the event of the declaration of
a stock dividend, or a reorganization, merger, consolidation, acquisition,
disposition, separation, recapitalization, stock split, split-up, spin-off,
combination or exchange of any shares of Common Stock or like event, the number
or character of the shares subject to the option or the exercise price of any
option may be appropriately adjusted as deemed appropriate by the Committee.
The Plan terminates upon, and no options may be granted after, August
11, 2005, unless the Plan has sooner terminated due to grant and full exercise
or cancellation of options covering all the shares available for grant under the
Plan. The Board may at any time amend, suspend or discontinue the Plan;
provided, however, that the Board may not alter, amend, discontinue or revoke or
otherwise impair any outstanding options granted under the Plan and which remain
unexercised in a manner adverse to the holders of the options, except if the
written consent of such holder is obtained.
58
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 15, 2000, by (i) each person known to
the Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each named executive, and (iv)
all executive officers and directors of the Company, as a group.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Percentage
of Beneficial Owner Ownership (1) of Class
- ------------------- ------------- --------
<S> <C> <C>
Stonington Capital Appreciation 1994 Fund, L.P.(2)................ 14,803,000 96.4%
767 Fifth Avenue
New York, New York 10153
John H. Duerden(3)................................................ 376,967 2.5%
Joseph D. Skrzypczak(3)........................................... 36,350 *
Robert G. Schwager(3)............................................. 34,425 *
Daniel P. Hart(3)................................................. 24,100 *
Joseph Delaney(3)................................................. 8,920 *
Albert J. Fitzgibbons, III(4)..................................... 14,803,000 96.4%
Emil F. Jachmann.................................................. 10,000 *
Alexis P. Michas(4)............................................... 14,803,000 96.4%
Peter P. Tong..................................................... 10,000 *
Scott M. Shaw(4).................................................. 14,803,000 96.4%
Directors and executive officers as a group ((12) persons)(4)(5).. 15,355,562 100.0%
</TABLE>
- ----------------------------
* Represents beneficial ownership of less than 1% of the outstanding
shares of Common Stock.
(1) Beneficial ownership is determined in accordance with the rules and
regulations of the Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options, warrants or
convertible securities held by that person that are currently
exercisable or convertible, or exercisable or convertible within 60
days of March 15, 2000 are deemed outstanding. Such shares, however,
are not deemed outstanding for the purposes of computing the percentage
of any other person. Except as indicated in the footnotes to this
table, the stockholders named in the table have sole voting and
investment power with respect to the shares set forth opposite such
stockholder's name.
(2) Stonington is the record holder of 14,653,000 shares, or 95.4%, of
Common Stock. Stonington also controls, but disclaims beneficial
ownership of, an additional 150,000 shares purchased by an
institutional investor, pursuant to the Stockholder Agreement.
Stonington is a Delaware limited partnership whose limited partners
consist of certain institutional investors, formed to invest in
corporate acquisitions organized by Stonington Partners. SPLP, a
Delaware limited partnership, is the general partner of Stonington with
a 1% economic interest in Stonington. Except for such economic
interest, SPLP disclaims beneficial ownership of the shares set forth
above. Stonington II, a Delaware corporation, is the general partner of
SPLP with a 1% economic interest in SPLP. Except for such economic
interest, Stonington II disclaims beneficial ownership of the shares
set forth above. Stonington Partners, a Delaware corporation, is the
management company for Stonington with a 1% interest in SPLP. Except
for such economic interest, Stonington Partners disclaims beneficial
ownership of the shares set forth above. The limited partners of SPLP
are certain current and former employees of Stonington Partners,
entities controlled by certain employees of Stonington and individuals
with special relationships to portfolio companies of Stonington.
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<PAGE>
Pursuant to a management agreement with Stonington, Stonington Partners
has full discretionary authority with respect to the investments of
Stonington, including the authority to make and dispose of such
investments. Stonington Partners disclaims beneficial ownership of the
shares set forth above. The address of each of the entities and
individuals listed in this footnote is c/o Stonington Partners, Inc.,
757 Fifth Avenue, New York, New York 10153.
(3) Includes shares of Common Stock which the directors and executive
officers have the right to acquire through the exercise of options
within 60 days of March 15, 2000, as follows: Mr. Duerden - 306,967
shares; Mr. Skrzypczak - 21,350 shares; Mr. Schwager - 19,425 shares;
Mr. Hart - 16,100 shares; and Mr. Delaney - 8,920 shares. Mr. Duerden
is a 3.1% limited partner of SPLP.
(4) The shares indicated as owned beneficially by Messrs. Fitzgibbons,
Michas and Shaw are owned or controlled by Stonington and are included
because of their ownership of stock as status as directors of
Stonington Partners and Stonington II. Messrs. Fitzgibbons, Michas and
Shaw disclaim beneficial ownership of such shares.
(5) Includes 424,562 shares of Common Stock subject to options granted
under the Plan which are currently exercisable or vest within 60 days
of March 15, 2000 and 2,000,000 shares of Common Stock issuable upon
conversion of Convertible Preferred Stock which are currently
convertible or are convertible within 60 days of March 15, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Investment and Management Loans
In connection with the Acquisition, the Company sold 197,000 shares of
Common Stock to certain key members of the Company's Management, including
Messrs. Duerden, Skrzypczak and Schwager for $1,970,000 (the "Management
Placement"). The Company financed $1,273,000 of the Management Placement with
non-recourse loans bearing interest at a rate equal to the Adjusted Eurodollar
Rate (as defined) plus 2.75% in effect for the Revolving Credit Facility under
the Credit Agreement. Interest was due annually starting in August 1998. Unless
prepaid, all principal, accrued and unpaid interest is due and payable on August
7, 2005. The obligations under the management notes are secured by a pledge of
the proportionate number of shares of Common Stock pursuant to the Stockholders
Agreement. The name of each executive officer of the Company who participated in
the Management Placement whose indebtedness to the Company exceeds $60,000 is
listed below: Mr. Duerden -- $350,000; Mr. Skrzypczak -- $95,600; and Mr.
Schwager -- $140,000.
Stockholders Agreement
The Company, Stonington, each of the institutional investors who
purchased $15 million of the Company's 14% Pay-in-Kind Perpetual Preferred Stock
("Pay-in-Kind Preferred Stock"), together with warrants to purchase 350,000
shares of Common Stock (the "Warrants") or $1.5 million of the Common Stock (the
"Equity Private Placement"), and each of Messrs. Duerden, Skrzypczak, Schwager
and Hart (each a "Stockholder") entered into a stockholder agreement (the
"Stockholders Agreement"), which contains among other terms and conditions,
provisions relating to voting rights, certain restrictions with respect to the
transfer of Common Stock, Pay-in-Kind Preferred Stock and Warrants by certain
parties thereunder, certain rights related to puts and calls and certain
registration rights granted by the Company with respect to shares of Common
Stock.
Pursuant to the terms of the Stockholders Agreement, Stonington
controls the votes of the Common Stock purchased in the Equity Private
Placements. Under the Stockholders Agreement, Stonington also has the right to
designate at any time and from time to time at least three Directors of the
Company and has the right to remove such designees at any time and from time to
time and each of the Stockholders have agreed to vote in favor of such
designation or removal of such Directors. The Company currently has seven Board
members.
Pursuant to the terms of the Stockholders Agreement, in the event that
Stonington proposes to sell securities which, in the aggregate, represent 30% or
more of the Common Stock on a fully diluted basis to a third party which is not,
and following such sale will not be, an affiliate of Stonington, the
Institutional Investors (as defined in the
60
<PAGE>
Stockholders Agreement) and the Management Investors (as defined in the
Stockholders Agreement) will have the right to elect to participate in such sale
with respect to a certain number of shares of Common Stock. In the event that
Stonington proposes to sell securities which, in the aggregate, represent 30% or
more of the Common Stock on a fully diluted basis to a third party which is not,
and following such sale will not be, an affiliate of Stonington, Stonington has
the right to require each Management Investor, Institutional Investor and such
other stockholders who have agreed to be bound to the Stockholders Agreement to
participate in such sale with respect to a certain number of shares of Common
Stock.
Management Investors are not permitted to sell or transfer Common
Stock, other than to Permitted Transferees (as defined in the Stockholders
Agreement) (i.e., family members and, upon the death of a Management Investor,
to his or her estate or executors), prior to the occurrence of the earlier of
August 11, 2000 and an IPO (as defined in the Stockholders Agreement). Following
an IPO, a Management Investor may transfer shares in accordance with Rule 144 of
the Securities Act of 1933, as amended (the "Securities Act"), or pledge shares
to a financial institution, subject to applicable Securities Act restrictions.
On or after August 11, 2000, if an IPO has not occurred, Management Investors
are permitted to sell Common Stock to third parties after first giving the
Company and the other Management Investors right of first refusal for the same
number of shares of Common Stock at the same price.
Institutional Investors are not permitted to sell or transfer Common
Stock, other than to an Affiliate (as defined in the Stockholders Agreement),
prior to the occurrence of an IPO. Following an IPO, the Institutional Investors
will, with certain limited exceptions, generally be permitted to sell or
transfer Common Stock subject to applicable Securities Act restrictions. The
Pay-in-Kind Preferred Stock and Warrants are subject to transfer restrictions as
set forth in the Stockholders Agreement.
Prior to an IPO, the Company will have the right to require a
Management Investor to sell his or her shares of Common Stock and Options upon a
termination of employment for any reason. Such right will be exercisable within
a period of one year after the date of termination of employment (or within a
period of six months in the event of a termination of employment due to death)
at a price per share equal to the higher of Fair Value Price (as defined in the
Stockholders Agreement) or the original per share purchase price of a share of
Common Stock and at a price per Option equal to the difference between the Fair
Value Price or the original per share purchase price of the shares of Common
Stock covered by such Option and the exercise price of the shares of Common
Stock covered by such Option, multiplied by the number of shares of Common Stock
covered by the Option. Prior to an IPO, the Management Investor will have the
right to require the Company to purchase his or her shares of Common Stock or
Options upon termination of employment due to death, Disability, Retirement or
Involuntary Termination (as defined therein). Such a right will be exercisable
within a period of 180 days after the date of termination of employment due to
death, Disability, Retirement or Involuntary Termination (a) at a price per
share of Common Stock equal to the Fair Value Price of a share of Common Stock;
provided, however, that upon a termination of employment due to death,
Disability or Retirement, the purchase price per share will be equal to the
greater of (x) the Fair Value Price and (y) the original purchase price plus
interest at the Adjusted Eurodollar Rate plus 2.75%, minus the Applicable
Pricing Discount (as defined in the Credit Agreement) as of the date of such
death, Disability or Retirement) (in either case, the "Put Price"); and (b) at a
price per Option equal to the difference between the Put Price of the shares of
Common Stock covered by such Option and the exercise price of the shares of
Common Stock covered by such Option, multiplied by the number of shares of
Common Stock covered by the Option.
Stockholders are, subject to certain limitations, entitled to register
shares of Common Stock in connection with a registration statement prepared by
the Company to register Common Stock. Stonington has the right to require the
Company to take such steps as necessary to register all or part of the Common
Stock held by Stonington under the Securities Act pursuant to the provisions of
the Stockholders Agreement. The Stockholders Agreement contains customary terms
and provisions with respect to, among other things, registration procedures and
certain rights to indemnification granted by parties thereunder in connection
with the registration of Common Stock subject to such agreement.
61
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. Financial Statements
The financial statements are included in Part II, Item 8 of this
Report.
2. Financial Statement Schedules and Supplementary Information
Required to be Submitted
Schedule II "Valuation and Qualifying Accounts" is included in
Part II, Item 8 of this Report.
(B) Reports on Form 8-K.
1. On January 8, 1999, the Company filed a Current Report on Form
8-K, reporting under Item 5 thereof, the amendment of the
Company's senior Bank Credit Agreement, dated as of August 7,
1995, as amended, to waive compliance by the Company of the
financial covenants as of December 31, 1998 and for the four
Fiscal Quarter period then ended, to modify the covenants and
related definitions in respect of certain asset sales and the
utilization of the proceeds from such asset sales, to modify
the required Maximum Leverage, Minimum EBITDA and Minimum
Interest Coverage Ratio Covenants, to change the maturity date
of the Tranche C Loans to be equal to that of the Tranche B
Loans, and to increase the interest rate on the Tranche B
Loans to be equal to that of the Tranche C Loans.
In addition, with the fifth amendment, the Company's principal
shareholder (the "Shareholders") agreed to provide the Company
with $20,000,000 in new cash equity (the "New Equity")
contributions on or before January 28, 1999 to fund working
capital and for general corporate purposes.
2. On March 10, 2000, the Company filed a Current Report on Form
8-K, reporting under Item 5 thereof, in respect of its
announcement that it had agreed to be acquired by Lernout &
Hauspie Speech Products, N.V.
(C) Index to Exhibits.
The following is a list of all Exhibits filed as part of this
Report:
Exhibits Description
- --------- -----------
2.1 Stock and Asset Purchase Agreement, dated as of April 25, 1995,
between Pitney Bowes Inc. and Dictaphone Acquisition Inc. (filed as
Exhibit 2.1 to the Company's Registration Statement on Form S-1, File
No. 33-93464, filed on June 14, 1995).
2.2 Amendment to Stock and Asset Purchase Agreement, dated August 11, 1995,
between Pitney Bowes Inc. and Dictaphone Acquisition Inc. (filed as
Exhibit 2.2 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1995, filed on September 21, 1995).
2.3 Asset Purchase Agreement, dated August 11, 1995, between Dictaphone
Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc. (filed as
Exhibit 2.3 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1995, filed on September 21, 1995).
2.4 Stock Purchase Agreement, dated August 11, 1995, between Pitney Bowes
Deutschland GmbH and Dictaphone Acquisition Inc. (filed as Exhibit 2.4
to the Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
filed on September 21, 1995).
2.5 Stock Purchase Agreement, dated August 11, 1995, between Walnut Street
Corp. and Dictaphone Acquisition Inc. (filed as Exhibit 2.5 to the
Company's Form 10-Q for the fiscal quarter ended June 30, 1995, filed
on September 21, 1995).
2.6 Stock Purchase Agreement, dated August 11, 1995, between Pitney Bowes
Holdings Ltd. and Dictaphone U.K. Acquisition Limited (filed as Exhibit
2.6 to the Company's Form 10-Q for the fiscal quarter ended June 30,
1995, filed on September 21, 1995).
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<PAGE>
Exhibits Description
- --------- -----------
2.7 General Conveyance Agreement, dated August 11, 1995, between Dictaphone
Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc. (filed as
Exhibit 2.7 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1995, filed on September 21, 1995).
2.8 Assumption of Liabilities Agreement, dated August 11, 1995, between
Dictaphone Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc.
(filed as Exhibit 2.8 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1995, filed on September 21, 1995).
2.9 Merger Agreement between Dictaphone U.S. Acquisition Inc. and
Dictaphone Corporation, dated August 11, 1995 (filed as Exhibit 2.9 to
the Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
filed on September 21, 1995).
2.10 Agreement and Plan of Merger between Dictaphone Corporation and
Dictaphone Corporation (U.S.), dated January 28, 1998 (filed as Exhibit
2.10 to the Company's Form 10-K for the fiscal year ended December 31,
1997, filed on March 30, 1998).
2.11 Certificate of Ownership and Merger merging Dictaphone Corporation with
and into Dictaphone (U.S.) (filed as Exhibit 2.11 to the Company's Form
10-K for the fiscal year ended December 31, 1997, filed on March 30,
1998).
3(i) Restated Certificate of Incorporation of Dictaphone Corporation.
3(ii) By-Laws of the Company, adopted April 20, 1995 (filed as Exhibit 3.3 to
the Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
filed on September 21, 1995).
4.1 Indenture, dated as of August 11, 1995, among the Company, Dictaphone
Corporation (U.S.) and Shawmut Bank Connecticut, National Association,
Trustee, relating to the 11-3/4% Senior Subordinated Notes Due 2005 of
the Company (filed as Exhibit 4.1 to the Company's Form 10-Q for the
fiscal quarter ended June 30, 1995, filed on September 21, 1995).
4.2 Bank Credit Agreement, dated as of August 7, 1995, among the Company,
Dictaphone Corporation (U.S.) and the Lenders party thereto (filed as
Exhibit 4.2 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1995, filed on September 21, 1995).
4.3 First Amendment to Credit Agreement, dated as of June 28, 1996, among
the Company, Dictaphone Corporation (U.S.) and the Lenders party
thereto (filed as Exhibit 10.13 to the Company's Current Report on Form
8-K, filed on July 18, 1996).
4.4 Second Amendment to Credit Agreement, dated as of June 27, 1997, among
the Company, Dictaphone Corporation (U.S.) and the Lenders party
thereto (filed as Exhibit 10.15 to the Company's Current Report on Form
8-K, filed on July 8, 1997).
4.5 Third Amendment (Technical Correction) to Credit Agreement, dated as of
July 21, 1997, by and among Dictaphone Corporation (U.S.) and the
Lenders party thereto (filed as Exhibit 10.19 to the Company's Form
10-Q for the fiscal quarter ended June 30, 1997, filed on August 14,
1997).
4.6 Fourth Amendment to Credit Agreement, dated as of November 14, 1997, by
and among Dictaphone Corporation and the Lenders party thereto (filed
as Exhibit 10.20 to the Company's Current Report on Form 8-K, filed on
November 21, 1997).
4.7 Limited Waiver and Fifth Amendment to Credit Agreement, dated December
31, 1998, by and among Dictaphone Corporation (U.S.) and the Lenders
party thereto.
4.8 Limited Waiver and First Amendment to Credit Agreement, dated as of
December 31, 1998, among Dictaphone Corporation (U.S.) and the Lenders
party thereto.
10.1 Subscription Agreements for the Equity Private Placements, dated as of
August 7, 1995 (filed as Exhibit 10.1 to the Company's Form 10-Q for
the fiscal quarter ended June 30, 1995, filed on September 21, 1995).
10.2 Subscription Agreement for Management Private Placement, dated as of
August 7, 1995 (filed as Exhibit 10.2 to the Company's Form 10-Q for
the fiscal quarter ended June 30, 1995, filed on September 21, 1995).
10.3 Stockholders Agreement, dated as of August 11, 1995 (filed as Exhibit
10.3 to the Company's Form 10-Q for the fiscal quarter ended June 30,
1995, filed on September 21, 1995).
10.4 Employment contract of John H. Duerden, dated as of August 9, 1995
(filed as Exhibit 10.4 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995). +
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<PAGE>
Exhibits Description
- --------- -----------
10.5 Amendment to employment contract of John H. Duerden, dated January 1,
1997 (filed as Exhibit 10.5 to the Company's Form 10-K for the fiscal
year ended December 31, 1996, filed on March 31, 1997). +
10.6 Letter Agreement, dated October 21, 1998, between Dictaphone
Corporation and Joseph D. Skrzypczak. +
10.7 Employment contract of Robert G. Schwager, dated June 19, 1995 (filed
as Exhibit 10.7 to the Company's Registration Statement on Form S-1,
File No. 33-93464, filed on June 14, 1995). +
10.8 Management Stock Option Plan of the Company (filed as Exhibit 10.9 to
the Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
filed on September 21, 1995) and Amendment No. 1 to the Management
Stock Option Plan, dated as of April 27, 1996 (filed as Exhibit 10.13
to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996,
filed on May 15, 1996.) +
10.9 Supply Agreement, dated August 11, 1995, between the Company and Pitney
Bowes Inc. (filed as Exhibit 10.10 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, File No.
33-93464, filed on March 29, 1996).
10.10 Leasing Agreement, dated August 10, 1995, between Dictaphone
Corporation (U.S.) and Pitney Bowes Credit Corporation (filed as
Exhibit 10.11 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, File No. 33-93464, filed on March
29, 1996).
10.11 Consulting Agreement, dated November 17, 1995, between the Company and
Emil F. Jachmann (filed as Exhibit 10.12 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995, File No.
33-93464, filed on March 29, 1996). +
10.12 Form of Letter Agreement amending the Subscription Agreement for the
Management Private Placement, dated as of August 7, 1995, and the
Stockholders Agreement, dated as of August 11, 1995 (filed as Exhibit
10.14 to the Company's Form 10-Q for the fiscal quarter ended March 31,
1996, filed on May 15, 1996). +
10.13 Letter Agreement, dated April 11, 1997, between the Company and Peter
Tong (filed as Exhibit 10.16 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1997, filed on August 14, 1997). +
10.14 Stock Option Agreement, dated August 1, 1997, between the Company and
John H. Duerden (filed as Exhibit 10.15 to the Company's Form 10-K for
the fiscal year ended December 31, 1997, filed on March 31, 1998). +
10.15 Amendment No. 2 to the Dictaphone Management Stock Option Plan (filed
as Exhibit 10.18 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1997, filed on August 14, 1997). +
10.16 Letter Agreement between the Company and Ronald A. Elwell, dated
November 8, 1996 (filed as Exhibit 10.18 to the Company's Form 10-K for
the fiscal year ended December 31, 1997, filed on March 31, 1998). +
10.17 Stock Option Agreement, dated August 1, 1997, between the Company and
Peter P. Tong (filed as Exhibit 10.19 to the Company's Form 10-Q for
the fiscal quarter ended March 31, 1998, filed on May 14, 1998). +
10.18 Agreement of Purchase and Sale of Stratford, CT property between
Dictaphone Corporation and Stratford, CT Business Trust, dated May 14,
1998 (filed as Exhibit 10.20 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1998, filed August 14, 1998).
10.19 Lease Agreement of Stratford, CT property between Dictaphone
Corporation and Stratford, CT Business Trust, dated May 14, 1998 (filed
as Exhibit 10.21 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1998, filed August 14, 1998).
10.20 Letter Agreement, dated May 28, 1997, between Dictaphone Corporation
and Mr. Daniel P. Hart. +
10.21 Executive Severance Agreement, dated November 11, 1996, between
Dictaphone Corporation and Mr. Daniel Hart.
10.22 Employment Agreement dated June 1, 1999, between Dictaphone Corporation
and Mr. Daniel P. Hart (filed as Exhibit 10.22 to the Company's Form
10-Q for the fiscal quarter ended September 30, 1999, filed on November
15, 1999). +
10.23 Employment Agreement dated June 1, 1999, between Dictaphone Corporation
and Mr. Joseph D. Skrzypczak (filed as Exhibit 10.23 to the Company's
Form 10-Q for the fiscal quarter ended September 30, 1999, filed on
November 15, 1999). +
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<PAGE>
Exhibits Description
- --------- -----------
10.24 Employment Agreement dated June 1, 1999, between Dictaphone Corporation
and Mr. Ronald A. Elwell (filed as Exhibit 10.24 to the Company's Form
10-Q for the fiscal quarter ended September 30, 1999, filed on November
15, 1999). +
10.25 Employment Agreement dated June 1, 1999, between Dictaphone Corporation
and Mr. Robert G. Schwager (filed as Exhibit 10.25 to the Company's
Form 10-Q for the fiscal quarter ended September 30, 1999, filed on
November 15, 1999). +
10.26 Amendment No. 3 to the Management Stock Option Plan, dated as of July
28, 1999 (filed as Exhibit 10.26 to the Company's Form 10-Q for the
fiscal quarter ended September 30, 1999, filed on November 15, 1999). +
21.1 List of subsidiaries of the Company (filed as Exhibit 21 to the
Company's Registration Statement on Form S-1, File No. 33-93464, filed
on June 14, 1995).
24 Powers of Attorney (included on the signature page hereof).
*27 Financial Data Schedule.
- --------------------
* Filed herewith.
+ Management contract of compensatory arrangement.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Stratford, State of Connecticut, on this 25th day of March, 2000.
DICTAPHONE CORPORATION
By: /s/ John H. Duerden
---------------------------------
John H. Duerden
Chairman, Chief Executive
Officer and President
KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Scott M. Shaw and Joseph D. Skrzypczak
his true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or their or his substitutes
or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 25th day of March, 2000.
Signature Title(s)
--------- --------
/s/ John H. Duerden Chairman, Chief Executive Officer and
- ----------------------------------- President (Principal Executive Officer)
John H. Duerden
/s/ Joseph D. Skrzypczak Chief Operating Officer, Chief Financial
- ----------------------------------- Officer and Director (Principal Financial
Joseph D. Skrzypczak and Accounting Officer)
/s/ Albert J. Fitzgibbons, III Director
- -----------------------------------
Albert J. Fitzgibbons, III
- -----------------------------------
Emil F. Jachman Director
/s/ Alexis P. Michas Director
- -----------------------------------
Alexis P. Michas
/s/ Scott M. Shaw Director
- -----------------------------------
Scott M. Shaw
/s/ Peter P. Tong Director
- -----------------------------------
Peter P. Tong
66
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Sequentially
Exhibits Description Numbered Page
- -------- ----------- -------------
<S> <C> <C>
2.1 Stock and Asset Purchase Agreement, dated as of April 25, 1995, between
Pitney Bowes Inc. and Dictaphone Acquisition Inc. (filed as Exhibit 2.1
to the Company's Registration Statement on Form S-1, File No. 33-93464,
filed on June 14, 1995).
2.2 Amendment to Stock and Asset Purchase Agreement, dated August 11, 1995,
between Pitney Bowes Inc. and Dictaphone Acquisition Inc. (filed as
Exhibit 2.2 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1995, filed on September 21, 1995).
2.3 Asset Purchase Agreement, dated August 11, 1995, between Dictaphone
Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc. (filed as
Exhibit 2.3 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1995, filed on September 21, 1995).
2.4 Stock Purchase Agreement, dated August 11, 1995, between Pitney Bowes
Deutschland GmbH and Dictaphone Acquisition Inc. (filed as Exhibit 2.4
to the Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
filed on September 21, 1995).
2.5 Stock Purchase Agreement, dated August 11, 1995, between Walnut Street
Corp. and Dictaphone Acquisition Inc. (filed as Exhibit 2.5 to the
Company's Form 10-Q for the fiscal quarter ended June 30, 1995, filed
on September 21, 1995).
2.6 Stock Purchase Agreement, dated August 11, 1995, between Pitney Bowes
Holdings Ltd. and Dictaphone U.K. Acquisition Limited (filed as Exhibit
2.6 to the Company's Form 10-Q for the fiscal quarter ended June 30,
1995, filed on September 21, 1995).
2.7 General Conveyance Agreement, dated August 11, 1995, between Dictaphone
Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc. (filed as
Exhibit 2.7 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1995, filed on September 21, 1995).
2.8 Assumption of Liabilities Agreement, dated August 11, 1995, between
Dictaphone Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc.
(filed as Exhibit 2.8 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1995, filed on September 21, 1995).
2.9 Merger Agreement between Dictaphone U.S. Acquisition Inc. and
Dictaphone Corporation, dated August 11, 1995 (filed as Exhibit 2.9 to
the Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
filed on September 21, 1995).
2.10 Agreement and Plan of Merger between Dictaphone Corporation and
Dictaphone Corporation (U.S.), dated January 28, 1998 (filed as Exhibit
2.10 to the Company's Form 10-K for the fiscal year ended December 31,
1997, filed on March 30, 1998).
2.11 Certificate of Ownership and Merger merging Dictaphone Corporation with
and into Dictaphone (U.S.) (filed as Exhibit 2.11 to the Company's Form
10-K for the fiscal year ended December 31, 1997, filed on March 30,
1998).
3(i) Restated Certificate of Incorporation of Dictaphone Corporation.
3(ii) By-Laws of the Company, adopted April 20, 1995 (filed as Exhibit 3.3 to
the Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
filed on September 21, 1995).
4.1 Indenture, dated as of August 11, 1995, among the Company, Dictaphone
Corporation (U.S.) and Shawmut Bank Connecticut, National Association,
Trustee, relating to the 11-3/4% Senior Subordinated Notes Due 2005 of
the Company (filed as Exhibit 4.1 to the Company's Form 10-Q for the
fiscal quarter ended June 30, 1995, filed on September 21, 1995).
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibits Description Numbered Page
- -------- ----------- -------------
<S> <C> <C>
4.2 Bank Credit Agreement, dated as of August 7, 1995, among the Company,
Dictaphone Corporation (U.S.) and the Lenders party thereto (filed as
Exhibit 4.2 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1995, filed on September 21, 1995).
4.3 First Amendment to Credit Agreement, dated as of June 28, 1996, among
the Company, Dictaphone Corporation (U.S.) and the Lenders party
thereto (filed as Exhibit 10.13 to the Company's Current Report on Form
8-K, filed on July 18, 1996).
4.4 Second Amendment to Credit Agreement, dated as of June 27, 1997, among
the Company, Dictaphone Corporation (U.S.) and the Lenders party
thereto (filed as Exhibit 10.15 to the Company's Current Report on Form
8-K, filed on July 8, 1997).
4.5 Third Amendment (Technical Correction) to Credit Agreement, dated as of
July 21, 1997, by and among Dictaphone Corporation (U.S.) and the
Lenders party thereto (filed as Exhibit 10.19 to the Company's Form
10-Q for the fiscal quarter ended June 30, 1997, filed on August 14,
1997).
4.6 Fourth Amendment to Credit Agreement, dated as of November 14, 1997, by
and among Dictaphone Corporation and the Lenders party thereto (filed
as Exhibit 10.20 to the Company's Current Report on Form 8-K, filed on
November 21, 1997).
4.7 Limited Waiver and Fifth Amendment to Credit agreement, dated December
31, 1998, by and among Dictaphone Corporation (U.S.) and the Lenders
party thereto.
4.8 Limited Waiver and First Amendment to Credit Agreement, dated as of
December 31, 1998, among Dictaphone Corporation (U.S.) and the Lender's
party thereto.
10.1 Subscription Agreements for the Equity Private Placements, dated as of
August 7, 1995 (filed as Exhibit 10.1 to the Company's Form 10-Q for
the fiscal quarter ended June 30, 1995, filed on September 21, 1995).
10.2 Subscription Agreement for Management Private Placement, dated as of
August 7, 1995 (filed as Exhibit 10.2 to the Company's Form 10-Q for
the fiscal quarter ended June 30, 1995, filed on September 21, 1995).
10.3 Stockholders Agreement, dated as of August 11, 1995 (filed as Exhibit
10.3 to the Company's Form 10-Q for the fiscal quarter ended June 30,
1995, filed on September 21, 1995).
10.4 Employment contract of John H. Duerden, dated as of August 9, 1995
(filed as Exhibit 10.4 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1995, filed on September 21, 1995). +
10.5 Amendment to employment contract of John H. Duerden, dated January 1,
1997 (filed as Exhibit 10.5 to the Company's Form 10-K for the fiscal
year ended December 31, 1996, filed on March 31, 1997). +
10.6 Letter Agreement, dated October 21, 1998, between Dictaphone
Corporation and Joseph D. Skrzypczak. +
10.7 Employment contract of Robert G. Schwager, dated June 19, 1995 (filed
as Exhibit 10.7 to the Company's Registration Statement on Form S-1,
File No. 33-93464, filed on June 14, 1995).
10.8 Management Stock Option Plan of the Company (filed as Exhibit 10.9 to
the Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
filed on September 21, 1995) and Amendment No. 1 to the Management
Stock Option Plan, dated as of April 27, 1996 (filed as Exhibit 10.13
to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996,
filed on May 15, 1996.) +
</TABLE>
68
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<CAPTION>
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Exhibits Description Numbered Page
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10.9 Supply Agreement, dated August 11, 1995, between the Company and Pitney
Bowes Inc. (filed as Exhibit 10.10 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, File No.
33-93464, filed on March 29, 1996).
10.10 Leasing Agreement, dated August 10, 1995, between Dictaphone
Corporation (U.S.) and Pitney Bowes Credit Corporation (filed as
Exhibit 10.11 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, File No. 33-93464, filed on March
29, 1996).
10.11 Consulting Agreement, dated November 17, 1995, between the Company and
Emil F. Jachmann (filed as Exhibit 10.12 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995, File No.
33-93464, filed on March 29, 1996). +
10.12 Form of Letter Agreement amending the Subscription Agreement for the
Management Private Placement, dated as of August 7, 1995, and the
Stockholders Agreement, dated as of August 11, 1995 (filed as Exhibit
10.14 to the Company's Form 10-Q for the fiscal quarter ended March 31,
1996, filed on May 15, 1996). +
10.13 Letter Agreement, dated April 11, 1997, between the Company and Peter
Tong (filed as Exhibit 10.16 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1997, filed on August 14, 1997). +
10.14 Stock Option Agreement, dated August 1, 1997, between the Company and
John H. Duerden (filed as Exhibit 10.15 to the Company's Form 10-K for
the fiscal year ended December 31, 1997, filed on March 31, 1998). +
10.15 Amendment No. 2 to the Dictaphone Management Stock Option Plan (filed
as Exhibit 10.18 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1997, filed on August 14, 1997). +
10.16 Letter Agreement between the Company and Ronald A. Elwell, dated
November 8, 1996 (filed as Exhibit 10.18 to the Company's Form 10-K for
the fiscal year ended December 31, 1997, filed on March 31, 1998). +
10.17 Stock Option Agreement, dated August 1, 1997, between the Company and
Peter P. Tong (filed as Exhibit 10.19 to the Company's Form 10-Q for
the fiscal quarter ended March 31, 1998, filed on May 14, 1998). +
10.18 Agreement of Purchase and Sale of Stratford, CT property between
Dictaphone Corporation and Stratford, CT Business Trust, dated May 14,
1998 (filed as Exhibit 10.20 to the Company's Form 10-Q for the fiscal
quarter ended June 30, 1998, filed August 14, 1998).
10.19 Lease Agreement of Stratford, CT property between Dictaphone
Corporation and Stratford, CT Business Trust, dated May 14, 1998 (filed
as Exhibit 10.21 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1998, filed August 14, 1998).
10.20 Letter Agreement, dated May 28, 1997, between Dictaphone Corporation
and Mr. Daniel P. Hart. +
10.21 Executive Severance Agreement, dated November 11, 1996, between
Dictaphone Corporation and Mr. Daniel Hart.
10.22 Employment Agreement dated June 1, 1999, between Dictaphone Corporation
and Mr. Daniel P. Hart (filed as Exhibit 10.22 to the Company's Form
10-Q for the fiscal quarter ended September 30, 1999, filed on November
15, 1999). +
10.23 Employment Agreement dated June 1, 1999, between Dictaphone Corporation
and Mr. Joseph D. Skrzypczak (filed as Exhibit 10.23 to the Company's
Form 10-Q for the fiscal quarter ended September 30, 1999, filed on
November 15, 1999). +
</TABLE>
69
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10.24 Employment Agreement dated June 1, 1999, between Dictaphone Corporation
and Mr. Ronald A. Elwell (filed as Exhibit 10.24 to the Company's Form
10-Q for the fiscal quarter ended September 30, 1999, filed on November
15, 1999). +
10.25 Employment Agreement dated June 1, 1999, between Dictaphone Corporation
and Mr. Robert G. Schwager (filed as Exhibit 10.25 to the Company's
Form 10-Q for the fiscal quarter ended September 30, 1999, filed on
November 15, 1999). +
10.26 Amendment No. 3 to the Management Stock Option Plan, dated as of July
28, 1999 (filed as Exhibit 10.26 to the Company's Form 10-Q for the
fiscal quarter ended September 30, 1999, filed on November 15, 1999). +
21.1 List of subsidiaries of the Company (filed as Exhibit 21 to the
Company's Registration Statement on Form S-1, File No. 33-93464, filed
on June 14, 1995).
24 Powers of Attorney (included on the signature page hereof).
*27 Financial Data Schedule.
</TABLE>
- --------------------------
* Filed herewith.
+ Management contract of compensatory arrangement.
70
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the condensed
consolidated balance sheet of Dictaphone Corporation at December 31, 1999
and the condensed consolidated statement of operations for the 12 months ended
December 31, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000946734
<NAME> Dictaphone Corporation
<MULTIPLIER> 1
<CURRENCY> US dollars
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<EXCHANGE-RATE> 1
<CASH> 6,190
<SECURITIES> 0
<RECEIVABLES> 102,635
<ALLOWANCES> 1,801
<INVENTORY> 49,759
<CURRENT-ASSETS> 162,935
<PP&E> 77,884
<DEPRECIATION> 40,395
<TOTAL-ASSETS> 461,138
<CURRENT-LIABILITIES> 102,538
<BONDS> 353,443
49,730
0
<COMMON> 130
<OTHER-SE> (67,462)
<TOTAL-LIABILITY-AND-EQUITY> 461,138
<SALES> 258,061
<TOTAL-REVENUES> 353,734
<CGS> 189,195
<TOTAL-COSTS> 321,633
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,062
<INCOME-PRETAX> (7,906)
<INCOME-TAX> (1,037)
<INCOME-CONTINUING> (8,943)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,943)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
