<PAGE>
-------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
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 (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF 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
-------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
REFERENCED
ITEM NUMBER FORM 10-K
----------- ----------
PART I
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......... 2
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K..................................34
<PAGE>
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".
1
<PAGE>
PART I
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.
2
<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)
3
<PAGE>
DICTAPHONE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------ ------------------
<S> <C> <C>
ASSETS
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.
4
<PAGE>
DICTAPHONE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
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:
Product sales and rentals 102,408 90,048 93,926
Contract manufacturing sales 37,878 39,773 37,657
Support services 54,146 58,867 57,612
-------- -------- --------
Total costs 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.
5
<PAGE>
DICTAPHONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
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.
6
<PAGE>
DICTAPHONE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES ACCUMULATED
RECEIVABLE ADDITIONAL OTHER COMPREHENSIVE TOTAL
PREFERRED COMMON FROM TREASURY PAID-IN ACCUMULATED COMPREHENSIVE EARNINGS EQUITY
STOCK STOCK STOCKHOLDERS STOCK CAPITAL DEFICIT INCOME (LOSS) (LOSS) (DEFICIT)
--------- ---------- ------------ ---------- ------- ----------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 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.
7
<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.
8
<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 (primarily voice processing and
communication recording systems), the Company records revenue attributable
to the hardware and software element upon shipment and defers revenue
attributable to undelivered elements (principally installation and training)
to the periods in which the related obligations are performed. Vendor-
specific objective evidence exists for each of these elements, derived from
the sale prices of each element of the sales arrangement when sold
separately. Revenue for other products (primarily analog desktop and
portable dictation products that do not have significant software content)
is recognized upon shipment. Revenue from maintenance and support services
is recognized ratably over the relevant contractual period. The Company may
grant sales discounts to customers. Such sales discounts are reflected as a
reduction in the associated revenue from product sales and rentals.
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.
9
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation. Statement of Financial Accounting Standards
Number 123, "Accounting For Stock-Based Compensation" ("SFAS 123")
encourages, but does not require, companies to record at fair value
compensation cost of stock-based employee compensation plans. Dictaphone
has elected to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting For Stock Issued to Employees" ("APB No. 25") and related
interpretations. Under the intrinsic value based method, compensation cost
is the excess, if any, of the quoted market price of the stock at grant date
over the exercise price of the option. Typically, grants of stock options
pursuant to 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
<TABLE>
<CAPTION>
Inventories consist of the following:
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
<TABLE>
<CAPTION>
Property, plant and equipment consists of the following:
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.
10
<PAGE>
5. INTANGIBLES (CONTINUED)
<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>
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.
11
<PAGE>
6. DEBT (CONTINUED)
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 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.
12
<PAGE>
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.
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.
13
<PAGE>
7. EQUITY AND STOCK OPTIONS (CONTINUED)
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%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:
1997 1998 1999
--------- --------- ---------
Net loss As reported $(70,921) $(56,764) $(14,758)
Pro Forma $(71,503) $(57,051) $(15,406)
14
<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:
1997 1998 1999
-------- -------- --------
Risk free interest rate 5.72% 4.56% 6.36%
Expected life 5 years 5 years 5 years
Expected volatility --- --- ---
Expected dividend yield --- --- ---
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.
15
<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:
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
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)
======== ========
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.
16
<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.
17
<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.
18
<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. (S) 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 (U.S.), the Company's wholly owned U.S.
subsidiary, has fully and unconditionally guaranteed the repayment of the
Notes. In January 1998, Dictaphone Corporation was merged into Dictaphone
Corporation (U.S.), whereupon the surviving corporation changed its name to
"Dictaphone Corporation". Dictaphone Non-U.S. is not a guarantor of the
Notes. Financial information for Dictaphone Corporation (Dictaphone
Corporation (U.S.)) is presented in the following schedules.
19
<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.
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
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:
Product sales and rentals 94,726 20,815 (13,133) 102,408
Contract manufacturing sales 37,878 --- --- 37,878
Support services 47,897 6,249 --- 54,146
-------- ------- -------- --------
Total costs 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>
20
<PAGE>
11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT INFORMATION
(Continued)
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
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:
Product sales and rentals 88,978 11,450 (10,380) 90,048
Contract manufacturing sales 39,773 --- --- 39,773
Support services 54,315 4,552 --- 58,867
-------- ------- -------- --------
Total costs 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>
21
<PAGE>
11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT INFORMATION
(Continued)
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
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:
Product sales and rentals 92,870 16,055 (14,999) 93,926
Contract manufacturing sales 37,657 --- -- 37,657
Support services 51,993 5,619 --- 57,612
-------- ------- -------- --------
Total costs 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>
22
<PAGE>
11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT INFORMATION
(Continued)
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION
DECEMBER 31, 1998
<TABLE>
<CAPTION>
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>
23
<PAGE>
11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT INFORMATION
(Continued)
DICTAPHONE CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
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>
24
<PAGE>
11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT INFORMATION
(Continued)
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
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>
25
<PAGE>
11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT INFORMATION
(Continued)
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
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>
26
<PAGE>
11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT INFORMATION
(CONTINUED)
DICTAPHONE CORPORATION
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
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>
27
<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.
DICTAPHONE CORPORATION
SEGMENT INFORMATION
<TABLE>
<CAPTION>
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>
28
<PAGE>
12. DISCLOSURES ABOUT SEGMENTS ON AN ENTERPRISE AND RELATED INFORMATION
(Continued)
GEOGRAPHIC INFORMATION
LONG-LIVED
REVENUES ASSETS
-------- ----------
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
29
<PAGE>
12. DISCLOSURES ABOUT SEGMENTS ON AN ENTERPRISE AND RELATED INFORMATION
(Continued)
ASSET RECONCILIATION
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
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.
30
<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>
31
<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.
32
<PAGE>
SCHEDULE II
DICTAPHONE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- --------- -------- ---------- ------
<S> <C> <C> <C> <C>
Year ended December 31, 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>
33
<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).
34
<PAGE>
EXHIBITS DESCRIPTION
-------- -----------
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,
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).
35
<PAGE>
Exhibits DESCRIPTION
-------- -----------
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.) +
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). +
36
<PAGE>
Exhibits DESCRIPTION
-------- -----------
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). +
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.
37
<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 20th day of November, 2000.
DICTAPHONE CORPORATION
By: /s/ Joseph D. Skrzypczak
-----------------------------
Joseph D. Skrzypczak
Chief Operating Officer,
Chief Financial Officer and Director
38
