<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 33-93464
DICTAPHONE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 04-3506655
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3191 Broadbridge Avenue
Stratford, CT 06614
(203) 381-7000
(Address of principal executive offices, including zip code,
AND TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------------------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
The registrant meets the conditions set forth in General Instructions H(1)(a)
and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- ------
Number of shares of Common Stock, par value $.01 per share, outstanding as of
August 12, 2000: 100
The Common Stock of the registrant is not publicly traded.
<PAGE>
EXPLANATORY NOTE:
-----------------
On May 5, 2000, Lernout & Hauspie Speech Products N.V. ("Lernout & Hauspie")
acquired all of the outstanding capital stock of Dictaphone Corporation
("Dictaphone" or the "Company") through a merger of the Company into a wholly-
owned subsidiary of Lernout & Hauspie (the "Acquisition"). The Condensed
Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly
Report on Form 10-Q are divided into Condensed Consolidated Financial Statements
for Dictaphone Corporation, the Successor Company, for the Three and Five Months
ended and as of September 30, 2000 and Dictaphone Corporation, the Predecessor
Company, for the Four Months ended April 30, 2000 and the Three and Nine Months
ended September 30, 1999, and as of December 31, 1999. The Condensed
Consolidated Financial Statements for Dictaphone Corporation, the Successor
Company, include the results of operations of Dictaphone Corporation from May 1,
2000. The results of operations for the period from May 1, 2000 through May 4,
2000 are immaterial.
In connection with the Acquisition, Lernout & Hauspie Speech Products N.V.
announced its intent to dispose of Dictaphone's contract manufacturing business
in Florida. Dictaphone is currently pursuing various alternatives regarding the
sale of that business. The expected net proceeds of the sale and cash flows of
this business until it is sold, less an allocation of interest expense for the
holding period, were allocated to net assets held for sale in the allocation of
the Dictaphone purchase price. Any difference between the actual and expected
amounts will result in an adjustment to goodwill. The business held for sale had
net income of $1.8 million from the date of Acquisition to September 30, 2000.
Dictaphone Corporation has a continuing reporting obligation under Section
15(d) of the Securities Exchange Act of 1934 due to contractual obligations
entered into in connection with the outstanding Senior Subordinated Notes.
1
<PAGE>
DICTAPHONE CORPORATION
----------------------
INDEX
-----
PART I. FINANCIAL INFORMATION
------------------------------
<TABLE>
<CAPTION>
Page No.
<S> <C>
ITEM 1. Condensed Consolidated Financial Statements 3
Dictaphone Corporation (Successor Company)
------------------------------------------
Condensed Consolidated Statement of Operations for the
Three Months and Five Months Ended September 30, 2000
(Unaudited) 3
Condensed Consolidated Balance Sheet as of September 30,
2000 (Unaudited) 4
Condensed Consolidated Statement of Cash Flow for the
Five Months Ended September 30, 2000 (Unaudited) 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Dictaphone Corporation (Predecessor Company)
---------------------------------------------
Condensed Consolidated Statements of Operations for the
Four Months Ended April 30, 2000 and the Three and Nine
Months Ended September 30, 1999 (Unaudited) 20
Condensed Consolidated Balance Sheet as of December 31,
1999 21
Condensed Consolidated Statements of Cash Flows for the
Four Months Ended April 30, 2000 and the Nine Months Ended
September 30, 1999 (Unaudited) 22
Notes to Unaudited Condensed Consolidated Financial
Statements 23
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 35
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 41
ITEM 6. Exhibits and Reports on Form 8-K 41
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
DICTAPHONE CORPORATION (Successor Company)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS FIVE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------- -------------------
<S> <C> <C>
Revenues:
Product sales and rentals $ 34,643 $ 50,107
Support services 23,727 35,913
-------- --------
Total revenue 58,370 86,020
-------- --------
Costs and expenses:
Cost of:
Product sales and rentals $ 18,485 $ 24,967
Support services 15,390 26,214
-------- --------
Total cost 33,875 51,181
-------- --------
Selling and administrative 29,182 47,521
Amortization of intangibles 24,806 41,306
Research and development 3,340 5,499
-------- --------
Operating loss (32,833) (59,487)
Interest expense 9,461 15,874
Other (income) expense - net (730) 152
-------- --------
Loss before income taxes (41,564) (75,513)
Income tax benefit 241 468
-------- --------
Net loss $(41,323) $(75,045)
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE>
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-------------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,572
Accounts receivable, less allowances of $5,939 77,991
Receivable due from affiliate 1,341
Inventories 14,235
Assets to be disposed of 35,349
Other current assets 4,391
--------
Total current assets 134,879
Property, plant and equipment, net 32,706
Intangibles, net 817,924
Other assets 5,599
--------
Total assets $991,108
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 5,307
Payable due to affiliates 19,018
Interest payable 3,082
Accrued liabilities 16,784
Advance billings 67,195
Current portion of long-term debt 10,123
--------
Total current liabilities 121,509
Long-term debt 315,416
Due to Parent Company 16,000
Accrued pension liability 5,950
Deferred tax liability 2,600
Other liabilities 11,231
--------
Total liabilities 472,706
--------
Contingencies (Note 7)
Stockholder's equity:
Common stock ($.01 par value; 100 shares outstanding) 1
Additional paid-in capital 593,444
Accumulated deficit (75,045)
Accumulated other comprehensive income 2
--------
Total stockholder's equity 518,402
--------
Total liabilities and stockholder's equity $991,108
========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE>
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED
SEPTEMBER 30, 2000
-------------------
<S> <C>
Operating activities:
Net loss $(75,045)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 44,703
Changes in operating assets and liabilities:
Accounts receivable (9,938)
Inventories (853)
Other current assets (4,933)
Accounts payable and accrued liabilities 1,942
Advance billings 22,126
Other liabilities 1,899
--------
Net cash used in operating activities (20,099)
--------
Investing activities:
Net investment in fixed assets (2,068)
Licenses and software development costs capitalized (3,750)
--------
Net cash used in investing activities (5,818)
--------
Financing activities:
Redemption of notes (41,584)
Borrowings under revolving credit facility 17,700
Repayments under revolving credit facility (7,700)
Capital Contribution from Parent Company 54,000
Other (557)
--------
Net cash provided by financing activities 21,859
--------
Effect of exchange rate changes on cash (30)
--------
Decrease in cash (4,088)
--------
Cash and cash equivalents, beginning of period 5,660
--------
Cash and cash equivalents, end of period $ 1,572
========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 12,211
========
Income taxes paid $ 480
========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
5
<PAGE>
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands, or as otherwise indicated)
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
On March 7, 2000, the Company entered into a definitive agreement to be
acquired by Lernout & Hauspie Speech Products, N.V. On May 5, 2000 Lernout &
Hauspie acquired all of the outstanding stock of the Company for
approximately 9.4 million shares of Lernout & Hauspie Common Stock, taking
into account the two-for-one stock split (of Lernout & Hauspie) effected as
of May 12, 2000, through the merger of the Company with a wholly owned
subsidiary of Lernout & Hauspie. In connection with the Acquisition, a
portion of the Company's approximately $430 million of debt and other
obligations were paid off or refinanced by an advance made to the Company by
Lernout & Hauspie.
The capital structure and accounting basis of the assets and liabilities
of the Company as of May 1, 2000 and thereafter differ from those of the
Company prior to its acquisition (the "Predecessor Company") as a result of
the application of purchase accounting. The Acquisition is being accounted
for under the purchase method of accounting in accordance with Accounting
Principles Board Opinion No. 16, Accounting for Business Combinations. The
total purchase price has been allocated to tangible and intangible assets and
liabilities of the Company based on their estimated fair values.
The condensed consolidated financial statements of Dictaphone Corporation
have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 11, as a result of the concerns raised by
recent events, the Company and Lernout & Hauspie have been in discussions
with their lenders under the L&H Revolving Credit Facility, Dictaphone's
limited guaranty of that facility (the "Dictaphone Guaranty"), the Line of
Credit and Lernout & Hauspie's guaranty of the Line of Credit ("L&H
Guaranty").
Lernout & Hauspie's lenders under the L&H Revolving Credit Facility have
asserted that an event of default may exist under that facility and the
associated Dictaphone Guaranty, however, they have not declared an event of
default. Deutsche Bank, Dictaphone's lender under the Line of Credit, also
has asserted that an event of default exists under the Line of Credit, but
similarly has not yet declared an event of default. The Company has not
admitted that an event of default exists under the Line of Credit. Deutsche
Bank has, however, declared an event of default under the L&H Guaranty.
Lernout & Hauspie and the Company are in discussions with their lenders
regarding the alleged defaults and the restructuring of the underlying loans
and guarantees.
Based upon the status of the Company's and Lernout & Hauspie's
discussions with the banks and the alleged events of default, as to which the
Company's lenders have not yet formally declared an event of default, the
Company cannot reach a definitive conclusion as to the likelihood that the
banks will, in fact, formally declare an event of default under the Line of
Credit or the Dictaphone Guaranty. Accordingly, the Company's balance sheet
has not been adjusted to reflect the effect of a determination that the
likelihood is probable. If it were determined to be probable that the banks
would formally declare an event of default under the Dictaphone Guaranty, the
Company would be required to make the following adjustments: (i) the
intercompany payable (approximately $173 million at September 30, 2000) would
be reclassified as a current liability; (ii) the Dictaphone Guaranty, to the
extent of the excess of the guaranteed obligation over the intercompany loan
balance, would be recorded as a current liability (through a corresponding
reduction to additional paid-in capital) rather than being reported solely as
a contingent obligation--resulting in an additional current liability of
approximately $35.6 million; and (iii) the Notes (approximately $159 million
outstanding as of September 30, 2000) would be reclassified as a current
liability in light of the cross default provisions under the Indenture.
The financial statements are unaudited as of and for the three and five
month periods ended September 30, 2000, but in the opinion of management
contain all adjustments which are of a normal and recurring nature necessary
to present fairly the financial position and results of operations and cash
flows for the period presented. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
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. Results of
operations for the three and five month periods ended September 30, 2000 are
not necessarily indicative of the results to be expected for the remainder of
the year.
The accounting policies of the Successor Company are consistent with
those of the Predecessor Company as set forth in the Company's Annual Report
on Form 10-K, except for revenue recognition and intangibles which are
disclosed below.
6
<PAGE>
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue. For voice processing systems and communications recording
equipment that have installation requirements, the Company recognizes revenue
upon installation, which is when contractual obligations have been satisfied.
All revenue on maintenance contracts is recognized ratably over the contract
period. Revenue for all other products is recognized upon shipment. 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.
In connection with the Acquisition of the Company by Lernout & Hauspie
Speech Products, N.V., management has made certain strategic decisions with
regard to the incorporation of Lernout & Hauspie technologies into the
Company's products. This new strategic direction will result in increased
software content in the majority of the Company's products combined with an
increased level of customization of the Company's products at customer sites
upon installation. This business directive represents a distinct shift from
the Company's current business model of typically modular installation with
relatively little customization at customer sites. It is this combination of
increased software content and heightened customization upon installation
which resulted in the change to recognize revenue for the affected products
upon installation.
Intangibles. Intangible assets are stated at cost less accumulated
amortization as provided over the estimated useful lives of the assets.
Assembled workforce and capitalized technology are amortized on a straight-
line basis over five years. Customer lists are amortized on a straight-line
basis over eight years. All goodwill and tradenames are being amortized on a
straight-line basis over 10 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.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, 2000
------------------
<S> <C>
Raw materials and work in process $ 1,236
Supplies and service parts 7,995
Finished products 5,004
-------
$14,235
=======
</TABLE>
3. INTANGIBLES
The following summarizes intangible assets at September 30, 2000.
Amortization expense for the three and five months ended September 30, 2000
was $24,806 and $41,306, respectively.
<TABLE>
<CAPTION>
September 30, 2000
-------------------
<S> <C>
Goodwill $599,330
Tradenames 29,500
Customer lists 132,100
Assembled workforce 21,500
Capitalized technology 76,800
--------
859,230
Accumulated amortization (41,306)
--------
$817,924
========
</TABLE>
7
<PAGE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-------------------
<S> <C>
Revolving line of credit $ 10,000
Due to Lernout & Hauspie (Parent Company) 173,000
Senior Subordinated Notes 142,416
Due to Parent Company 16,000
Other 123
--------
341,539
Less current portion (10,123)
--------
$331,416
========
</TABLE>
The amount due to Lernout & Hauspie is for a term of two years as from
May 5, 2000 at a fixed interest rate of 8% per annum, with interest payable
at the end of each six month period during the term. The interest payment
otherwise due on November 5, 2000 has been deferred for a period of six
months.
The Senior Subordinated Notes ("Notes") bear interest at a rate of 11
3/4% per annum, payable semi-annually on each February 1 and August 1. The
Notes mature on August 1, 2005. In September 2000, an affiliate of Lernout
and Hauspie purchased Notes in the amount of $16 million in the open market.
The aggregate principal amount available under the revolving line of credit
is $20 million. Loans under the revolving line of credit bear interest at a
per annum interest rate equal to Deutsche Bank's floating base rate (6.93% at
September 30, 2000). Other debt matures in 2001 and bears interest at a per
annum rate of 7.25%.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133
requires that derivative instruments be recognized as either assets or
liabilities in the consolidated balance sheet based on their fair values.
Changes in the fair values of such derivative instruments will be recorded
either in results of operations or in other comprehensive income, depending
on the intended use of the derivative instrument. The initial application of
SFAS 133 will be reported as the effect of a change in accounting principle.
SFAS 133, as amended, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company will adopt the requirements of
SFAS 133 in its financial statements for the year ending December 31, 2001.
The Company does not believe that the adoption of SFAS 133 will have a
material impact on its financial position, results of operations or
liquidity.
On March 31, 2000, the FASB issued FASB Interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation - An Interpretation of
APB Opinion No. 25 ("FIN 44"). FIN 44 provides guidance for issues that have
arisen in applying APB Opinion No. 25, Accounting for Stock Issued to
Employees. FIN 44 applies prospectively to new awards, exchanges of awards
in a business combination, modifications to outstanding awards, and changes
in grantee status that occur on or after July 1, 2000. The Company does not
believe the provisions of FIN 44 will have a material impact on the Company's
financial position, results of operations or liquidity.
8
<PAGE>
5. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
The Securities and Exchange Commission (SEC) released Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," on
December 3, 1999, SAB No. 101A on March 24, 2000, SAB No. 101B on June 26,
2000 and a document issued on October 12, 2000 responding to frequently asked
questions (FAQ) regarding accounting standards related to revenue recognition
and SAB No. 101. SAB No. 101 sets forth the views of the staff of the SEC on
revenue recognition issues, including conceptual issues as well as certain
industry-specific guidance. We are required to report the impact of SAB No.
101, as amended by SAB No. 101A and SAB No. 101B, no later than the fourth
fiscal quarter of the fiscal year 2000. The effect of the change would be
recognized as a cumulative effect of a change in accounting principle as of
January 1, 2000. Prior year financial statements will not be restated. We
have not yet made a determination of the impact of this accounting guidance
on our financial position or results from operations, and are considering
guidance from the SEC's recently issued FAQ on SAB No. 101.
9
<PAGE>
6. PROFORMA COMBINED STATEMENTS OF OPERATIONS DATA
The following summary proforma financial information reflects the
Acquisition of Dictaphone as if it occurred on January 1, 2000 and January 1,
1999 for purposes of the statement of operations, and does not, nor is it
intended, to present the results of operations of the Company, in accordance
with accounting principles generally accepted in the United States. The
summary proforma information is intended for informational purposes only and
is not necessarily representative of what the Company's results of operations
would have been had this Acquisition in fact occurred on January 1, 2000 and
January 1, 1999, respectively, and is not intended to project the Company's
results of operations for any future period or date.
Proforma financial information (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
-------------------------------------------- ------------------------------------------------------------------
PREDECESSOR SUCCESSOR
COMPANY COMPANY
FOUR MONTHS FIVE MONTHS DICTAPHONE DICTAPHONE
ENDED ENDED PROFORMA CORPORATION PREDECESSOR PROFORMA CORPORATION
APRIL 30, 2000 SEPT. 30, 2000 ADJUSTMENTS PROFORMA COMPANY ADJUSTMENTS PROFORMA
-------------- -------------- ----------- -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 96,416 $ 86,020 $(12,502) (a) $169,934 $264,132 $(34,078)(a) $230,054
Cost
& Expenses:
Cost
of sales 68,117 51,181 (10,849) (a) 108,449 141,257 (29,013)(a) 112,244
Selling & admini-
strative 39,672 47,521 (4,124) (a)(b) 83,069 79,242 (3,836)(a)(b) 75,406
Amortization of
intangibles 2,945 41,306 30,106 (a)(b) 74,357 9,158 65,206 (a)(b) 74,364
Research &
development 2,492 5,499 --- 7,991 6,979 --- 6,979
-------- ------- ------ ------- ------- ------- -------
Operating
(loss) profit (16,810) (59,487) (27,635) (103,932) 27,496 (66,435) (38,939)
Interest
expense
(benefit) 14,025 15,874 (2,310)(a) 27,589 30,092 (3,374)(a) 26,718
(c)(d) (c)(d)
Other expense 62 152 --- 214 332 --- 332
-------- ------- ------ ------- ------- ------- -------
Loss
before
income
taxes (30,897) (75,513) (25,325) (131,735) (2,928) (63,061) (65,989)
Income
tax
(benefit)
expense (521) (468) --- (989) 1,753 --- 1,753
-------- ------- ------ ------- ------- ------- -------
Net loss $(30,376) $(75,045) $(25,325) $(130,746) $ (4,681) $(63,061) $ (67,742)
======== ======= ====== ======= ====== ======= =========
</TABLE>
10
<PAGE>
6. PROFORMA COMBINED STATEMENTS OF OPERATIONS DATA (CONTINUED)
Notes to Proforma Combined Statements of Operations Data
----------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
PROFORMA PROFORMA
ADJUSTMENTS ADJUSTMENTS
----------- -----------
<S> <C> <C>
a) To reflect the planned disposal
of the Company's Manufacturing Business
Revenue (12,502) $(34,078)
Cost of sales (10,849) (29,013)
Selling & administrative (221) (742)
Amortization of intangibles (768) (1,700)
Interest expense (1,295) (2,796)
b) To reflect the elimination of the
historical amortization of goodwill,
other intangibles and capitalized
software costs and record the
amortization of goodwill, capitalized
software and other intangibles in
connection with the Acquisition of
the Company by Lernout & Hauspie.
Total historical goodwill and
intangible amortization (2,945) (9,158)
Less portion related to the
Company's Manufacturing
Business 768 1,700
-------- --------
Net historical intangible
amortization (2,177) (7,458)
Historical capitalized software
amortization (3,903) (3,094)
Acquisition related
amortization of goodwill,
intangibles & capitalized technology 33,051 74,364
c) To reflect the reduction in interest
expense related to the Company's long
term debt repaid on the date of
the Acquisition and to reflect
additional interest expense associated with
amounts due to Parent Company
recorded in connection with the
Acquisition. Historical interest expense
relating to repaid debt (5,315) (10,478)
Less portion related to the
Company's Manufacturing
Business 491 979
-------- --------
Net historical interest expense
relating to repaid debt (4,824) (9,499)
Interest expense on amounts due
to Parent Company 4,614 10,380
d) To reflect the reduction in the
Company's historical amortization of deferred
financing fees associated with
long term debt repaid on the
date of the Acquisition. (805) (1,459)
</TABLE>
11
<PAGE>
7. CONTINGENCIES
CONTINGENCIES
On February 14, 1995, Pitney Bowes, Inc. ("Pitney Bowes"), the Company's
former parent corporation, 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. Pre-trial proceedings, including claim construction
and dispositive motions are continuing. A trial date in 2001 is likely.
Management believes the Company has meritorious defenses to the claims
against it. Consequently, the Company has not provided for any loss exposure
in connection with this complaint. Additionally, regardless of the outcome
of this litigation, Pitney Bowes has agreed to defend this action and to
indemnify the Company for any liabilities arising from such litigation.
The Company is subject to federal, state and local laws and regulations
concerning the environment and is currently participating in administrative
proceedings as a participant in a group of potentially responsible parties in
connection with two third party disposal sites. These proceedings are in the
preliminary stage, and it is currently impossible to reasonably estimate the
potential costs of remediation, the timing and extent of remedial actions
which may be required by governmental authorities, and the amount of the
liability, if any, of the Company alone or in relation to that of any other
responsible parties. When it is possible to make a reasonable estimate of
the Company's liability with respect to such a matter, a provision will be
made as appropriate. Additionally, the Company has settled and paid its
liability at three other third party disposal sites. At a fourth site, the
Company has paid approximately $11 thousand for its share of the costs of the
first phase of the clean up of the site and management believes that it has
no continuing material liability for any later phases of the cleanup.
Consequently, management believes that its future liability, if any, for
these four sites is not material. In addition, regardless of the outcome of
such matters, Pitney Bowes has agreed to indemnify the Company in connection
with retained environmental liabilities and for breaches of the environmental
representations and warranties in the Stock and Asset Purchase Agreement,
originally executed on April 25, 1995 and amended August 11, 1995 between
Dictaphone Acquisition Corporation and Pitney Bowes subject to certain
limitations.
The Company is a defendant in a number of additional lawsuits and
administrative proceedings, none of which will, in the opinion of management,
have a material adverse effect on the Company's consolidated financial
position or results of operations.
The Company does not believe that the ultimate resolution of the
litigation, administrative proceedings and environmental matters described
above in the aggregate will have a material adverse effect on the Company's
consolidated financial position or results of operations.
12
<PAGE>
7. CONTINGENCIES (CONTINUED)
CONTINGENCIES (CONT.)
In May 2000, Lernout & Hauspie acquired the Company in a merger with a
wholly owned subsidiary of Lernout & Hauspie. As part of the Acquisition of
the Company, Lernout & Hauspie obtained $430 million in credit facilities
(the "L&H Revolving Credit Facility") from a syndicate of banks (the "Banks")
to pay a portion of the purchase price, to repay certain Dictaphone
liabilities and for general corporate purposes. The L&H Revolving Credit
Facility consists of a short-term facility due March 31, 2001 of $200 million
at LIBOR plus 100 basis points (7.761% at September 30, 2000), and a five
year declining balance facility of $230 million at LIBOR plus 175 basis
points (8.511% at September 30, 2000). Borrowings under the five-year
declining balance facility are for renewable terms of up to six months and
therefore will be accounted for as short-term debt by Lernout & Hauspie. In
June 2000, Dictaphone delivered to the Banks a limited guaranty of Lernout &
Hauspie's obligations under the L&H Revolving Credit Facility. The limited
guaranty covers advances under the L&H Revolving Credit Facility used to
repay certain Dictaphone liabilities. When initially delivered, the guarantee
amount was $167 million, the amount advanced under the L&H Revolving Credit
Facility used to satisfy Dictaphone's obligations under the Term Loans and
Revolving Credit Facility with Dictaphone's senior secured lender. In July
2000, the guaranteed amount was increased by $41.6 million, the amount
advanced under the L&H Revolving Credit Facility used to redeem a portion of
Dictaphone's Senior Subordinated Notes due 2005.
8. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION
The following consolidating financial statements include the Company and
all majority-owned subsidiaries as follows: Dictaphone Canada Ltd/Ltee,
Dictaphone Company Ltd., Dictaphone Deutschland GmbH and Dictaphone
International A.G. (together "Dictaphone Non-U.S.").
Dictaphone Corporation (U.S.), the Company's wholly owned U.S.
subsidiary, fully and unconditionally guaranteed the repayment of $200.0
million of 11-3/4% Senior Subordinated Notes Due 2005 (the "Notes") issued to
finance the acquisition of the Company from Pitney Bowes. 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. As a
result of the Acquisition, the Noteholders had the option to put the Notes to
the Company. In July 2000, holders of $41.6 million of the Notes exercised
that right and those Notes were redeemed. The Company had $158.4 million of
Notes outstanding as of September 30, 2000.
13
<PAGE>
8. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
The following are the supplemental consolidating statement of operations
for the three and five month periods ended September 30, 2000, the
supplemental consolidating balance sheet information as of September 30,
2000, and cash flow information for the five month period ended September 30,
2000.
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
THREE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
------------ ----------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue from:
Product sales and rentals $ 31,876 $3,896 $(1,129) $ 34,643
Support services 21,948 1,779 --- 23,727
-------- ------ ------- --------
Total revenues 53,824 5,675 (1,129) 58,370
-------- ------ ------- --------
Costs and expenses:
Cost of :
Product sales and rentals 16,643 2,539 (697) 18,485
Support services 13,953 1,437 --- 15,390
-------- ------ ------- --------
Total cost 30,596 3,976 (697) 33,875
-------- ------ ------- --------
Selling and administrative, including
amortization of intangibles 51,435 2,553 --- 53,988
Research and development 3,340 --- --- 3,340
Interest expense (net) and other expense 8,917 (186) --- 8,731
-------- ------ ------- --------
Total costs and expenses 94,288 6,343 (697) 99,934
-------- ------ ------- --------
Loss before income taxes (40,464) (668) (432) (41,564)
Income tax expense (benefit) 19 (85) (175) (241)
-------- ------ ------- --------
Net loss $(40,483) $ (583) $ (257) $(41,323)
======== ====== ======= ========
</TABLE>
14
<PAGE>
8. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
FIVE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
------------ ----------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue from:
Product sales and rentals $ 48,259 $ 6,333 $(4,485) $ 50,107
Support services 32,967 2,946 --- 35,913
-------- ------- ------- --------
Total revenues 81,226 9,279 (4,485) 86,020
-------- ------- ------- --------
Costs and expenses:
Cost of:
Product sales and rentals 24,429 4,591 (4,053) 24,967
Support services 23,731 2,483 --- 26,214
-------- ------- ------- --------
Total cost 48,160 7,074 (4,053) 51,181
-------- ------- ------- --------
Selling and administrative, including
amortization of intangibles 84,396 4,140 --- 88,827
Research and development 5,499 --- --- 5,499
Interest expense (net) and other expense 14,949 1,077 --- 16,026
-------- ------- ------- --------
Total costs and expenses 153,295 12,291 (4,053) 161,533
-------- ------- ------- --------
Loss before income taxes (72,069) (3,012) (432) (75,513)
Income tax expense (benefit) 32 (325) (175) (468)
-------- ------- ------- --------
Net loss $(72,101) $(2,687) $ (257) $(75,045)
======== ======= ======= ========
</TABLE>
15
<PAGE>
8. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ (82) $ 1,654 $ --- $ 1,572
Accounts receivable, less allowances 71,279 6,731 (19) 77,991
Receivable due from affiliate 5,010 1,949 (5,618) 1,341
Inventories 11,895 2,759 (419) 14,235
Assets to be disposed of 35,349 --- --- 35,349
Other current assets 3,167 1,049 175 4,391
-------- ------- -------- --------
Total current assets 126,618 14,142 (5,881) 134,879
Investments in subsidiaries 16,751 --- (16,751) ---
Property, plant and equipment, net 30,393 2,313 --- 32,706
Intangibles, net 805,451 12,473 --- 817,924
Other assets 3,813 1,786 --- 5,599
-------- ------- -------- --------
Total assets $983,026 $30,714 $(22,632) $991,108
======== ======= ======== ========
LIABILITIES AND STOCKHOLDER'S
EQUITY
Current liabilities:
Accounts payable, interest payable
and accrued liabilities $ 17,765 $13,292 $ (5,884) $ 25,173
Payable due to affiliates 19,018 --- --- 19,018
Advance billings 64,030 3,165 --- 67,195
Current portion of long-term debt 10,000 123 --- 10,123
-------- ------- -------- --------
Total current liabilities 110,813 16,580 (5,884) 121,509
Long-term debt 315,416 16,491 (16,491) 315,416
Due to Parent Company 16,000 --- --- 16,000
Accrued pension liability 5,950 --- --- 5,950
Deferred tax liability 2,600 --- --- 2,600
Other liabilities 10,903 328 --- 11,231
Stockholder's equity (deficit) 521,344 (2,685) (257) 518,402
-------- ------- -------- --------
Total liabilities and stockholder's equity $983,026 $30,714 $(22,632) $991,108
======== ======= ======== ========
</TABLE>
16
<PAGE>
8. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
Dictaphone Corporation (Successor Company)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
FIVE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss $(72,101) $(2,687) $(257) $(75,045)
Adjustments to reconcile net
loss
to net cash used in operating
activities:
Depreciation and amortization 43,647 1,056 --- 44,703
Change in assets and
liabilities:
Accounts receivable (10,924) 982 4 (9,938)
Inventories 394 (1,679) 432 (853)
Other current assets (4,608) (150) (175) (4,933)
Accounts payable and accrued
liabilities (287) 2,417 (188) 1,942
Advance billings 21,348 778 --- 22,126
Other assets and other
liabilities 1,151 564 184 1,899
-------- ------- ---- --------
Net cash (used in) provided
by operating activities (21,380) 1,281 --- (20,099)
-------- ------- ---- --------
Investing activities:
Net investment in fixed assets (1,607) (461) --- (2,068)
Licenses and software
development
costs capitalized (3,750) --- --- (3,750)
-------- ------- ---- --------
Net cash used in investing
activities (5,357) (461) --- (5,818)
-------- ------- ---- --------
Financing activities:
Redemption of notes (41,584) --- --- (41,584)
Borrowings from revolving
credit facility 17,700 --- --- 17,700
Repayments under revolving
credit facility (7,700) --- --- (7,700)
Capital from Parent Company 54,000 --- --- 54,000
Other (472) (85) --- (557)
-------- ------- ---- --------
Net cash provided by (used in)
financing
activities 21,944 (85) --- 21,859
-------- ------- ---- --------
Effect of exchange rate changes
on cash --- (30) --- (30)
-------- ------- ---- --------
(Decrease) increase in cash (4,793) 705 --- (4,088)
Cash and cash equivalents,
beginning of period 4,711 949 --- 5,660
-------- ------- ---- --------
Cash and cash equivalents,
end of period $ (82) $ 1,654 $--- $ 1,572
======== ======= ==== ========
</TABLE>
17
<PAGE>
9. COMPREHENSIVE LOSS
Total comprehensive loss for the five months ended September 30, 2000
consists of the following:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
SEPTEMBER 30, 2000
-------------------
<S> <C>
Net loss $(75,045)
Foreign currency translation
adjustments 2
--------
Total comprehensive loss $(75,045)
========
</TABLE>
10. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION
As a result of the Company's announcement of its intention to dispose of
its manufacturing business, Dictaphone has one reportable segment: System
Products and Services. 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 CORPORATION (SUCCESSOR COMPANY)
SEGMENT PROFIT AND LOSS AND ASSETS
<TABLE>
<CAPTION>
SYSTEM
PRODUCTS &
SERVICES
--------
<S> <C>
Revenue from external customers
Five months ended September 30, 2000 $ 86,020
Intersegment revenues
Five months ended September 30, 2000 ---
Segment loss before income taxes
Five months ended September 30, 2000 (75,513)
Total assets as of September 30, 2000 991,108
Manufacturing business assets to be disposed of (35,349)
--------
Segment assets $955,759
</TABLE>
11. SUBSEQUENT EVENT
On November 9, 2000, Lernout & Hauspie announced that it intends to
restate its financial statements for the periods of 1998, 1999 and the first
half of 2000. Previously Lernout & Hauspie had announced that it was the
subject of a U.S. SEC investigation and a defendant in a number of class
action lawsuits, all of which primarily relate to Lernout & Hauspie's
financial statements. As of the date of this report, the Company does not
believe that either the SEC investigation or the class action lawsuits
involve any allegations regarding the Company's financial statements.
18
<PAGE>
11. SUBSEQUENT EVENT (CONTINUED)
As a result of the concerns raised by the recent events, the Company and
Lernout & Hauspie have been in discussions with their lenders concerning the
L&H Revolving Credit Facility, Dictaphone's limited guaranty of that facility
(the "Dictaphone Guaranty"), the Line of Credit and Lernout & Hauspie's
guaranty of the Line of Credit ("L&H Guaranty"). A substantial portion of the
proceeds advanced under the L&H Revolving Credit Facility were re-advanced to
the Company to refinance the Company's former revolving credit and term loan
facilities, to pay interest on the Notes, and to meet working capital and
other obligations of the Company.
Lernout & Hauspie's lenders under the L&H Revolving Credit Facility have
asserted that an event of default may exist under that facility and the
associated Dictaphone Guaranty, however, they have not declared an event of
default. Deutsche Bank, Dictaphone's lender under the Line of Credit, also
has asserted that an event of default exists under the Line of Credit, but
similarly has not yet accelerated the Line of Credit. Deutsche Bank has,
however, declared an event of default under the L&H Guaranty. The Company has
not admitted that an event of default exists under the Line of Credit.
Lernout & Hauspie and the Company are in discussions with their lenders
regarding the alleged defaults and the restructuring of the underlying loans
and guarantees.
The Company anticipates that in connection with their discussions with
Deutsche Bank and the other lenders to Lernout & Hauspie, the Company and
Lernout & Hauspie likely will need to obtain waivers or amendments with
respect to the Line of Credit, the L&H Revolving Credit Facility and the
associated guarantees. The Company cannot assure, however, that such waivers
or amendments, if necessary, can be obtained. Moreover, even if the Company
restructures its obligations under the Line of Credit, the Company does not
anticipate that Deutsche Bank will permit any further draws under the Line of
Credit. As of November 8, 2000, the balance under the Line of Credit was
approximately $14.8 million and Deutsche Bank has indicated that the Company
may have to pay down the Line of Credit to $12.6 million as a condition of
any waivers of the events of default that Deutsche Bank has claimed exist.
In addition, while L&H has requested that its lenders restore L&H's ability
to borrow up to the full amount of the L&H Revolving Credit Facility, there
is no assurance that any further advances will be permitted under such
facility. Deutsche Bank and the lenders under the L&H Revolving Credit
Facility have also indicated that they may seek to obtain liens on certain of
L&H's and Dictaphone's assets as a condition of such a waiver.
The Company has a $9.3 million payment due on February 1, 2001 to satisfy
a semi-annual interest payment due on the Notes. The Company's $7 million
interest payment due to Lernout & Hauspie on the intercompany debt,
originally due November 5, 2000, has been deferred for six months.
Notwithstanding whether any defaults exist under the L&H Revolving Credit
Facility, unless such date is extended as part of restructuring, on March 31,
2001, $200 million becomes due thereunder by its terms. Pursuant to the
Dictaphone Guaranty, the Company, as well as Lernout & Hauspie as a direct
obligor, will be liable for that $200 million obligation. While the Company's
and Lernout & Hauspie's discussions with their lenders include a request to
defer the March 31, 2001 payment, the Company does not anticipate that it
will have sufficient resources to make the March 31, 2001 payment if called
upon to do so under the Dictaphone Guaranty on such date. If the Company and
Lernout & Hauspie are not successful in restructuring their obligations under
the L&H Revolving Credit Facility and the lenders thereunder declare an event
of default thereunder and demand payment under the Dictaphone Guaranty, a
default would then exist under the Indenture concerning the Notes. In such
circumstances, the Company will not have sufficient resources to pay its
obligations in respect of the Dictaphone Guaranty of the L&H Revolving Credit
Facility, the Deutsche Bank Line of Credit and its obligation to pay interest
(and, if an event of default exists thereunder, principal) on the Notes and
to fund its working capital obligations and planned capital expenditures.
While the Company is cautiously optimistic that such financial
accommodations can be reached, and that such accommodations could provide the
Company with sufficient resources to make its February 1, 2001 interest
payment, the Company cannot assure that it will be successful. The Company
also is actively pursuing the sale of its manufacturing facility in
Melbourne, Florida. The ability of the Company to complete this sale would
further improve the Company's liquidity, but the sales proceeds, if realized,
would be insufficient by themselves to allow the Company to meet all of its
obligations if it and L&H are unsuccessful in restructuring the L&H Revolving
Credit Facility.
19
<PAGE>
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
FOUR MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED
APRIL 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
--------------- ------------------- -------------------
<S> <C> <C> <C>
Revenues:
Product sales and rentals $ 48,617 $60,066 $156,833
Contract manufacturing sales 12,502 10,830 34,078
Support services 35,297 24,965 73,221
-------- ------- --------
Total revenues 96,416 95,861 264,132
-------- ------- --------
Costs and expenses:
Cost of:
Product sales & rentals 36,592 28,011 71,086
Contract manufacturing sales 10,745 9,133 28,853
Support services 20,780 14,361 41,318
-------- ------- --------
Total cost 68,117 51,505 141,257
-------- ------- --------
Selling and administrative 39,672 27,877 79,242
Amortization of intangibles 2,945 2,681 9,158
Research and development 2,492 2,099 6,979
-------- ------- --------
Operating (loss) profit (16,810) 11,699 27,496
Interest expense 14,025 10,029 30,092
Other expense (income) - net 62 (45) 332
-------- ------- --------
(Loss) income before income taxes (30,897) 1,715 (2,928)
Income tax (benefit) expense (521) 832 1,753
-------- ------- --------
Net (loss) income (30,376) 883 (4,681)
Stock dividends on PIK Preferred Stock 2,210 1,527 4,237
-------- ------- --------
Net loss applicable to Common Stock $(32,586) $ (644) $ (8,918)
======== ======= ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
20
<PAGE>
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1999
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,190
Accounts receivable, less allowance of $1,801 100,834
Inventories 49,759
Other current assets 6,152
---------
Total current assets 162,935
Property, plant and equipment, net 37,489
Deferred financing costs, net of accumulated amortization of $16,145 8,141
Intangibles, net of accumulated amortization of $133,964 194,865
Deferred tax asset 39,934
Other assets 17,774
---------
Total assets $ 461,138
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,755
Interest payable 9,965
Accrued liabilities 30,928
Advance billings 49,100
Current portion of long-term debt 790
---------
Total current liabilities 102,538
Long-term debt 353,443
Accrued pension liability 9,953
Other liabilities 12,806
---------
Total liabilities 478,740
---------
Contingencies (Note 7)
Stockholders' equity:
Preferred stock ($.01 par value; 7,500,000 shares authorized; 2,742,400
shares of 14% PIK perpetual preferred stock
issued and outstanding, liquidation value of $27,424
at December 31, 1999) 27,424
Preferred stock ($.01 par value; 10,000,000 shares authorized;
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 outstanding at December 31, 1999) 130
Notes receivable from stockholders (741)
Additional paid-in capital 115,140
Treasury stock, at cost (66,000 shares at December 31, 1999) (660)
Accumulated deficit (179,360)
Accumulated other comprehensive loss (1,841)
------
Total stockholders' equity (deficit) (17,602)
---------
Total liabilities and stockholders' equity $ 461,138
=========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
21
<PAGE>
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
FOUR MONTHS NINE MONTHS
ENDED ENDED
APRIL 30, 2000 SEPTEMBER 30, 1999
--------------- -------------------
<S> <C> <C>
Operating activities:
Net loss $(30,376) $ (4,681)
Adjustments to reconcile net loss to net
cash
provided by (used in) operating
activities:
Depreciation and amortization 10,376 18,225
Provision for deferred income taxes 44 453
Non-cash provision for doubtful accounts
(Note 2) 3,951 ---
Non-cash provision for inventory
obsolescence (Note 3) 9,206 ---
Changes in assets and liabilities:
Accounts receivable 20,321 (15,682)
Inventories 1,025 8,126
Other current assets (1,564) 828
Accounts payable and accrued
liabilities (14,343) (1,066)
Advance billings (1,054) 5,664
Other assets and other liabilities (1,042) (1,046)
-------- --------
Net cash (used in) provided by
operating activities (3,456) 10,821
-------- --------
Investing activities:
Net investment in fixed assets (5,315) (8,457)
Licenses and software development costs
capitalized (4,852) (7,516)
-------- --------
Net cash used in investing activities (10,167) (15,973)
-------- --------
Financing activities:
Sale of preferred stock --- 20,000
Borrowings under revolving credit facility 18,250 31,000
Repayments under revolving credit facility (4,250) (47,500)
Repayments under term loans 439 ---
Other (1,336) (1,293)
-------- --------
Net cash provided by financing activities 13,103 2,207
-------- --------
Effect of exchange rate changes on cash (10) (40)
-------- --------
Decrease in cash (530) (2,985)
Cash and cash equivalents, beginning of
period 6,190 11,727
-------- --------
Cash and cash equivalents, end of period $ 5,660 $ 8,742
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 17,254 $ 34,699
======== ========
Income taxes paid $ 993 $ 201
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
22
<PAGE>
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands, or as otherwise indicated)
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
On March 7, 2000, the Company entered into a definitive agreement to be
acquired by Lernout & Hauspie Speech Products, N.V. On May 5, 2000 Lernout &
Hauspie acquired all of the outstanding stock of the Company for
approximately 9.4 million shares of Lernout & Hauspie Common Stock, taking
into account the two-for-one stock split (of Lernout & Hauspie) effected as
of May 12, 2000, through the merger of the Company with a wholly owned
subsidiary of Lernout & Hauspie. In connection with the Acquisition, a
portion of the Company's approximately $430 million of debt and other
obligations were paid off or refinanced by an advance made to the Company by
Lernout & Hauspie.
The capital structure and accounting basis of the assets and liabilities
of the Company as of May 1, 2000 and thereafter differ from those of the
Company prior to its acquisition (the "Predecessor Company") as a result of
the application of purchase accounting. The Acquisition is being accounted
for under the purchase method of accounting in accordance with Accounting
Principles Board Opinion No. 16, Accounting for Business Combinations. The
total purchase price has been allocated to tangible and intangible assets and
liabilities of the Company based on preliminary estimates of their respective
fair values. Accordingly, the allocation of the purchase price reflected in
the accompanying condensed consolidated balance sheet will be adjusted upon
final determination of the purchase price adjustments and upon the final
results of gathering certain necessary information. The final asset and
liability values may differ from those set forth in such balance sheet,
however, the changes are not expected to have a material effect on the
results of operations or financial position of the Company.
The condensed consolidated financial statements of Dictaphone Corporation
are unaudited as of and for the four month period ended April 30, 2000 and
the three and nine month periods ended September 30, 1999, but in the opinion
of management contain all adjustments which are of a normal and recurring
nature necessary to present fairly the financial position and results of
operations and cash flows for the periods presented. These financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
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.
2. ACCOUNTS RECEIVABLE
It is the Company's policy to review its allowance for doubtful accounts
and reserve for sales returns on a regular basis. As a result of such a
review in the second quarter of 2000, the Company increased its allowance for
doubtful accounts reserve to reflect a reduction in over 90 day account
collections and specifically identified accounts receivable risks, and
increased its sales returns reserve for an elevated sales returns and
allowances profile associated with recently introduced product offerings.
The effect of these changes in estimates was to record non-cash charges of
$1.8 million and $2.2 million for bad debts and sales returns, respectively.
23
<PAGE>
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
1999
-----------
Raw materials and work in process $23,376
Supplies and service parts 11,083
Finished products 15,300
-------
Total inventories $49,759
=======
During the three months ended March 31, 2000, the Company recorded a non-
cash charge of $9.2 million associated with the provision for excess field
service parts and inventory primarily related to products recently replaced
by newly introduced products. With the production of Freedom(TM) in the first
quarter of 2000, the Company provided for excess inventory associated with
those products that the Freedom(TM) product would replace, recording this
charge as an inventory provision.
4. INTANGIBLES
The following summarizes intangible assets, net of accumulated
amortization and writedowns of $133,964 at December 31, 1999. Amortization
expense for the four months ended April 30, 2000 and the three and nine
months ended September 30, 1999 was $2,945, $2,681 and $9,158, respectively.
DECEMBER 31,
1999
------------
Goodwill $123,737
Tradenames 69,318
Non-compete agreement 1,041
Patents 769
--------
$194,865
========
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133
requires that derivative instruments be recognized as either assets or
liabilities in the consolidated balance sheet based on their fair values.
Changes in the fair values of such derivative instruments will be recorded
either in results of operations or in other comprehensive income, depending
on the intended use of the derivative instrument. The initial application of
SFAS 133 will be reported as the effect of a change in accounting principle.
SFAS 133, as amended, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company will adopt the requirements of
SFAS 133 in its financial statements for the year ending December 31, 2001.
The Company does not believe that the adoption of SFAS 133 will have a
material impact on its financial position, results of operations or
liquidity.
24
<PAGE>
6. CONTINGENCIES
CONTINGENCIES
On February 14, 1995, Pitney Bowes, Inc. ("Pitney Bowes"), the Company's
former parent corporation, 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 2001 is likely.
Management believes the Company has meritorious defenses to the claims
against it. Consequently, the Company has not provided for any loss exposure
in connection with this complaint. Additionally, regardless of the outcome
of this litigation, Pitney Bowes has agreed to defend this action and to
indemnify the Company for any liabilities arising from such litigation.
The Company is subject to federal, state and local laws and regulations
concerning the environment and is currently participating in administrative
proceedings as a participant in a group of potentially responsible parties in
connection with two third party disposal sites. These proceedings are in the
preliminary stage, and it is currently impossible to reasonably estimate the
potential costs of remediation, the timing and extent of remedial actions
which may be required by governmental authorities, and the amount of the
liability, if any, of the Company alone or in relation to that of any other
responsible parties. When it is possible to make a reasonable estimate of
the Company's liability with respect to such a matter, a provision will be
made as appropriate. Additionally, the Company has settled and paid its
liability at three other third party disposal sites. At a fourth site, the
Company has paid approximately $11 thousand for its share of the costs of the
first phase of the clean up of the site and management believes that it has
no continuing material liability for any later phases of the cleanup.
Consequently, management believes that its future liability, if any, for
these four sites is not material. In addition, regardless of the outcome of
such matters, Pitney Bowes has agreed to indemnify the Company in connection
with retained environmental liabilities and for breaches of the environmental
representations and warranties in the Stock and Asset Purchase Agreement,
originally executed on April 25, 1995 and amended August 11, 1995 between
Dictaphone Acquisition Corporation and Pitney Bowes subject to certain
limitations.
The Company is a defendant in a number of additional lawsuits and
administrative proceedings, none of which will, in the opinion of management,
have a material adverse effect on the Company's consolidated financial
position or results of operations.
The Company does not believe that the ultimate resolution of the
litigation, administrative proceedings and environmental matters described
above in the aggregate will have a material adverse effect on the Company's
consolidated financial position or results of operations.
25
<PAGE>
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION
The following consolidating financial statements include the Company and
all majority-owned subsidiaries as follows: Dictaphone Canada Ltd/Ltee,
Dictaphone Company Ltd., Dictaphone Deutschland GmbH and Dictaphone
International A.G. (together "Dictaphone Non-U.S.").
Dictaphone Corporation (U.S.), the Company's wholly owned U.S.
subsidiary, has fully and unconditionally guaranteed the repayment of $200.0
million of 11-3/4% Senior Subordinated Notes Due 2005 (the "Notes") issued to
finance the acquisition of the Company from Pitney Bowes. 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. As a
result of the Acquisition, the Noteholders had the option to put the Notes to
the Company. In July 2000, holders of $41.6 million of the Notes exercised
that right and those Notes were redeemed. The Company had $158.4 million of
Notes outstanding as of September 30, 2000.
26
<PAGE>
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
The following are the supplemental consolidating statements of operations
for the four month period ended April 30, 2000 and the three and nine month
periods ended September 30, 1999, the supplemental consolidating balance
sheet information as of December 31, 1999, and cash flows information for the
four month period ended April 30, 2000 and nine month period ended September
30, 1999.
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
FOUR MONTHS ENDED APRIL 30, 2000
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
------------ ----------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue from:
Product sales and rentals $ 46,356 $ 6,957 $(4,696) $ 48,617
Contract manufacturing sales 12,502 --- --- 12,502
Support services 32,846 2,451 --- 35,297
-------- ------- ------- --------
Total revenues 91,704 9,408 (4,696) 96,416
-------- ------- ------- --------
Costs and expenses:
Cost of:
Product sales and rentals 35,250 5,910 (4,568) 36,592
Contract manufacturing sales 10,745 --- --- 10,745
Support services 18,690 2,090 --- 20,780
-------- ------- ------- --------
Total cost 64,685 8,000 (4,568) 68,117
-------- ------- ------- --------
Selling and administrative, including
amortization of intangibles 39,870 2,747 --- 42,617
Research and development 2,492 --- --- 2,492
Interest expense (net) and other expense 13,293 794 --- 14,087
-------- ------- ------- --------
Total costs and expenses 120,340 11,541 (4,568) 127,313
-------- ------- ------- --------
Equity (loss) earnings (1,124) --- 1,124 ---
-------- ------- ------- --------
(Loss) income before income taxes (29,760) (2,133) 996 (30,897)
Income tax expense (benefit) 28 (497) (52) (521)
-------- ------- ------- --------
Net (loss) income $(29,788) $(1,636) $ 1,048 $(30,376)
======== ======= ======= ========
</TABLE>
27
<PAGE>
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
THREE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
----------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
Revenue from:
Product sales and rentals $56,629 $ 7,967 $(4,530) $60,066
Contract manufacturing sales 10,830 --- --- 10,830
Support services 22,495 2,470 --- 24,965
------- ------- ------- -------
Total revenues 89,954 10,437 (4,530) 95,861
------- ------- ------- -------
Costs and expenses:
Cost of:
Product sales and rentals 28,338 4,203 (4,530) 28,011
Contract manufacturing sales 9,133 --- --- 9,133
Support services 12,957 1,404 --- 14,361
------- ------- ------- -------
Total cost 50,428 5,607 (4,530) 51,505
------- ------- ------- -------
Selling and administrative, including
amortization of intangibles 28,433 2,125 --- 30,558
Research and development 2,099 --- --- 2,099
Interest expense (net) and other expense 9,453 531 --- 9,984
------- ------- ------- -------
Total costs and expenses 90,413 8,263 (4,530) 94,146
------- ------- ------- -------
Equity earnings (loss) 1,801 --- (1,801) ---
------- ------- ------- -------
Income (loss) before income taxes 1,342 2,174 (1,801) 1,715
Income tax expense 21 811 --- 832
------- ------- ------- -------
Net income (loss) $ 1,321 $ 1,363 $(1,801) $ 883
======= ======= ======= =======
</TABLE>
28
<PAGE>
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
Dictaphone Corporation (Predecessor Company)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
DICTAPHONE DICTAPHONE CONSOLIDATING
CORPORATION NON-U.S. ADJUSTMENTS CONSOLIDATED
------------ ---------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue from:
Product sales and rentals $146,159 $20,225 $(9,551) $156,833
Contract manufacturing sales 34,078 --- --- 34,078
Support services 66,267 6,954 --- 73,221
-------- ------- ------- --------
Total revenues 246,504 27,179 (9,551) 264,132
-------- ------- ------- --------
Costs and expenses:
Cost of:
Product sales and rentals 69,723 11,018 (9,655) 71,086
Contract manufacturing sales 28,853 --- --- 28,853
Support services 37,468 3,850 --- 41,318
-------- ------- ------- --------
Total cost 136,044 14,868 (9,655) 141,257
-------- ------- ------- --------
Selling and administrative, including
amortization of intangibles 81,836 6,564 --- 88,400
Research and development 6,979 --- --- 6,979
Interest expense (net) and other expense 28,292 2,132 --- 30,424
-------- ------- ------- --------
Total costs and expenses 253,151 23,564 (9,655) 267,060
-------- ------- ------- --------
Equity earnings (loss) 2,874 --- (2,874) ---
-------- ------- ------- --------
(Loss) income before income taxes (3,773) 3,615 (2,770) (2,928)
Income tax expense 66 1,645 42 1,753
-------- ------- ------- --------
Net (loss) income $ (3,839) $ 1,970 $(2,812) $ (4,681)
======== ======= ======= ========
</TABLE>
29
<PAGE>
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
Dictaphone Corporation (Predecessor Company)
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>
30
<PAGE>
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
Dictaphone Corporation (Predecessor Company)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
FOUR MONTHS ENDED APRIL 30, 2000
<TABLE>
<CAPTION>
Dictaphone Dictaphone Consolidating
Corporation NON-U.S. ADJUSTMENTS CONSOLIDATED
------------ ----------- -------------- -------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss $(29,788) $(1,636) $ 1,048 $(30,376)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 9,865 511 --- 10,376
Provision for deferred income taxes --- 44 --- 44
Non-cash provisions for doubtful accounts
and sales returns 3,951 --- --- 3,951
Non-cash provision for inventory
obsolescence 7,919 1,287 --- 9,206
Change in assets and liabilities:
Accounts receivable 16,563 734 3,024 20,321
Inventories 1,331 (434) 128 1,025
Other current assets (1,391) (121) (52) (1,564)
Accounts payable and accrued
liabilities (10,728) (515) (3,100) (14,343)
Advance billings (999) (55) --- (1,054)
Other assets and other liabilities 341 (335) (1,048) (1,042)
-------- ------- ------- --------
Net cash used in operating activities (2,936) (520) --- (3,456)
-------- ------- ------- --------
Investing activities:
Net investment in fixed assets (5,305) (10) --- (5,315)
Licenses and software development costs
capitalized (4,852) --- --- (4,852)
-------- ------- ------- --------
Net cash used in investing activities (10,157) (10) --- (10,167)
-------- ------- ------- --------
Financing activities:
Sale of preferred stock --- --- --- ---
Borrowings from revolving credit facility 18,250 --- --- 18,250
Repayments under revolving credit facility (4,250) --- --- (4,250)
Repayments under term loans 439 --- --- 439
Other (1,230) (106) --- (1,336)
-------- ------- ------- --------
Net cash provided by (used in) financing
activities 13,209 (106) --- 13,103
-------- ------- ------- --------
Effect of exchange rate changes on cash --- (10) --- (10)
-------- ------- ------- --------
Increase (decrease) in cash 116 (646) --- (530)
Cash and cash equivalents,
beginning of period 4,595 1,595 --- 6,190
-------- ------- ------- --------
Cash and cash equivalents,
end of period $ 4,711 $ 949 $ --- $ 5,660
======== ======= ======= ========
</TABLE>
31
<PAGE>
7. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
INFORMATION (Continued)
DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Dictaphone Dictaphone Consolidating
Corporation NON-U.S. ADJUSTMENTS CONSOLIDATED
------------ ------------ -------------- -------------
<S> <C> <C> <C> <C>
Operating activities:
Net (loss) income $ (3,839) $ 1,970 $ (2,812) $ (4,681)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 16,963 1,262 --- 18,225
Provision for deferred income taxes --- 130 323 453
Change in assets and liabilities:
Accounts receivable (8,668) (5,294) (1,720) (15,682)
Inventories 7,084 1,146 (104) 8,126
Other current assets 1,167 (58) (281) 828
Accounts payable and accrued
liabilities (3,752) 1,266 1,420 (1,066)
Advance billings 5,464 200 --- 5,664
Other assets and other liabilities (3,684) (536) 3,174 (1,046)
------ ------- -------- -------
Cash provided by operating activities 10,735 86 --- 10,821
------ ------- -------- -------
Investing activities:
Net investment in fixed assets (8,110) (347) --- (8,457)
Licenses and software development costs
capitalized (7,516) --- --- (7,516)
------ ------- -------- -------
Cash used in investing activities (15,626) (347) --- (15,973)
------ ------- -------- -------
Financing activities:
Sale of Preferred Stock 20,000 --- --- 20,000
Borrowing from revolving credit facility 31,000 --- --- 31,000
Repayment under revolving credit facility (47,500) --- --- (47,500)
Other (862) (431) --- (1,293)
------ ------- -------- -------
Cash provided by (used in) financing
activities 2,638 (431) --- 2,207
------ ------- -------- -------
Effect of exchange rate changes on cash --- (40) --- (40)
------ ------- -------- -------
Decrease in cash (2,253) (732) --- (2,985)
Cash and cash equivalents,
beginning of period 10,114 1,613 --- 11,727
------ ------- -------- -------
Cash and cash equivalents,
end of period $ 7,861 $ 881 $ --- $ 8,742
======= ======== ========== ======
</TABLE>
32
<PAGE>
8. COMPREHENSIVE INCOME (LOSS)
Total comprehensive loss for the four months ending April 30, 2000 and
three and nine months ending September 30, 1999 consists of the following:
<TABLE>
<CAPTION>
Four Months THREE MONTHS NINE MONTHS
Ended Ended Ended
April 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
--------------- ------------------- -------------------
<S> <C> <C> <C>
Net (loss) income $(30,376) $883 $(4,681)
Foreign currency translation
adjustments (188) (20) (189)
-------- ---- -------
Total comprehensive income (loss) $(30,564) $863 $(4,870)
======== ==== =======
</TABLE>
9. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION
Predecessor Company had 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.
33
<PAGE>
9. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION (CONTINUED)
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 (PREDECESSOR COMPANY)
SEGMENT PROFIT AND LOSS AND ASSETS
<TABLE>
<CAPTION>
SYSTEM
PRODUCTS & CONTRACT
SERVICES MANUFACTURING TOTAL
----------- ------------- ---------
<S> <C> <C> <C> <C>
Revenue from external customers
Three months ended September 30, 1999 85,031 10,830 95,861
Four months ended April 30, 2000 83,914 12,502 96,416
Nine months ended September 30, 1999 230,054 34,078 264,132
Intersegment revenues
Three months ended September 30, 1999 --- 9,097 9,097
Four months ended April 30, 2000 --- 9,428 9,428
Nine months ended September 30, 1999 --- 28,984 28,984
Segment profit (loss)
Three months ended September 30, 1999 450 1,265 1,715
Four months ended April 30, 2000 (31,271) 374 (30,897)
Nine months ended September 30, 1999 (6,862) 3,934 (2,928)
Segment assets
As of December 31, 1999 $416,523 $44,615 $461,138
</TABLE>
34
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following financial information presents the combined historical
results of operations of Predecessor Company and Successor Company for the
three and nine month periods ended September 30, 1999 and 2000. Results of
operations of the Predecessor and Successor Company are not comparable
because their assets are carried on a different basis of accounting,
resulting mainly in the increase in amortization expense of intangibles as
described below. Accordingly, this presentation is not representative of
either what the results of operations of the Company would have been had the
Acquisition been consummated on January 1, 1999 and 2000 or the results of
operations to be expected for the remainder of the year.
Overview
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 2000 1999 2000
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Total revenue $95.9 $ 58.4 $264.1 $ 182.4
Cost of sales, rentals and support services 51.5 33.9 141.2 119.3
Selling and administrative expense (1) 30.6 54.0 88.4 131.4
Research and development 2.1 3.3 7.0 8.0
----- ------ ------ -------
Operating profit (loss) 11.7 (32.8) 27.5 (76.3)
----- ------ ------ -------
Net interest expense and other 10.0 8.7 30.4 30.1
Income tax (expense) benefit (0.8) 0.2 (1.8) 1.0
----- ------ ------ -------
Net income (loss) $ 0.9 $(41.3) $ (4.7) $(105.4)
===== ====== ====== =======
</TABLE>
_____________________
(1) Includes amortization of intangibles.
35
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -----------------
1999 2000 1999 2000
----- ----- ------ ------
(in millions)
<S> <C> <C> <C> <C>
Revenue from:
Sales:
Integrated Voice Systems $12.2 $ 4.4 $ 26.4 $ 13.8
Integrated Health Systems 19.5 9.3 49.0 26.3
----- ----- ------ ------
Total U.S. Voice Systems 31.7 13.7 75.4 40.1
----- ----- ------ ------
Communication Recording Systems 12.5 10.5 37.2 24.9
Customer Service Parts 4.4 4.5 12.3 11.7
International and Dealer Operations 11.3 6.0 31.0 21.4
Rentals 0.3 --- 0.9 0.6
----- ----- ------ ------
Product Sales and Rentals 60.1 34.7 156.8 98.7
----- ----- ------ ------
Support Service:
Customer Service 21.0 20.8 62.5 61.6
Applications & Training Specialists 1.5 1.1 3.7 4.2
International and Dealer Operations 2.5 1.8 7.0 5.4
----- ----- ------ ------
Total support service 25.0 23.7 73.2 71.2
----- ----- ------ ------
Total System Products and Services 85.1 59.0 230.0 169.9
Contract Manufacturing 10.8 --- 34.1 12.5
----- ----- ------ ------
Total Revenue $95.9 $59.0 $264.1 $182.4
===== ===== ====== ======
</TABLE>
RESULTS OF OPERATIONS - THIRD QUARTER 2000 VS. THIRD QUARTER 1999
Total revenue declined 39.1% to $58.4 million in the third quarter of 2000
from $95.9 million for the third quarter of 1999. This decline in revenue is
attributable to certain strategic decisions made by management upon the
acquisition of the Company by Lernout & Hauspie with regard to the incorporation
of Lernout & Hauspie technologies into the Company's products. This new
strategic direction which will result in increased software content in the
majority of the Company's products combined with an increased level of
customization of the Company's products at customer sites upon installation
resulted in the change to recognize revenue for the affected products upon
installation (which reduced revenue by $4.2 million). Two other factors are the
absence of Contract Manufacturing revenue consistent with the decision to
dispose of Manufacturing Operations (which represented $10.8 million), as well
as lower revenue due to the impact the Acquisition had on the Company's
organizational structure and product development process caused by management's
focus on incorporating new Lernout & Hauspie technology into the Company's
products.
Integrated Voice Systems ("I.V.S.") revenue declined 63.9% to $4.4 million
from $12.2 million due to lower Enterprise Express(TM) revenue. The decline in
Integrated Health Systems ("I.H.S.") revenue which decreased 52.3% to $9.3
million from $19.5 million was also due to lower Enterprise Express(TM) sales.
Orders for I.H.S. products declined 53.6% to $12.0 million versus the third
quarter of 1999. Communications Recording Systems ("C.R.S.") revenue declined
16.0% to $10.5 million due to lower call center and recording equipment revenue.
C.R.S. orders of $8.8 million were 34.9% lower than the third quarter of 1999.
Customer Service revenue (including sale of parts) was flat versus the third
quarter of 1999 as higher hourly revenue offset declines in proprietary product
contract and third party maintenance revenue. Applications and Training
Specialists ("A.T.S.") revenue declined 26.7% to $1.1 million due to reduced
training provided in support of system products. Sales and support service
revenue from International and Dealer Operations declined 43.5% on lower system
and C.R.S. revenue.
36
<PAGE>
Cost of sales, rentals and support services decreased 34.2% to $33.9 million
(58.0% of revenue) in the third quarter of 2000 from $51.5 million (53.7% of
revenue) in the third quarter of 1999. The increase in cost of sales, rentals
and support services as a percentage of revenue is due primarily to lower price
realization from International and Dealer Operations.
Selling and administrative expenses (including amortization of intangibles)
increased 76.5% to $54.0 million (92.5% of revenue) in the third quarter of 2000
from $30.6 million (31.9% of revenue) in the third quarter of 1999. This
increase is attributable to higher amortization expense associated with goodwill
from the Acquisition ($22.1 million), higher C.R.S. selling expense and
corporate administrative expense.
Research and development expenses of $3.3 million (9.6% of product sales and
rental revenue) increased 57.1% from $2.1 million (3.5% of product sales and
rental revenue), reflecting increased staffing and compensation consistent with
major project development efforts.
The Company recorded an operating loss of $32.8 million (56.2% of revenue)
during the third quarter of 2000 compared to an operating profit of $11.7
million (12.2% of revenue) during the third quarter of 1999. This decline in
operating profit is primarily attributable to the impact of lower revenue and
higher expense associated with the amortization of intangibles.
RESULTS OF OPERATIONS - NINE MONTHS 2000 VS. NINE MONTHS 1999
Total revenue for the first nine months of 2000 of $182.4 million was 30.9%
lower than the first nine months of 1999. Similar to the third quarter of 2000,
the major portion of the revenue decline was attributable to certain strategic
decisions made by management upon the acquisition of the Company by Lernout &
Hauspie with regard to the incorporation of Lernout & Hauspie technologies into
the Company's products. This new strategic direction which will result in
increased software content in the majority of the Company's products combined
with an increased level of customization of the Company's products at customer
sites upon installation resulted in the change to recognize revenue for the
affected products upon installation (which reduced revenue by $15.0 million).
Two other factors are the absence of Contract Manufacturing revenue since April
2000 consistent with the decision to dispose of Manufacturing Operations (which
represented $21.6 million), as well as lower revenue due to the impact the
Acquisition had on the Company's organizational structure and product
development process caused by management's focus on incorporating new Lernout &
Hauspie technology into the Company's products.
I.V.S. revenue declined 47.7% to $13.8 million due to lower billings of
desktops, portables, digital systems and Enterprise Express(TM). I.H.S. revenue
decreased 46.3% to $26.3 million due to lower Enterprise Express(TM) revenue.
Orders for I.H.S. products decreased 48.0% to $32.2 million versus the first
nine months of 1999. Order backlog for I.H.S. increased by $4.2 million to
$16.2 million during the first nine months of 2000. C.R.S. revenue declined
33.1% to $24.9 million due to lower recording and call center equipment revenue.
C.R.S. orders of $29.6 million were 30.3% lower than the first nine months of
1999. C.R.S. order backlog increased by $2.4 million to $12.2 million during
the first nine months of 2000. Customer Service revenue (including sale of
parts) was 2.0% lower than the first nine months of 1999 due to lower third
party maintenance and warranty revenue. A.T.S. revenue increased $0.5 million
to $4.2 million due to increased system product training. Sales and support
service revenue from International and Dealer Operations declined 29.5% due to
lower C.R.S. and systems revenue.
Cost of sales, rentals and support services decreased 15.5% to $119.3 million
(65.4% of revenue) from $141.2 million (53.5% of revenue) for the first nine
months of 1999. The increase in cost of sales, rentals and support services as a
percentage of revenue is attributable to the impact of a non-cash charge of $9.2
million recorded in the first quarter 2000 associated with the provision for
excess field service parts and inventory related to products recently replaced
by the newly introduced Freedom(TM) product. With the production of Freedom(TM)
in the first quarter of 2000, the Company provided for excess inventory
associated with those products that the Freedom(TM) product would replace,
recording this charge as an inventory provision. In addition, lower margins were
recorded for C.R.S. and I.H.S. sales.
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<PAGE>
Selling and administrative expenses (including amortization of intangibles)
increased 48.6% to $131.4 million (72.0% of revenue) in the first nine months of
2000 from $88.4 million (33.5% of revenue) in the first nine months of 1999.
This increase is attributable to higher amortization expense associated with
goodwill from the Acquisition ($35.1 million), as well as higher I.H.S. and
C.R.S. selling expense and higher corporate administrative expense.
Research and development expenses of $8.0 million (8.1% of product sales and
rental revenue) increased 14.3% from $7.0 million (4.5% of product sales and
rental revenue), reflecting increased staffing and compensation consistent with
major project development efforts.
The Company recorded an operating loss of $76.3 million (41.8% of revenue)
during the first nine months of 2000 compared to an operating profit of $27.5
million (10.4% of revenue) during the first nine months of 1999. This decline
in operating profit is primarily attributable to lower revenue and higher
amortization expense.
LIQUIDITY AND CAPITAL RESOURCES
In May 2000, Lernout & Hauspie acquired the Company in a merger with a wholly
owned subsidiary of Lernout & Hauspie. As part of the Acquisition of the
Company, Lernout & Hauspie obtained $430 million in credit facilities (the "L&H
Revolving Credit Facility") from a syndicate of banks (the "Banks") to pay a
portion of the purchase price, to repay certain Dictaphone liabilities and for
general corporate purposes. The L&H Revolving Credit Facility consists of a
short-term facility due March 31, 2001, of $200 million at LIBOR plus 100 basis
points (7.761% at September 30, 2000) and a five-year declining balance facility
of $230 million at LIBOR plus 175 basis points (8.511% at September 30, 2000).
Borrowings under the five-year declining balance facility are for renewable
terms of up to six months and therefore will be accounted for as short-term
debt.
In June 2000, Dictaphone delivered to the Banks a limited guaranty of Lernout
& Hauspie's obligations under the L&H Revolving Credit Facility. The limited
guaranty covers only advances under the L&H Revolving Credit Facility used to
repay certain of Dictaphone's indebtedness. As of June 30, 2000, the amount of
the Guaranty was $167 million. In July the amount was increased by $41.6
million, as a result of an advance under the L&H Revolving Credit Facility used
to redeem a portion of the Notes as described below.
On May 5, 2000, with funds advanced by Lernout & Hauspie in the amount of
approximately $223 million, the Company repaid the outstanding Term Loans and
the loan outstanding under the Revolving Credit Facility and retired all of the
outstanding 14% PIK Preferred Stock, made payments to holders of options to
acquire stock of the Company as required to close the Acquisition, and made
certain other closing payments. Of the $223 million advance, $50 million was
treated as a capital contribution and $173 million was treated as an
intercompany loan. In the third quarter, an additional $54.0 million was
advanced to the Company by Lernout & Hauspie and treated as capital contribution
as well. The loan bears interest at 8% per annum, is due and payable on May 5,
2002, and is unsecured. Pursuant to the terms of the intercompany loan, in the
event that Dictaphone makes a payment under its limited guaranty of the L&H
Revolving Credit Facility, Dictaphone's obligations under the intercompany loan
will be reduced by the amount of the payment. In addition, in the event that
Dictaphone is required to make a payment on the intercompany loan, Dictaphone
will not be required to do so unless, at the same time, Dictaphone's obligations
under its limited guaranty of the L&H Revolving Credit Facility is reduced by
the amount Dictaphone pays on the intercompany loan.
38
<PAGE>
In connection with the Acquisition by Lernout & Hauspie, the Company
established a $20 million line of credit (the "Line of Credit") with Deutsche
Bank. At September 30, 2000, availability under the Line of Credit was $10.0
million.
As a result of the Acquisition, the Noteholders had the option to put the
Notes to the Company. In July 2000, holders of $41.6 million of Notes exercised
that right and those Notes were redeemed. The Notes provide for each noteholder
to have the right to require that the Company repurchase the Notes at 101% of
the principal amount upon a change of control (as defined in the Note
Indenture). The L&H Revolving Credit Facility was used to fund the repurchase
of the Notes. The Notes bear interest of 11-3/4% per annum, payable semi-
annually on each February 1 and August 1. The Notes mature on August 1, 2005.
In September 2000, an affiliate of Lernout & Hauspie purchased Notes in the
amount of $16 million on the open market. The Company had $158.4 million of
Notes outstanding as of September 30, 2000.
In the first nine months of 2000, cash used in operating activities totalled
$23.5 million. Non-cash expenses during the period included depreciation and
amortization of $55.1 million, a $4.0 million provision for doubtful accounts
and a $9.2 million provision for inventory obsolescence. Other sources of cash
included a reduction in accounts receivable of $10.4 million and an increase in
Advance Billings of $21.0 million. Uses of cash included a decrease in accounts
payable and accrued liabilities of $12.3 million and an increase in other
current assets of $6.5 million. Investing activities during the first nine
months of 2000 reflects a use of cash of $16.0 million. Capital expenditures
totalled $7.4 million. Capitalized licenses and software development costs
totalled $8.6 million. The Company has at times relied upon the cash resources
of Lernout & Hauspie, the availability under the L&H Revolving Credit Facility,
and the availability under the Line of Credit to meet the Company's financing
needs. On November 9, 2000, Lernout & Hauspie announced that it expected to
restate its financial statements for the periods of 1998, 1999 and the first
half of 2000. Previously Lernout & Hauspie had announced that it was the subject
of a U.S. SEC investigation and a defendant in a number of several class action
lawsuits, all of which primarily relate to Lernout & Hauspie's financial
statements. As of the date of this report, the Company does not believe that
either the SEC investigation nor the class action lawsuits involve any
allegations regarding the Company's financial statements.
As a result of the concerns raised by the recent events, the Company and
Lernout & Hauspie have been in discussions with their lenders concerning the L&H
Revolving Credit Facility, Dictaphone's limited guaranty of that facility (the
"Dictaphone Guaranty"), the Line of Credit and Lernout & Hauspie's guaranty of
the Line of Credit ("L&H Guaranty"). A substantial portion of the proceeds
advanced under the L&H Revolving Credit Facility were re-advanced to the Company
to refinance the Company's former revolving credit and term loan facilities, to
pay interest on the Notes, and to meet working capital and other obligations of
the Company.
Lernout & Hauspie's lenders under the L&H Revolving Credit Facility have
asserted that an event of default may exist under that facility and the
associated Dictaphone Guaranty, however, they have not declared an event of
default. Deutsche Bank, Dictaphone's lender under the Line of Credit, also has
asserted that an event of default exists under the Line of Credit, but similarly
has not yet accelerated the Line of Credit. Deutsche Bank has, however, declared
an event of default under the L&H Guaranty. The Company has not admitted that an
event of default exists under the Line of Credit. Lernout & Hauspie and the
Company are in discussions with their lenders regarding the alleged defaults and
the restructuring of the underlying loans and guarantees.
Based upon the status of the Company's and Lernout & Hauspie's discussions
with the banks and the alleged events of default, as to which the Company's
lenders have not yet formally declared an event of default, the Company cannot
reach a definitive conclusion as to the likelihood that the banks will, in fact,
formally declare an event of default under the Line of Credit or the Dictaphone
Guaranty. Accordingly, the Company's balance sheet has not been adjusted to
reflect the effect of a determination that the likelihood is probable. If it
were determined to be probable that the banks would formally declare an event of
default under the Dictaphone Guaranty, the Company would be required to make the
following adjustments: (i) the intercompany payable (approximately $173 million
at September 30, 2000) would be reclassified as a current liability; (ii) the
Dictaphone Guaranty, to the extent of the excess of the guaranteed obligation
over the intercompany loan balance, would be recorded as a current liability
(through a corresponding reduction to additional paid-in capital) rather than
being reported solely as a contingent obligation--resulting in an additional
current liability of approximately $35.6 million; and (iii) the Notes
(approximately $159 million outstanding as of September 30, 2000) would be
reclassified as a current liability in light of the cross default provisions
under the Indenture.
The Company anticipates that in connection with their discussions with
Deutsche Bank and the other lenders to Lernout & Hauspie, the Company and
Lernout & Hauspie likely will need to obtain waivers or amendments with respect
to the Line of Credit, the L&H Revolving Credit Facility and the associated
guarantees. The Company cannot assure, however, that such waivers or amendments,
if necessary, can be obtained. Moreover, even if the Company restructures its
obligations under the Line of Credit, the Company does not anticipate that
Deutsche Bank will permit any further draws under the Line of Credit. As of
November 8, 2000, the balance under the Line
39
<PAGE>
of Credit was approximately $14.8 million and Deutsche Bank has indicated that
the Company may have to pay down the Line of Credit to $12.6 million as a
condition of any waivers of the events of default that Deutsche Bank has claimed
exist. In addition, while L&H has requested that its lenders restore L&H's
ability to borrow up to the full amount of the L&H Revolving Credit Facility,
there is no assurance that any further advances will be permitted under such
facility. Deutsche Bank and the lenders under the L&H Revolving Credit Facility
have also indicated that they may seek to obtain liens on certain of L&H's and
Dictaphone's assets as a condition of such a waiver.
The Company has a $9.3 million payment due on February 1, 2001 to satisfy a
semi-annual interest payment due on the Notes. The Company's $7 million interest
payment due to Lernout & Hauspie on the intercompany debt, originally due
November 5, 2000, has been deferred for six months. Notwithstanding whether any
defaults exist under the L&H Revolving Credit Facility, unless such date is
extended as part of a restructuring, on March 31, 2001, $200 million becomes due
thereunder by its terms. Pursuant to the Dictaphone Guaranty, the Company, as
well as Lernout & Hauspie as a direct obligor, will be liable for that $200
million obligation. While the Company's and Lernout & Hauspie's discussions with
their lenders include a request to defer the March 31, 2001 payment, the Company
does not anticipate that it will have sufficient resources to make the March 31,
2001 payment if called upon to do so under the Dictaphone Guaranty on such date.
If the Company and Lernout & Hauspie are not successful in restructuring their
obligations under the L&H Revolving Credit Facility and the lenders thereunder
declare an event of default thereunder and demand payment under the Dictaphone
Guaranty, a default would then exist under the Indenture concerning the Notes.
In such circumstances, the Company will not have sufficient resources to pay its
obligations in respect of the Dictaphone Guaranty of the L&H Revolving Credit
Facility, the Deutsche Bank Line of Credit and its obligation to pay interest
(and, if an event of default exists thereunder, principal) on the Notes and to
fund its working capital obligations and planned capital expenditures.
While the Company is cautiously optimistic that such financial accommodations
can be reached, and that such accommodations could provide the Company with
sufficient resources to make its February 1, 2001 interest payment, the Company
cannot assure that it will be successful. The Company also is actively pursuing
the sale of its manufacturing facility in Melbourne, Florida. The ability of the
Company to complete this sale would further improve the Company's liquidity, but
the sales proceeds, if realized, would be insufficient by themselves to allow
the Company to meet all of its obligations if it and L&H are unsuccessful in
restructuring the L&H Revolving Credit Facility.
The Company's quarterly revenues and other operating results have been and
will continue to be affected by a wide variety of factors that could have a
material adverse effect on the Company's financial performance during any
particular quarter. Such factors include, but are not limited to, the level of
orders that are received and shipped by the Company in any given quarter, the
rescheduling and cancellation of orders by customers, availability and cost of
materials, the Company's ability to enhance its existing products and to
develop, manufacture and successfully introduce and market new products, new
product developments by the Company's competitors, market acceptance of products
of both the Company and its competitors, competitive pressures on prices, the
ability to attract and retain qualified technical personnel, significant damage
to or prolonged delay in operations at the Company's sole manufacturing
facility, and interest rate and foreign exchange fluctuations. The Company
introduced a number of new products in its target markets in 1997, 1998 and 1999
which are expected to enhance future revenues and liquidity of the Company.
However, there can be no assurance that such products will meet the expectations
of the Company for either revenues or profitability.
The Company may, from time to time, provide estimates as to future
performance. Such estimates would be "forward-looking" statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Because such statements include risks and
uncertainties, actual results may differ materially from those estimates
provided. The Company undertakes no duty to update such forward looking
statements. Factors that could cause actual results to differ from these
forward looking statements include, but are not limited to, those previously
discussed herein.
40
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
See Note 7 to the Company's Condensed Consolidated Statements of Operations
(Successor Company) (Unaudited) which is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
---------
10.01 - Amended and Restated Loan Agreement, dated as of November 20,
2000, between the Registrant and L&H Coordination Centre
C.V.B.A.
10.02 - Limited Guaranty, dated as of May 30, 2000, by the
Registrant.
27 - Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
There were no Reports on Form 8-K filed by the Company during the
three months ended September 30, 2000.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 20, 2000 Dictaphone Corporation
----------------------------------------
(Registrant)
By: /s/ John H. Duerden
------------------------------------------
Name: John H. Duerden
Title: President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ George M. Carpenter
-----------------------------------------
Name: George M. Carpenter
Title: Assistant Secretary and Chief Accounting
Officer (Principal Financial and
Accounting Officer)
42
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<S> <C>
10.01 -- Amended and Restated Loan Agreement, dated as of
November 20, 2000, between the Registrant and L&H
Coordination Centre C.V.B.A.
10.02 -- Limited Guaranty, dated as of May 30, 2000, by the
Registrant.
27 -- Financial Data Schedule.
</TABLE>
43
