MOODY'S DOWNGRADES DICTAPHONE'S RATINGS
New York, 09-05-97 -- Moody's Investors Service today lowered its ratings on Dictaphone Corporation's bank debt (to B3 from B1) and senior subordinated notes (to Caa3 from B3). The ratings were also placed on review for possible further downgrade.
The rating actions reflect substantial diminution in financial liquidity and flexibility, deterioration in debt protection measurements, unfavorable operating trends, and rising dependence on the uncertain success of new product introductions planned for the second half of 1997. At the end of June, to avoid non-compliance with its bank credit agreement, the company sought and obtained amendments to certain financial covenants. The company has acknowledged to lenders that it must improve its liquidity situation and that it is currently evaluating several proposals to that end.
Affected by the rating action are Dictaphone's $200 million issue of 11-3/4% senior subordinated notes due 2005, and its senior bank credit facility. At June 30, 1997, bank debt consisted of a $40 million revolving credit line expiring in 2001, and two reducing term loans aggregating $137 million, with final maturities in 2001 and 2002. The bank agreement is secured by all of Dictaphone's U.S. assets, including intangibles, and pledges of capital stock of subsidiaries.
Since being acquired in August 1995 from Pitney Bowes Inc. in a highly leveraged transaction, Dictaphone has drawn on its initial cash balance and unused borrowing capacity under a $40 million revolving credit facility to fund cash deficiencies arising, in part, from lower revenues and higher costs. Profits and cash flows have been negatively affected by a combination of heavy spending on R&D, new products and marketing, and shrinking revenues, in part reflecting lower sales of older products in anticipation of newer generation, more technologically advanced systems. For the 6-months ended June 30, 1997, operating profit (excluding certain non-cash purchase accounting adjustments) declined nearly $21 million relative to the comparable 1996 period due to lower revenue, higher costs associated with a one-time $10.5 million charge for inventory obsolescence, and higher expenses associated with severance and increased marketing costs.
Interest coverage by EBITDA (including other non-cash charges) approximated 0.8-times in 1997's first half versus 1.2-times in the same period in 1996.
At June 30, 1997, $26 million was borrowed under the revolving credit facility, leaving $14 million unused and available along with $5.8 million in cash. Borrowings are expected to increase in the third and fourth quarters of 1997, due to, among other things, the scheduled interest payment of $11.8 million made under the senior subordinated notes on August 1, 1997. On that date, the company entered into an agreement with a lender for a new $10 million line of credit, under which $1.5 million was drawn. Amounts outstanding were repaid on August 6, 1997. The $10 million facility terminates on January 30, 1998.
The company also has scheduled principal payments of the term loans approximating $6.2 million in the remainder of 1997, $16 million in each of 1998 and 1999, and $20 million in 2000. On February 1, 1998, the company is required to make an $11.7 million interest payment on its senior subordinated notes. The company is also required to reduce the amounts outstanding under its revolver to $15 million for 30 consecutive days during each 12-month period (this requirement has been waived until January 1, 1999).
Dictaphone is in the process of introducing a number of new products in its target markets in the second half of 1997, which new products the company expects will enhance future revenues and liquidity. Moody's cautioned that the successful introduction of the new products is subject to a number of uncertainties and failure to achieve adequate success could result in the company being unable to meet its cash requirements.
Dictaphone's ratings reflect steep financial leverage, a weak balance sheet (goodwill and other intangibles are more than one-half of total assets), a mature core business, increasing competitive pressures, and limited financial flexibility due to high debt-service costs. The ratings benefit from the company's leading position in the niche voice management market, a strong sales and service organization, and a large installed customer base with recurring service revenues. The bank debt ratings also reflect limited collateral coverage, and the rating on the notes also reflects subordination to senior secured bank debt and certain liabilities of non-U.S. subsidiaries.
Moody's rating review will consider, among other things, prospects for the company's future financial liquidity and flexibility, including transactions that might be completed to provide additional capital; its results of operation, especially with respect to new product introductions; its future competitive position; and the potential for asset write-downs.
Dictaphone Corporation, based in Stratford, Connecticut manufactures, sells and services advanced voice recording and retrieval products. The company's principal stockholders are affiliates of Stonington Partners.
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