<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996.
DIGITAL DICTATION, INC.
Incorporated in the State of Delaware
8230 Old Courthouse Road
Vienna, Virginia, 22182
Telephone : (703) 848-2830
I.R.S. Employer Identification No. 52-1451022
Commission file number 0-27052
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
----- -----
The number of shares outstanding of the Issuer's $.01 par value Common Stock as
of August 14, 1996 was 6,257,480.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index to unaudited condensed financial statements presented on pages 3 to 8:
Condensed balance sheets as of June 30, 1996 and December 31, 1995
Condensed statements of income for the three- and six-month periods ended
June 30, 1996 and 1995
Condensed statements of cash flows for the six months ended June 30, 1996 and
1995
Notes to condensed financial statements
2
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DIGITAL DICTATION, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 60,439 $ 32,534
Accounts receivable 923,809 714,206
Employee receivables 7,199 23,024
Prepaid expenses and other 46,395 24,580
------------ ------------
Total current assets 1,037,842 794,344
Property and equipment, net 799,221 845,629
------------ ------------
Total assets $ 1,837,063 $ 1,639,973
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Borrowings under line of credit $ 279,576 $ 264,747
Accounts payable 137,592 212,343
Accrued payroll and payroll taxes 167,882 129,100
Due to stockholder 26,770
Dividends payable 44,791
Current portion of long-term debt 6,139 56,390
Current portion of capital lease obligations 41,027 68,798
Current income taxes payable 15,000
Current deferred income taxes 255,000 152,000
------------ ------------
Total current liabilities 928,986 928,169
Long-term debt, non current portion 9,670
Capital lease obligations, non current portion 40,892 57,064
Non current deferred income taxes 54,000 50,000
Stockholders' equity
Common stock, par value $.01 per share, 20,000,000 shares
authorized, 6,257,480 shares issued and outstanding 62,575 62,575
Additional paid-in capital 571,496 571,496
Retained earnings (deficit) 169,444 (29,331)
------------ ------------
Total stockholders' equity 803,515 604,740
Commitments - Note 10
Total liabilities and stockholders' equity $ 1,837,063 $ 1,639,973
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $1,706,780 $1,251,754 $3,249,062 $2,406,084
Cost of services 1,083,531 862,398 2,139,722 1,604,523
---------- ---------- ---------- ----------
Gross profit 623,249 389,356 1,109,340 801,561
General and administrative expenses 432,051 269,600 767,275 566,982
---------- ---------- ---------- ----------
Operating income 191,198 119,756 342,065 234,579
Other income (expense)
Interest and other income 82 739 96 1,458
Interest expense (9,060) (5,277) (21,386) (10,484)
---------- ---------- ---------- ----------
Income before income taxes 182,220 115,218 320,775 225,553
Provision for income taxes 69,000 122,000
---------- ---------- ---------- ----------
Net income $ 113,220 $ 115,218 $ 198,775 $ 225,553
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per share $.02 $.03
---- ----
Weighted average shares outstanding 6,257,480 6,257,480
---------- ----------
---------- ----------
Pro forma data:
Net income, as reported $ 115,218 $ 225,553
Pro forma provision for income taxes 42,000 83,000
---------- ----------
Pro forma net income $ 73,218 $ 142,553
---------- ----------
---------- ----------
Pro forma net income per share $.01 $.02
---- ----
---- ----
Weighted average shares outstanding 6,257,480 6,257,480
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 198,775 $ 225,553
Charges to operations not affecting cash:
Depreciation and amortization 134,463 109,037
Deferred income tax provision 107,000
Changes in operating assets and liabilities:
Accounts receivable (209,603) 2,800
Employee receivables 15,825 9,835
Prepaid expenses and other (21,815) (10,644)
Accounts payable (74,751) 26,834
Accrued payroll and payroll taxes 38,782 (21,233)
Current income taxes payable 15,000
---------- ----------
Net cash provided by operating activities 203,676 342,182
---------- ----------
Cash flows from investing activities
Additions to property and equipment (88,055) (133,863)
---------- ----------
Net cash used by investing activities (88,055) (133,863)
---------- ----------
Cash flows from financing activities
Net increase in borrowings under line of credit 14,829
Proceeds from advance from stockholder 36,035
Dividends paid on earnings prior to recapitalization (44,791) (122,052)
Reduction of balance due to stockholder (9,265)
Reduction of long-term debt (40,581) (29,080)
Reduction of capital lease obligations (43,943) (42,768)
---------- ----------
Net cash used by financing activities (87,716) (193,900)
---------- ----------
Increase in cash 27,905 14,419
Cash and cash equivalents at beginning of period 32,534 1,722
---------- ----------
Cash and cash equivalents at end of period $ 60,439 $ 16,141
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
DIGITAL DICTATION, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - THE COMPANY
Digital Dictation, Inc. (the "Company" or "DDI") provides transcription
services for various medical facilities. The Company is incorporated in the
State of Delaware and commenced operations during 1989. In June, 1995 Mr.
Richard D. Cameron, now the President and Chief Executive Officer of DDI,
acquired all of the issued and outstanding shares of common stock of the
Company. In connection therewith, Mr. Cameron obtained a loan from Proactive
Partners, L.P., a California limited partnership ("Proactive"), pursuant to a
Note Purchase Agreement and Promissory Note. The terms of the Note provided for
payment through the transfer to Proactive of 50% of Mr. Cameron's shares of DDI
in connection with a merger of DDI with and into a public shell company.
On October 10, 1995, the Company was acquired by SonoChem, Inc,
("SonoChem") an inactive public corporation, in a non-taxable reverse
acquisition pursuant to Section 368(a) of the Internal Revenue Code of 1986 and
Plan of Merger dated September 15, 1995. SonoChem acquired all of the Company's
issued and outstanding shares of common stock in exchange for 5,944,606 shares
of SonoChem's $.01 par value common stock. As a result of this issuance, the
previous holders of the Company's common stock now hold 95% of the issued and
outstanding shares of SonoChem. Concurrent with this transaction, SonoChem's
name was changed to Digital Dictation, Inc.
For financial reporting purposes, this transaction has been treated as a
recapitalization of the Company, with the Company in the position of acquirer in
a reverse acquisition. The historical financial statements prior to October 10,
1995 are those of the Company. Pro forma financial statements for prior periods
are not presented because a business combination did not occur; however, pro
forma presentation of income tax expense for prior periods has been made. The
recapitalization of the Company's authorized, issued and outstanding common
stock has been given retroactive effect in the accompanying financial
statements.
NOTE 2 - PRESENTATION OF FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, these financial statements do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three- and six-
month periods ended June 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996. For further
information, reference is made to the financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995.
NOTE 3 - PROPERTY AND EQUIPMENT
June 30, December 31,
1996 1995
----------- -----------
Dictation and other equipment $ 1,565,755 $ 1,479,526
Furniture and fixtures 65,859 65,860
Leasehold improvements 44,343 44,343
Automobile 23,400 23,400
Software 47,720 45,894
----------- -----------
1,747,077 1,659,023
Accumulated depreciation and amortization (947,856) (813,394)
----------- -----------
$ 799,221 $ 845,629
----------- -----------
----------- -----------
6
<PAGE>
NOTE 4 - DUE TO STOCKHOLDER
During May 1996 Mr. Cameron repaid, on behalf of the Company, unsecured
installment notes totalling $36,035 (See Note 6.) The balance due of $26,770 at
June 30, 1996 is payable to Mr. Cameron in installments through December 1996
with interest at 10% per annum. This repayment schedule is on the same terms as
the original notes.
NOTE 5 - BORROWINGS UNDER LINE OF CREDIT
The Company has a $450,000 line of credit available from Merrill Lynch
Business Financial Services, Inc. through June 30, 1997. Borrowings under this
line of credit at June 30, 1996 amounted to $279,576. Interest is payable at
prime plus one per cent per annum (9.2% at June 30, 1996). The line of credit
is secured by all assets of the Company.
Borrowings under this line of credit are solely for working capital
purposes. The related loan and security agreement requires the Company to
submit annual reviewed financial statements within 120 days after the end of
each fiscal year, and unaudited interim financial statements within 45 days
after the end of each fiscal quarter. The Company is in compliance with these
reporting covenants.
NOTE 6 - LONG-TERM DEBT
June 30, December 31,
1996 1995
--------- -----------
Automobile installment loan, 10% interest,
due December 1998 $ 15,809
Unsecured installment notes, 10% interest,
due December 1996, prepaid in May 1996
(See Note 4) $ 56,390
--------- -----------
15,809 56,390
Less current portion (6,139) (56,390)
--------- -----------
$ 9,670 $ -
--------- -----------
--------- -----------
NOTE 7 - CAPITAL LEASES
The Company leases various equipment under long-term contracts. Property
and equipment includes the following amounts for leases that have been
capitalized:
June 30, December 31,
1996 1995
--------- -----------
Dictation and other equipment $ 302,953 $ 464,303
Allowance for depreciation (154,463) (277,085)
--------- -----------
$ 148,490 $ 187,218
--------- -----------
--------- -----------
NOTE 8 - INCOME TAXES AND CHANGES IN TAX STATUS
As a result of the reverse acquisition described in Note 1, on October 10,
1995 the Company's income tax status changed. Effective October 10, 1995, the
Company is required to pay income taxes on its earnings, including deferred
taxes existing at the time that the S corporation status was terminated. At
December 31, 1995,
7
<PAGE>
the Company had net operating loss carryforwards, expiring in 2010, aggregating
approximately $73,000 available to offset future taxable income.
For periods through October 9, 1995, profits and losses of the Company are
reported in the individual income tax returns of the stockholder under
provisions of Subchapter S of the Internal Revenue Code. Periodic distributions
have been made to the Company's former stockholder, part of which represent the
estimated income tax liability on the S corporation earnings which is the
responsibility of the individual stockholder.
The unaudited pro forma adjustment to reflect income taxes in the
accompanying statement of income is for information purposes only and has been
calculated based on the estimated effective tax rate for 1995, assuming the
Company had been subject to corporate income taxes.
NOTE 9 - STOCK OPTION PLAN
In March 1996 the Board of Directors authorized the establishment of a non-
qualified stock option plan for its full-time employees and consultants (the
"Employee Plan") and reserved 800,000 shares of the Company's common stock for
issuance upon the exercise of options granted under this plan. The Employee
Plan incorporated options for the purchase of 525,000 shares of common stock,
exercisable at $.76 per share, previously granted to five employees. In
June 1996 options for the purchase of an aggregate of 40,000 shares of common
stock, exercisable at $1.00 per share, were granted to two consultants. All
options granted to date under the Employee Plan vest at the rate of 25% per
year, beginning one year after the date of grant, and have a term of ten years.
As of June 30, 1996, no portion of these outstanding options had become
exercisable.
Also in March 1996 the Board of Directors authorized the establishment of a
non-qualified stock option plan for its directors (the "Director Plan") and
reserved 500,000 shares of the Company's common stock for issuance upon the
exercise of options granted under this plan. Initial grants were made of
options to purchase 75,000 shares of common stock to each of the Company's four
directors. These options vest at the rate of one-third per year beginning one
year after the date of grant, have an exercise price of $.76 per share, and have
a term of ten years.
NOTE 10 - COMMITMENTS
Future minimum lease payments under capital leases for equipment and non-
cancelable operating leases for office space, equipment and an automobile as of
June 30, 1996 are as follows:
Year ending Capital Operating
June 30, Leases Leases Total
-------- ---------- --------- -----------
1997 $ 48,188 $ 20,855 $ 69,043
1998 35,939 12,131 48,070
1999 7,998 1,335 9,333
---------- --------- -----------
Total minimum lease payments 92,125 $ 34,321 $ 126,446
--------- -----------
--------- -----------
Amount representing interest (10,206)
----------
Present value of net minimum lease
payments (including $41,027
classified as current) $ 81,919
----------
----------
Rent expense under operating leases for the six months ended June 30, 1996
and 1995 totalled $27,839 and $24,077, respectively.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
DESCRIPTION OF THE BUSINESS
Digital Dictation, Inc. ("DDI" or the "Company") provides medical
transcription services to institutional health care providers, including
hospitals, health maintenance organizations (HMO's), and emergency medicine
facilities located in various parts of the country. The Company's business
involves the transcription of medical reports which have been dictated by
physicians and other medical professionals, into computer readable form and/or
hard copy. The Company's emphasis is on the management and control of the
entire dictation and transcription process for its clients.
Management believes that DDI is one of the few firms in its industry that
has successfully created a centralized, automated transcription service able to
serve a national client base from a single location. DDI has developed a
proprietary in-hospital transcription processing system that provides totally
automated processing of all incoming transcriptions through an electronic link
with the Company's centralized processing system in its Virginia Operations
Center in Vienna, Virginia. The Company utilizes high caliber independent
medical transcriptionists ("IMT's"), working from their homes throughout the
country, who are connected to the Virginia Operations Center via computer modem.
The Company presently serves twenty-five major hospitals, six of which are
located in the Washington, D.C. metropolitan area, five in Virginia, four in
Pennsylvania, three in California, two in New Jersey and Ohio, and one each in
Illinois, Maryland and Michigan. These client hospitals include St. John's
Regional Medical Center in Oxnard, California, Michael Reese Hospital and
Medical Center in Chicago, St. Francis Medical Center in Pittsburgh, the
National Naval Medical Center in Bethesda, Maryland, and the Arlington Hospital
in Arlington, Virginia.
Management has evaluated opportunities to expand the Company through
acquisitions, to expand its service offerings to include overflow transcription
services, to diversify its client base to serve physicians' offices, and to sell
or license its technology to other companies. Management strongly believes,
however, that the growth and profitability of the Company can best be optimized
by continuing to focus on DDI's core business and resist the temptation to
diversify into other areas.
The Company is prepared to launch a major marketing offensive, aimed at
exposing and educating potential clients to the benefits that can be realized
from a technology-based, quality-focused company. This marketing plan will
capitalize on the Company's excellent reputation in the industry and will
utilize the willingness of existing clients to testify as to the Company's high
level of service. The Company recently hired one regional manager in
California, and expects to hire additional regional managers in other parts of
the country during the next two years, to provide new business development and
locally based client support.
EMPLOYEES AND TRANSCRIPTIONISTS
As of June 30, 1996, the Company had thirteen full-time employees and one
part-time employee in its principal executive offices and Virginia Operations
Center, in addition to the regional marketing manager in the Santa Barbara,
California office. DDI also has arrangements with more than 175 home-based
transcriptionists who are either CMT-certified or in the process of becoming
certified. Transcriptionists work from their homes, setting their own hours any
time during the day or night. The transcriptionists are paid bi-weekly in
accordance with the amount of transcription they produce, as opposed to an
hourly rate. The Company has subcontract agreements with all of the
transcriptionists which specify the quality and delivery requirements and set
forth the method and rate for payment.
9
<PAGE>
DISCUSSION OF OPERATING RESULTS AND FINANCIAL CONDITION
The Company has reported average annual growth in revenues over the past
five fiscal years of 34%. DDI focuses on securing long-term contracts for full-
service (outsourced) medical transcription services rather than overflow
services from medical institutions. As a result, each client contract produces
a fairly consistent stream of revenue paid on a weekly basis.
Total revenue from all contracts each week (the "run rate") is management's
key indicator of current financial performance. The acquisition of a new client
results in an immediate positive impact on the weekly run rate, as revenue is
increased by the full weekly amount of the new contract. At the same time, the
Company has been able to maintain its existing client base. Since January 1,
1990, the Company has added twenty-one new clients to its original base of five,
while losing only one client, an emergency facility whose transcription needs
were taken over by its parent hospital.
Annual revenues for the preceding five fiscal years were as follows:
For the year ended December 31,
---------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
Revenues $ 5,057,585 $ 3,838,076 $ 2,745,897 $ 2,354,043 $ 1,602,748
The Company's record of adding new clients while maintaining existing
client loyalty has resulted in a stable and generally predictable annual revenue
growth rate. As DDI continues to expand its market nationally and exploit its
technology and client support, management anticipates the ability to continue to
increase annual revenue in line with historic trends, although there can be no
assurances that such annual revenue growth rates will be sustained.
Revenues of $1,707,000 for the second quarter of 1996 were 36% higher than
the revenues of $1,252,000 for the second quarter of 1995 primarily as a result
of additional hospitals being taken on as clients, without any reduction in the
existing client base. For the first half of 1996, revenues of $3,249,000 were
35% higher than the revenues of $2,406,000 for the first half of 1995. As of
June 30, 1995, the Company was providing services to nineteen health care
institutions, while currently, DDI is providing services to twenty-five health
care institutions. The weekly run rate was approximately $135,000 as of June
30, 1996 as compared to approximately $95,000 as of as of June 30, 1995.
Management now estimates annual revenues for 1996 in excess of $6.5 milliion.
Cost of services, which includes all costs related to the IMT's, telephone
and associated equipment depreciation, represented 63.5% of revenues in the
second quarter of 1996 as compared to 68.8% in the second quarter of 1995. The
reduction in cost of services as a percentage of revenues is attributable
primarily to a reduction in telecommunications costs. At the beginning of this
year the Company undertook an aggressive program to reduce telecommunications
costs by decentralizing certain operations and, as a result of that program,
costs of services have been reduced by a full 5% of revenues.
General and administrative ("G&A") expenses consist primarily of salaries
and benefits of all technical, marketing, operations and client support,
administrative and executive personnel, occupancy costs, marketing and
promotional costs, and other administrative expenses. G&A expenses were 25.3%
of revenues in the second quarter of 1996 versus 21.5% of revenues in the secomd
quarter of 1995. G&A expenses increased as a percentage of revenues relative to
1995 primarily because of higher travel, promotion and recruiting expenses
associated with growth in remote locations.
Income taxes for periods prior to the October 10, 1995 Merger (see Note 1
to the accompanying condensed financial statements) were the responsibility of
the stockholders of the Company under the provisions of Subchapter S of the
Internal Revenue Code. Following the Merger, the Company's S corporation status
was terminated, and the Company is now required to pay income taxes on its
earnings, including deferred taxes existing at the time that the S corporation
status was terminated.
10
<PAGE>
At June 30, 1996, the Company held cash and equivalents of approximately
$60,000, along with trade receivables of approximately $924,000. As necessary
to meet temporary cash flow shortages, the Company may draw upon a $450,000 line
of credit which remains available through June 30, 1997. Borrowings against the
line of credit totalled approximately $280,000 as of June 30, 1996.
Given that the Company is expected to grow at a rate in excess of its net
profit margin, it is likely that the Company will need to secure a source of
additional funding to finance such growth. The Company is considering seeking
additional equity capital as a potential source of funding. Management believes
that projected increases in revenues will be sufficient to fund the associated
increases in operating costs of the Company.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1 Amended and Restated Certificate of Incorporation
of SonoChem, Inc. (now known as Digital Dictation,
Inc.) (1)
2.2 Amended and Restated Bylaws of Digital Dictation, Inc. (f/k/a
SonoChem, Inc.)(1)
3 Specimen Certificate for Shares of DDI Common Stock(1)
5 Digital Dictation, Inc. Shareholders' Agreement(1)
12 Agreement and Plan of Merger By and Among Digital Dictation,
Inc., SonoChem, Inc. and Principal SonoChem Stockholders(1)
(1) Filed previously with the Company's Registration Statement #0-
27052 on Form 10-SB filed with the Securities and Exchange
Commission on October 23, 1995.
(b) Reports on Form 8-K: None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
DIGITAL DICTATION, INC.
(Registrant)
Richard D. Cameron
----------------------------------------
by: Richard D. Cameron
Chief Executive Officer
August 14, 1996
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 60,439
<SECURITIES> 0
<RECEIVABLES> 923,809
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,037,842
<PP&E> 1,747,077
<DEPRECIATION> 947,856
<TOTAL-ASSETS> 1,837,063
<CURRENT-LIABILITIES> 826,986
<BONDS> 0
0
0
<COMMON> 62,575
<OTHER-SE> 740,940
<TOTAL-LIABILITY-AND-EQUITY> 1,837,063
<SALES> 0
<TOTAL-REVENUES> 3,249,062
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,906,997
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,386
<INCOME-PRETAX> 320,775
<INCOME-TAX> 122,000
<INCOME-CONTINUING> 198,775
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 198,775
<EPS-PRIMARY> $.03
<EPS-DILUTED> 0
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