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 September 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 [x]
The number of shares outstanding of the Issuer's $.01 par value Common Stock as
of November 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 9:
Condensed balance sheets as of September 30, 1996 and December 31, 1995
Condensed statements of income for the three- and nine-month periods
ended September 30, 1996 and 1995
Condensed statements of cash flows for the nine months ended September 30,
1996 and 1995
Notes to condensed financial statements
2
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
September 30, December 31,
ASSETS 1996 1995
---------- ----------
Current assets
Cash and cash equivalents $ 104,998 $ 32,534
Accounts receivable 1,033,054 714,206
Employee receivables 5,458 23,024
Prepaid expenses and other 32,989 24,580
---------- ----------
Total current assets 1,176,499 794,344
Property and equipment, net 816,785 845,629
---------- ----------
Total assets $1,993,284 $1,639,973
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Borrowings under line of credit $ 133,242 $ 264,747
Accounts payable 150,711 212,343
Accrued payroll and payroll taxes 302,848 129,100
Due to stockholder 13,795
Dividends payable 44,791
Current portion of long-term debt 5,785 56,390
Current portion of capital lease obligations 30,920 68,798
Current income taxes payable 15,000
Current deferred income taxes 324,000 152,000
---------- ----------
Total current liabilities 976,301 928,169
Long-term debt, non current portion 8,666
Capital lease obligations, non current portion 33,917 57,064
Non current deferred income taxes 56,000 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) 284,329 (29,331)
---------- ----------
Total stockholders' equity 918,400 604,740
Commitments - Note 10
---------- ----------
Total liabilities and stockholders' equity $1,993,284 $1,639,973
========== ==========
See accompanying notes to condensed financial statements.
3
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
Revenues $1,825,326 $1,271,187 $5,074,387 $3,677,272
Cost of services 1,158,935 837,057 3,298,657 2,441,580
---------- ---------- ---------- ----------
Gross profit 666,391 434,130 1,775,730 1,235,692
General and administrative
expenses 470,672 298,480 1,237,947 865,462
---------- ---------- ---------- ----------
Operating income 195,719 135,650 537,783 370,230
Other income (expense)
Interest and other income 19 230 116 1,688
Interest expense (9,853) (5,782) (31,239) (16,266)
---------- ---------- ---------- ----------
Income before income taxes 185,885 130,098 506,660 355,652
Provision for income taxes 71,000 193,000
---------- ---------- ---------- ----------
Net income $ 114,885 $ 130,098 $ 313,660 $ 355,652
========== ========== ========== ==========
Net income per share $.02 $.05
==== ====
Weighted average shares
outstanding 6,257,480 6,257,480
========= =========
Pro forma data:
Net income, as reported $ 130,098 $ 355,652
Pro forma provision for income taxes 58,000 141,000
---------- ----------
Pro forma net income $ 72,098 $ 214,652
========== ==========
Pro forma net income per share $.01 $.03
==== ====
Weighted average shares outstanding 6,257,480 6,257,480
========= =========
See accompanying notes to condensed financial statements.
4
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
1996 1995
--------- ---------
Cash flows from operating activities
Net income $ 313,660 $ 355,652
Charges to operations not affecting cash:
Depreciation and amortization 206,650 163,064
Deferred income tax provision 178,000
Changes in operating assets and liabilities:
Accounts receivable (318,848) (36,007)
Employee receivables 17,566 9,001
Prepaid expenses and other (8,409) (15,621)
Accounts payable (61,632) 107,159
Accrued payroll and payroll taxes 173,748 36,404
Current income taxes payable 15,000
--------- ---------
Net cash provided by operating activities 515,735 619,652
--------- ---------
Cash flows from investing activities
Additions to property and equipment (177,806) (279,857)
--------- ---------
Net cash used by investing activities (177,806) (279,857)
--------- ---------
Cash flows from financing activities
Net (decrease) increase in borrowings
under line of credit (131,505) 64,093
Proceeds from advance from stockholder 36,035
Dividends paid on earnings prior to
recapitalization (44,791) (232,003)
Merger costs charged to paid-in capital (29,583)
Reduction of balance due to stockholder (22,240)
Reduction of long-term debt (41,939) (42,070)
Reduction of capital lease obligations (61,025) (62,909)
--------- ---------
Net cash used by financing activities (265,465) (302,472)
--------- ---------
Increase in cash 72,464 37,323
Cash and cash equivalents
Beginning of period 32,534 1,722
--------- ---------
End of period $ 104,998 $ 39,045
========= =========
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
nine-month periods ended September 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
September 30, December 31,
1996 1995
----------- -----------
Dictation and other equipment $ 1,647,411 $ 1,479,526
Furniture and fixtures 67,671 65,860
Leasehold improvements 48,154 44,343
Automobile 23,400 23,400
Software 50,193 45,894
----------- -----------
1,836,829 1,659,023
Accumulated depreciation and amortization (1,020,044) (813,394)
----------- -----------
$ 816,785 $ 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 $13,795 at
September 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 September 30, 1996 amounted to $133,242. Interest is payable
at prime plus one per cent per annum (9.2% at September 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
September 30, December 31,
1996 1995
----------- -----------
Automobile installment loan, 10% interest,
due December 1998 $ 14,451
Unsecured installment notes, 10% interest,
due December 1996, prepaid in May 1996
(See Note 4) $ 56,390
----------- -----------
14,451 56,390
Less current portion (5,785) (56,390)
----------- -----------
$ 8,666 $ -
=========== ===========
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:
September 30, December 31,
1996 1995
----------- -----------
Dictation and other equipment $ 198,564 $ 464,303
Allowance for depreciation (156,555) (277,085)
----------- -----------
$ 42,009 $ 187,218
=========== ===========
7
<PAGE>
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, 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
September 30, 1996, no portion of these outstanding options had become
exercisable. On October 15, 1996 options were granted to nine employees for the
purchase of an aggregate of 4,745 shares of common stock, exercisable at $1.00
per share.
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 September 30, 1996 are as follows:
Year ending Capital Operating
September 30, Leases Leases Total
------------ --------- --------- ----------
1997 $ 37,913 $ 92,395 $ 130,308
1998 34,458 94,016 128,474
1999 82,576 82,576
--------- --------- ---------
Total minimum lease payments 72,371 $ 268,987 $ 341,358
========= =========
Amount representing interest (7,534)
---------
Present value of net minimum
lease payments (including
$30,920 classified as current) $ 64,837
=========
8
<PAGE>
Rent expense under operating leases for the nine months ended September
30, 1996 and 1995 totalled $41,939 and $36,629, respectively.
Note 11 - Employee Benefits
The Company recently established a 401(k) plan for its employees. This
plan is funded jointly by employee and employer contributions. Employees are
allowed to contribute up to 15% of their salary subject to an overall limitation
and the Company matches the amount contributed by employees, limited to 5% of
the employee's salary. Employer contributions to this plan for the nine months
ended September 30, 1996 totaled $650.
9
<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-six major hospitals, six of which are
located in the Washington, D.C. metropolitan area, five in Virginia, four in
Pennsylvania, four 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, Illinois, St. Francis Medical Center in Pittsburgh,
Pennsylvania, Riverside Hospital in Toledo, Ohio, 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 September 30, 1996, the Company had fifteen 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 190
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.
10
<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-two 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 $1,825,326 for the third quarter of 1996 were 44% higher than
the revenues of $1,271,187 for the third 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 nine months of 1996, revenues of $5,074,387
were 38% higher than the revenues of $3,667,272 for the first nine months of
1995. As of September 30, 1995, the Company was providing services to nineteen
health care institutions, while currently, DDI is providing services to
twenty-six health care institutions. The weekly run rate was approximately
$145,000 as of September 30, 1996 as compared to approximately $100,000 as of as
of September 30, 1995. Management now estimates annual revenues for 1996 in
excess of $6.9 million.
Cost of services, which includes all costs related to the IMT's,
telephone and associated equipment depreciation, represented 63.5% of revenues
in the third quarter of 1996 as compared to 65.8% in the third 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.
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 25.8% of
revenues in the third quarter of 1996 versus 23.5% of revenues in the third
quarter of 1995. G&A expenses increased as a percentage of revenues relative to
1995 primarily because of higher recruiting expenses associated with the
acquisition of additional transcription staff and systems personnel.
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.
11
<PAGE>
At September 30, 1996, the Company held cash and equivalents of
approximately $105,000, along with trade receivables of approximately
$1,033,000. 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 $133,000 as
of September 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
November 14, 1996
12
<PAGE>
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