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 March 31, 1997.
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 April 28, 1997 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 7:
Condensed balance sheets as of March 31, 1997 and December 31, 1996
Condensed statements of income for the three months ended March 31, 1997
and 1996
Condensed statements of cash flows for the three months ended March 31,
1997 and 1996
Notes to condensed financial statements
2
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 1997 1996
----------- -----------
Current Assets
Cash and equivalents $ 269,866 $ 88,815
Accounts receivable 1,008,210 1,156,841
Employee receivables 1,390 2,762
Prepaid expenses and other 35,563 23,801
----------- -----------
Total current assets 1,315,029 1,272,219
----------- -----------
Property and equipment, net 962,726 879,983
Rent deposits 4,901 4,901
----------- -----------
Total assets $2,282,656 $2,157,103
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Borrowings under line of credit $ - $ 329,029
Accounts payable 312,312 151,485
Accrued payroll and payroll taxes 304,767 115,060
Current portion of long-term debt 5,550 5,931
Current potion of capital lease obligations 37,420 33,218
Current income taxes payable 17,000 27,000
Current deferred income taxes 351,000 351,000
----------- -----------
Total current liabilities 1,028,049 1,012,723
----------- -----------
Long-term debt, non-current portion 6,080 7,127
Capital lease obligations, non-current portion 15,995 23,846
Non-current deferred income taxes 69,000 69,000
Stockholders' equity
Common stock, par value $0.01 per share, 20,000,000
Authorized, 6,257,480 shares issued and
outstanding 62,575 62,575
Additional paid-in capital 571,496 571,496
Retained earnings 529,461 410,336
----------- -----------
Total stockholders' equity 1,163,532 1,044,407
----------- -----------
Commitments - Note 8 - -
----------- -----------
Total liabilities and stockholders' equity $2,282,656 $2,157,103
=========== ===========
See accompanying notes to condensed financial statements.
3
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED STATEMENT OF INCOME
(Unaudited)
Three months ended March 31,
1997 1996
------------- -------------
Revenues $ 1,994,391 $ 1,542,282
Cost of services 1,275,589 1,056,191
----------- -----------
Gross profit 718,802 486,091
General and administrative expenses 524,128 335,224
----------- -----------
Operating income 194,674 150,887
Other income (expense)
Interest and other income 958 14
Interest expense 4,507 (12,326)
----------- -----------
Income before income taxes 191,125 138,555
Provision for income taxes 72,000 53,000
----------- -----------
Net income $ 119,125 $ 85,555
=========== ===========
Net income per share $ .02 $ .01
=========== ===========
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)
Three months ended March 31,
1997 1996
------------- -------------
Cash flows from operating activities
Net income $ 119,125 $ 85,555
Changes to operations not affecting cash
Depreciation and amortization 74,210 65,834
Deferred income tax provision - 18,000
Changes in operating assets and liabilities
Accounts receivable 148,631 (123,083)
Employee receivables 1,372 5,390
Prepaid expenses and other (11,762) (23,812)
Accounts payable 127,494 (44,126)
Accrued payroll and payroll taxes 189,707 62,577
Current income taxes payable (10,000) 35,000
---------- ----------
Net cash provided by operating activities 638,777 81,335
---------- ----------
Cash flows from investing activities
Additions to property and equipment (156,953) (29,831)
---------- ----------
Net cash from investing activities (156,953) (29,831)
---------- ----------
Cash flows from financing activities
Net (decrease) in borrowing under line of
credit (29,029) (43,391)
Proceeds from bank loan - 18,000
Increase (reduction) of long-term debt 31,905 (14,519)
Reduction of capital lease obligations (3,649) (21,325)
---------- ----------
Net cash used by financing activities (300,773) (61,235)
---------- ----------
Increase (decrease) in cash 181,051 (9,731)
Cash and cash equivalents at beginning of period 88,815 32,534
---------- ----------
Cash and cash equivalents at end of period $ 269,866 $ 22,803
========== ==========
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.
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-month
period ended March 31, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997. 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, 1996.
NOTE 3 - PROPERTY AND EQUIPMENT
March 31, December 31,
1997 1996
------------- -------------
Dictation and other equipment $ 1,842,596 $ 1,706,294
Furniture and fixtures 85,073 84,069
Leasehold improvements 55,878 55,083
Automobile 23,958 23,400
Software 63,144 44,850
------------- -------------
Total Property Assets 2,070,649 1,913,696
Accumulated depreciation and amortization (1,107,923) (1,033,713)
------------- -------------
$ 962,726 $ 879,983
============= =============
NOTE 4 - 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. Interest is payable at
prime plus one per cent per annum (9.5% at March 31, 1997). The line of credit
is secured by all assets of the Company. There were no borrowings under this
line of credit at March 31, 1997.
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 5 - LONG-TERM DEBT
March 31, December 31,
1997 1996
------------- -------------
Automobile installment loan, 10% interest,
due December 1998 $ 11,630 $ 13,058
------------ -------------
11,630 13,058
Less current portion (5,550) (5,931)
------------ --------------
$ 6,080 $ 7,127
============ ==============
NOTE 6 - CAPITAL LEASES
The Company leases various equipment under long-term contracts. Property
and equipment includes the following amounts for leases that have been
capitalized:
March 31, December 31,
1997 1996
------------- -------------
Dictation and other equipment $ 104,515 $ 104,515
Allowance for depreciation (42,527) (37,301)
------------- --------------
$ 61,988 $ 67,214
============= ==============
6
<PAGE>
NOTE 7 - STOCK OPTION PLANS
In March 1996 the Board of Directors authorized the establishment of a
non-qualified stock option plan for its full-time employees (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. 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.
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. 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 8 - COMMITMENTS
The Company rents office space under two agreements which expire August 31,
1999 and October 31, 1999.
Future minimum lease payments under capital leases for equipment and
non-cancelable operating leases for office space, equipment and an automobile as
of March 31, 1997 are as follows:
Year ending Capital Operating
March 31, Leases Leases Total
------------- ------------- ------------- -------------
1998 $ 37,420 $ 101,842 $ 139,262
1999 15,995 94,204 110,199
2000 41,556 41,556
------------ ------------ ------------
Total minimum lease
payments $ 53,415 $ 237,602 $ 290,017
============ ============
Amount representing
interest (4,094)
------------
Present value of net
minimum lease payments
(including $37,420
classified as current) $ 49,321
============
Rent expense under operating leases for the three months ended March 31,
1997 and 1996 totaled $23,921 and $13,600, respectively.
7
<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 thirty major hospitals. Twelve are located in
the general Washington, DC metropolitan area while the others do not represent
any major geographic concentration.
The Company has prepared and is launching 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
capitalizes on the Company's excellent reputation in the industry and utilizes
the willingness of existing clients to testify as to the Company's high level of
service. The Company has 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.
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.
EMPLOYEES AND TRANSCRIPTIONISTS
As of March 31, 1997, the Company had twenty-one 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 200
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.
DISCUSSION OF OPERATING RESULTS AND FINANCIAL CONDITION
OPERATING RESULTS
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.
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
requires initial start-up expenses prior to the cut-over of service, and
thereafter results in an immediate positive impact on the weekly run rate, as
revenue is increased by the full weekly amount of the new contract. The Company
has been able to maintain its existing client base. The weekly run rate was
approximately $160,000 as of March 31, 1997 as compared to approximately
$130,000 as of as of March 31, 1996. The current run rate indicates total
revenues for 1997 in excess of $8.3 million is likely.
8
<PAGE>
Annual revenues for the preceding five fiscal years were as follows:
For the year ended December 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Revenue $ 6,936,730 $ 5,057,585 $ 3,838,076 $ 2,745,897 $ 2,354,043
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 for the first quarter of 1997 were 29% higher than revenues for
the first quarter of 1996 primarily as a result of additional hospitals being
taken on as clients, without any reduction in the existing client base. As of
March 31, 1996, the Company was providing services to 23 health care
institutions, while currently, DDI is providing services to 30 health care
institutions.
Cost of services, which includes all costs related to transcriptionists,
telephone and associated equipment depreciation, represented 63.9% of revenues
in the first quarter of 1997 as compared to 68.5% in the first quarter of 1996.
The decrease in cost of services as a percentage of revenues is attributable
primarily to a decrease in telecommunications costs. Telecommunications costs
were high during the first quarter of 1996, and the Company took steps to reduce
these costs. Costs of services are directly related to revenue and it is
expected that such costs will continue at the rate of approximately two-thirds
of total revenue.
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 26.3% of
revenue in the first quarter of 1997 versus 21.7% of revenue in the first
quarter of 1996. G&A expenses increased as a percentage of revenues because of
additional personnel expenses in 1997 and launching of marketing campaign
expenses. The Company has otherwise shown the ability to increase its revenue
base without a similar percentage increase in fixed expenses in part due to its
strategy of nationwide expansion from a central operating facility.
FINANCIAL CONDITION
At March 31, 1997, the Company held cash and equivalents of approximately
$270,000, along with trade receivables of approximately $1,008,000. 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; management expects to
be able to renew the line. There were no borrowings against the line of credit
as of March 31, 1997 compared to borrowings of approximately $230,000 as of
March 31, 1996. Net cash flow from operations was $638,777 for the three months
ending March 31, 1997 and $81,335 in 1996.
Given that the Company is expected to grow at a rate in excess of its net
profit margin, it is possible the Company will need to secure a source of
additional funding to finance such growth. Management believes that projected
increases in revenues will be sufficient to fund the associated increases in
operating costs of the Company.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(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)
/S/ Richard D. Cameron
---------------------------------
By: Richard D. Cameron
Chief Executive Officer
/S/ Gerald H. Gruber
---------------------------------
By: Gerald H. Gruber
Chief Financial Officer
April 28, 1997
10
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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