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, 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 (s) 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 per value Common Stock as
of October 24, 1997 was 6,262,480.
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index to unaudited condensed financial statements presented on pages 3 to 8:
Condensed balance sheets as of September 30, 1997 and December 31, 1996
Condensed statements of income for the three and nine month periods
ended September 30, 1997 and 1996.
Condensed statements of cash flows for the nine months ended September
30, 1997 and 1996.
Notes to condensed financial statements.
<PAGE>
Digital Dictation, Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
September 30, December 31,
ASSETS 1997 1996
-------------- --------------
Current assets
Cash and cash equivalents $ 3,473 $ 88,815
Accounts receivable 1,643,756 1,156,841
Employee receivables 5,725 2,762
Prepaid expenses and other 5,212 23,801
-------------- --------------
Total current assets 1,658,166 1,272,219
Property and equipment, net 1,307,781 879,983
Rent deposits 4,901 4,901
-------------- --------------
Total assets $ 2,970,848 $ 2,157,103
============== ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities
Borrowing under line of credit $ - $ 329,029
Accounts payable 331,347 151,485
Accrued payroll and payroll taxes 478,970 115,060
Current portion of long-term debt 6,390 5,931
Current portion of capital lease
obligations 32,592 33,218
Current income taxes payable 222,374 27,000
Current deferred income taxes 351,000 351,000
-------------- --------------
Total current liabilities 1,422,673 1,012,723
Long-term debt, non-current portion 2,273 7,127
Capital lease obligations, non current portion - 23,846
Non current deferred income taxes 69,000 69,000
Stockholders' equity
Common stock, par value $.01 per share
20,000,000 shares authorized,
6,262,480 and 6,257,480 shares issued
and outstanding at 9/30/97 and 12/31/96 62,625 62,575
Additional paid-in capital 578,946 571,496
Retained earnings 835,331 410,336
---------------- -------------
Total stockholders' equity 1,476,902 1,044,407
Commitments - Note 10 - -
------------- -------------
Total liabilities & stockholders'
equity $ 2,970,848 $ 2,157,103
============= ==============
See accompanying notes to condensed financial statements.
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------- ------------- ------------- ------------
Revenues $ 2,687,365 $ 1,825,326 $ 7,039,341 $ 5,074,387
Cost of services 1,734,159 1,158,935 4,491,848 3,298,657
------------ ------------ ----------- ----------
Gross profit 953,206 666,391 2,547,493 1,775,730
General & administrative
expense 689,205 470,672 1,848,454 1,237,947
------------ ----------- ----------- ----------
Operating income 264,001 195,719 699,039 537,783
Other income (expense)
Interest & other income 580 19 1,998 116
Interest expense (6,478) (9,853) (15,042) (31,239)
------------ ----------- ----------- -----------
Income before income
taxes 258,103 185,885 685,995 506,660
------------ ----------- ----------- -----------
Provision for income
taxes 99,000 71,000 261,000 193,000
------------ ----------- ----------- -----------
Net income $ 159,103 $ 114,885 $ 424,995 $ 313,660
============ =========== =========== ===========
Net income per share $ .03 $ .02 $ .07 $ .05
============ =========== =========== ===========
Weighted average shares
outstanding 6,261,326 6,257,480 6,258,762 6,257,480
============ =========== =========== ===========
See accompanying notes to condensed financial statements
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
1997 1996
Net cash flows from operating activities ------------- -------------
Net income $ 424,995 $ 313,660
Charges to operations not affecting cash:
Provision for bad debts 20,000 0
Depreciation and amortization 259,562 206,650
Deferred income tax provision 0 178,000
Changes in operating assets and liabilities:
Accounts receivable ( 506,915) (318,848)
Employee receivables (2,963) 17,566
Prepaid expenses and other 18,589 ( 8,409)
Accounts payable 179,862 (61,632)
Accrued payroll and payroll taxes 363,910 173,748
Current income taxes payable 195,374 15,000
------------- -------------
Net cash provided by operating activities 952,414 515,735
Cash flows from investing activities:
Additions to property and equipment ( 687,360) (177,806)
------------- -------------
Net cash used by investing activities ( 687,360) (177,806)
Cash flows from financing activities:
Net decrease in borrowings under line
of credit ( 329,029) (131,505)
Proceeds from advance from stockholder 0 36,035
Dividends paid on earnings prior to
recapitalization 0 (44,791)
Reduction of balance due stockholder 0 (22,240)
Reduction of long-term debt ( 4,395) (41,939)
Reduction of capital lease obligation ( 24,472) (61,025)
Proceeds from sale of common stock 7,500 0
------------- -------------
Net cash used by financing activities ( 350,396) (265,465)
Increase (decrease) in cash ( 85,342) 72,464
Cash and cash equivalents at beginning of period 88,815 32,534
------------- -------------
Cash and cash equivalents at end of period $ 3,473 $ 104,998
============= =============
See accompanying notes to condensed financial statements.
<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 nine month
period ended September 30, 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
September 30, December 31,
1997 1996
------------- -------------
Dictation and other equipment $ 2,260,556 $ 1,706,294
Furniture and fixtures 93,440 84,069
Leasehold improvements 64,671 55,083
Automobile 23,958 23,400
Software 158,431 44,850
------------- --------------
Total property and equipment 2,601,056 1,913,696
Accumulated depreciation and amortization (1,293,275) (1,033,713)
------------- --------------
$ 1,307,781 $ 879,983
============= ==============
Note 4 - Borrowings under Line of Credit
The Company has a $400,000 line of credit available from Crestar Bank,
Inc. through June 30, 1998. Interest is payable at prime plus one per cent per
annum (9.5% at September 30, 1997). The line of credit is secured by all assets
of the Company. As of September 30, 1997 there were no borrowings under this
line of credit.
Borrowings under this line of credit are solely for working capital
purposes. The related loan and security agreement requires the Company to submit
financial and business information to the Bank as and when required from time to
time. The Company is in compliance with these reporting covenants.
<PAGE>
Note 5 - Long-term Debt
September 30, December 31,
1997 1996
------------- -------------
Automobile installment loan, 10% interest,
due December 1998 $ 8,663 $ 13,058
------------- --------------
8,663 13,058
Less current portion (6,390) (5,931)
------------- --------------
$ 2,273 $ 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:
September 30, December 31,
1997 1996
------------- -------------
Dictation and other equipment $ 104,515 $ 104,515
Allowance for depreciation (52,978) (37,301)
------------- --------------
$ 51,537 $ 67,214
============= ==============
Note 7 - 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 directors and
reserved 1,300,000 shares of the Company's common stock for issuance upon the
exercise of options granted under this plan. On September 22, 1997 the Board of
Directors amended the Plan and authorized an additional 300,000 shares of the
Company's common stock for issuance upon the exercise of options granted under
this plan.
All options granted have a term of not more than ten years. The vesting
periods for options granted under the plan have ranged from immediate to four
years. The exercise price for all options granted under the plan have been at
fair market value on the date of the grant.
<PAGE>
Note 8 - Employee Stock Purchase Plan
In December, 1996 the Board of Directors approved an Employee Stock
Purchase Plan and reserved 150,000 shares of the Company's common stock. No
shares have been issued under the Plan as of September 30, 1997.
Note 9 - Employee Benefit Plan
In March 1997 the Board of Directors established a Section 125 Cafeteria
Plan.
Note 10 - 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 September 30, 1997 are as follows:
Year ending Capital Operating
September 30, Leases Leases Total
------------- ------------- -------------
1998 $ 34,458 $ 131,990 $ 166,448
1999 101,433 101,433
2000 3,179 3,179
------------- ------------- -------------
Total minimum lease
payments 34,458 $ 236,602 $ 271,060
============= =============
Amount representing
interest (1,866)
-------------
Present value of net minimum
lease payments (including
$32,592 classified as current)$ 32,592
=============
Rent expense under operating leases for the nine months ended September 30,
1997 and 1996 totaled $71,914 and $41,939, respectively.
<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-six 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 executing a marketing plan, 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 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 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 resisting temptations to
diversify into other areas.
Employees and Transcriptionists
As of September 30, 1997, the Company had twenty-nine full-time employees
and two part-time employees in its principal executive offices in Vienna,
Virginia and its regional marketing office in the Santa Barbara, California. DDI
also has arrangements with more than 250 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.
<PAGE>
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. The Company has been able to maintain its
existing client base.
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 weekly run rate was approximately $205,000 as of September 30, 1997 as
compared to approximately $145,000 as of as of September 30, 1996. The actual
revenues through September 30, together with the current run rate indicates
annual revenues for 1997 in excess of $9.6 million is likely.
Annual revenues for the preceding five fiscal years were as follows:
For the year ended December 31,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
Revenues $ 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 third quarter of 1997 were 47.2% higher than revenues
for the third quarter of 1996 and revenues for the first nine months of 1997
were 38.7% higher than the revenues for the first nine months of 1996. These
results were primarily a result of additional hospitals being taken on as
clients, without substantial reduction in the existing client base. As of
September 30, 1996, the Company was providing services to 26 health care
institutions, while currently, DDI is providing services to 36 health care
institutions, a net increase of ten new clients.
Cost of services, which includes all costs related to transcriptionists,
telephone and associated equipment depreciation, represented 64.5% of revenues
in the third quarter of 1997 as compared to 63.5% in the third quarter of 1996
and. The increase in cost of services as a percentage of revenues is
attributable primarily to an increase in telecommunications costs.
Telecommunications costs have increased as a percentage of revenues as a result
of new clients being farther from the Company's Virginia Operations Center and
from the addition of new services requiring additional telecommunications
services for delivery. Cost 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.
<PAGE>
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, transcription recruiting and other administrative expenses.
G&A expenses were 25.6% and 26.3% of revenue in the third quarter and the first
nine months of 1997 versus 25.8% and 24.4% of revenue in the third quarter and
first nine months of 1996. G&A expenses increased as a percentage of revenues
because of additional personnel expenses in 1997 and the costs associated with
the process of acquiring and commencing business with new clients. 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 September 30, 1997, the Company held cash and equivalents of
approximately $3,500, along with trade receivables of approximately $1,644,000.
As necessary to meet temporary cash flow shortages, the Company may draw upon a
$400,000 line of credit which remains available through June 30, 1998.
Borrowings against the line of credit as of September 30, 1997 were zero
compared to borrowings of approximately $133,000 as of September 30, 1996. Net
cash flow provided by operating activities was approximately $950,000 for the
nine months ended September 30, 1997 and $516,000 for the first nine months 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.
<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)
Richard D. Cameron
by: Richard D. Cameron
Chief Executive Officer
Gerald H. Gruber
By: Gerald H. Gruber
Chief Accounting & Financial Officer
October 24, 1997
<PAGE>
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