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, 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 July 14, 1997 was 6,257,480.
<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 June 30, 1997 and December 31, 1996
Condensed statements of income for the three and six month periods
ended June 30, 1997 and 1996.
Condensed statements of cash flows for the six months ended June 30,
1997 and 1996.
Notes to condensed financial statements.
<PAGE>
Digital Dictation, Inc.
CONDENSED BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 1997 1996
------------ ------------
Current assets
Cash and cash equivalents $ 46,651 $ 88,815
Accounts receivable 1,434,157 1,156,841
Employee receivables 2,965 2,762
Prepaid expenses and other 32,218 23,801
------------- -------------
Total current assets 1,515,991 1,272,219
Property and equipment, net 1,169,612 879,983
Rent deposits 4,901 4,901
------------- -------------
Total assets $ 2,690,504 $ 2,157,103
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities
Borrowing under line of credit $ 266,751 $ 329,029
Accounts payable 298,662 151,485
Accrued payroll and payroll taxes 253,734 115,060
Current portion of long-term debt 3,933 5,931
Current portion of capital lease
obligations 33,040 33,218
Current income taxes payable 90,000 27,000
Current deferred income taxes 351,000 351,000
------------- -------------
Total current liabilities 1,297,120 1,012,723
Long-term debt, non-current portion 6,233 7,127
Capital lease obligations, non current
portion 7,852 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, 6,257,480
shares issued and outstanding 62,575 62,575
Additional paid-in capital 571,496 571,496
Retained earnings 676,228 410,336
------------- -------------
Total stockholders' equity 1,310,299 1,044,407
Commitments - Note 10 - -
------------- -------------
Total liabilities & stockholders' equity $ 2,690,504 $ 2,157,103
============= =============
See accompanying notes to condensed financial statements.
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
Revenues $ 2,357,585 $ 1,706,780 $ 4,351,975 $ 3,249,062
Cost of services 1,482,100 1,083,531 2,757,689 2,139,722
------------ ------------ ------------ ------------
Gross profit 875,485 623,249 1,594,286 1,109,340
General & administrative
expense 635,121 432,051 1,159,247 767,275
------------ ------------ ------------ ------------
Operating income 240,364 191,198 435,039 342,065
Other income (expense)
Interest & other income 460 82 1,418 96
Interest expense (4,057) (9,060) (8,565) (21,386)
------------ ------------ ------------ ------------
Income before income tax 236,767 182,220 427,892 320,775
------------ ------------ ------------ ------------
Provision for income taxes 90,000 69,000 162,000 122,000
------------ ------------ ------------ ------------
Net income $ 146,767 $ 113,220 $ 265,892 $ 198,775
============ ============ ============ ============
Net income per share $ .02 $ .02 $ .04 $ .03
============ ============ ============ ============
Weighted average shares
outstanding 6,257,480 6,257,480 6,257,480 6,257,480
============ ============ ============ ============
See accompanying notes to condensed financial statements
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
Six months ended June 30,
1997 1996
------------ ------------
Cash flows from operating activities
Net Income $ 265,892 $ 198,775
Charges to operations not affecting cash:
Provision for bad debts 10,000 0
Depreciation and amortization 161,642 134,463
Deferred income tax provision 0 107,000
Changes in operating assets and liabilities:
Accounts receivable ( 287,316) (209,603)
Employee receivables ( 203) 15,825
Prepaid expenses and other ( 8,417) (21,815)
Accounts payable 147,177 (74,751)
Accrued payroll and payroll taxes 138,674 38,782
Current income taxes payable 63,000 15,000
------------ ------------
Net cash provided by operating
activities 490,449 203,676
Cash flows from investing activities:
Additions to property and equipment ( 451,270) (88,055)
------------ ------------
Net cash used by investing activities ( 451,270) (88,055)
Cash flows from financing activities:
Net increase in borrowings under line
of credit ( 62,278) 14,829
Proceeds from advance from stockholder 0 36,035
Reduction of balance due to stockholder 0 (9,265)
Dividends paid on earnings prior to
recapitalization 0 (44,791)
Reduction of long-term debt ( 2,893) (40,581)
Reduction of capital lease obligat ( 16,172) (43,943)
------------ ------------
Net cash used by financing activities ( 81,343) (87,716)
Increase (decrease) in cash ( 42,164) 27,905
Cash and cash equivalents at beginning of period 88,815 32,534
------------ ------------
Cash and cash equivalents at end of period $ 46,651 $ 60,439
============ ============
See accompanying notes to condensed financial statements.
<PAGE>
DIGITAL DICATION, 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 six month period
ended June 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
June 30, December 31,
1997 1996
Dictation and other equipment $ 2,100,620 $ 1,706,294
Furniture and fixtures 91,842 84,069
Leasehold improvements 63,228 55,083
Automobile 23,958 23,400
Software 85,318 44,850
-------------- ---------------
Total Property Assets 2,364,966 1,913,696
Accumulated depreciation and
amortization (1,195,354) (1,033,713)
-------------- ---------------
$ 1,169,612 $ 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 June 30, 1997). The line of credit is
secured by all assets of the Company. As of June 30, 1997, borrowings under this
line of credit were $266,751.
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
June 30, December 31,
1997 1996
Automobile installment loan, 10% interest,
due December 1998 $ 10,166 $ 13,058
------------- ------------
10,166 13,058
Less current portion (3,933) (5,931)
------------- ------------
$ 6,233 $ 7,127
============= ============
<PAGE>
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:
June 30, December 31,
1997 1996
-------------- --------------
Dictation and other equipment $ 104,515 $ 104,515
Allowance for depre (48,143) (37,301)
--------------- ---------------
$ 56,372 $ 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.
All options granted have a term of 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.
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 June 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 June 30, 1997 are as follows:
Year ending Capital Operating
June 30, Leases Leases Total
1998 $ 35,939 $ 100,854 $ 136,793
1999 7,998 93,195 101,193
2000 18,092 18,092
------------ ----------- ------------
Total minimum lease payments 43,937 $ 212,141 $ 256,078
=========== ============
Amount representing interest (3,045)
------------
Present value of net minimum
lease payments (including
$33,040 classified as current)$ 40,892
============
Rent expense under operating leases for the six months ended June 30,
1997 and 1996 totaled $47,872 and $27,839, 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-four 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 June 30, 1997, the Company had twenty-five full-time employees and
two 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 225
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. 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 $190,000 as of June 30, 1997 as compared
to approximately $135,000 as of as of June 30, 1996. The actual revenues through
June 30, together with the current run rate indicates annual revenues for 1997
in excess of $9.0 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
<PAGE>
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 second quarter of 1997 were 38% higher than revenues for
the second quarter of 1996 and revenues for the first half of 1997 were 34%
higher than the revenues for the first half 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 June 30, 1996, the
Company was providing services to 25 health care institutions, while currently,
DDI is providing services to 34 health care institutions, a net increase of nine
new clients.
Cost of services, which includes all costs related to transcriptionists,
telephone and associated equipment depreciation, represented 62.9% of revenues
in the second quarter of 1997 as compared to 63.5% in the second 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, transcription recruiting and other administrative expenses.
G&A expenses were 26.9% and 26.6% of revenue in the second quarter and the first
half of 1997 versus 25.3% and 23.6% of revenue in the second quarter and first
half 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 June 30, 1997, the Company held cash and equivalents of approximately
$46,000, along with trade receivables of approximately $1,434,000. 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 June 30, 1997 were approximately $267,000 compared to
borrowings of approximately $280,000 as of June 30, 1996. Net cash flow provided
by operating activities was approximately $490,000 for the six months ended June
30, 1997 and $204,000 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
July 17, 1997
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