SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 0-27052
DIGITAL DICTATION, INC.
Incorporated in State of Delaware
8230 Old Courthouse Road
Vienna, Virginia, 22182
Telephone : (703) 848-2830
I.R.S. Employer Identification No. 52-1451022
Securities registered pursuant to Section 12(b) of the Act:
Title of Name of each exchange on
each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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 twelve months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past ninety days.
YES [ X ] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
Revenues for the year ended December 31, 1996 were $6,936,730.
The number of shares outstanding of the Issuer's $.01 par value Common
Stock as of March 31, 1997 was 6,257,480. The aggregate market value of voting
stock held by non-affiliates of the Registrant as of March 31, 1997 is
approximately $156,437.
Documents Incorporated by Reference
None.
Transitional Small Business Disclosure Format: YES [ X ] NO [ ]
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
The Company
Digital Dictation, Inc. ("DDI", or the "Company"), a Delaware corporation,
provides medical transcription services to institutional health care providers,
including hospitals 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 medical
transcriptionists, working from their homes throughout the country, who are
connected to the Virginia Operations Center via computer modem.
Incorporation and Operating History
The Company was organized as a Virginia corporation, originally under the name
Kabrumer Transcriptions, Inc., in April 1989 and, in May 1989, acquired certain
assets from Kabrumer Transcriptions ("Kabrumer"), a proprietorship operating a
traditional local medical transcription business serving the Washington, D.C.
market and, through a second office, the Pittsburgh market. The name of the
corporation was changed to Digital Dictation, Inc. in October 1989. Digital has
since operated under the trade names "digital dictation, inc." and "ddi". In
October 1995, the Company underwent a merger and reorganization, following which
it became a reporting company under Section 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act") through the filing of a Registration Statement on
Form 10-SB with the Securities and Exchange Commission. (See "Recapitalization
of the Company".)
The Company has developed and refined an operating concept of centralized
management of remote transcription and developed an integrated information
processing and dictation control system to support that operating concept. These
technological advances, combined with a specific and stated corporate philosophy
of achieving total client satisfaction through a focus on operational
excellence, have enabled DDI to achieve a five-year record of 31% average per
year revenue growth, although there can be no assurances that such annual
revenue growth rates will be sustained.
The Company presently serves twenty-eight major hospitals, five of which are
located in Washington, D.C., five in Virginia, four in California, three in
Pennsylvania, two each in New Jersey, Maryland and Ohio, and one each in New
York, Michigan, Florida, Illinois, and Washington State. These client hospitals
include Sutter Roseville Hospital in Sacramento, California, Michael Reese
Hospital and Medical Center in Chicago, St. Francis Medical Center in
Pittsburgh, State University of New York (SUNY) Health Sciences Center in
Syracuse, New York, the National Naval Medical Center in Bethesda, Maryland, and
Mary Washington Hospital in Fredericksburg, Virginia.
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Business
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. DDI's services are utilized by institutional
health care providers to replace in-house medical transcription functions. The
Company's clients are limited to acute care hospitals and related facilities.
The Company does not provide transcription services to individual physician
practices.
Medical transcription is generally not an elective function within the health
care industry; that is, the documentation, insurance, billing and compliance
regulations within the industry require that medical reports be prepared.
Virtually all such reports are dictated and transcribed, with only a small
percentage hand-written. The medical transcription process, however, is highly
specialized and requires the use of skilled and experienced personnel. The
ability to retain qualified medical transcriptionists is one of the critical
success factors for a company in this industry.
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 central location. The Company retains
high caliber medical transcriptionists, many of whom hold the designation of
Certified Medical Transcriptionist (CMT) from the American Association for
Medical Transcription. All of DDI's transcriptionists, referred to as
independent medical transcriptionists ("IMT's"), work from their homes
throughout the country, and are supported by a centralized transcription control
and management system located at the Company's Virginia Operations Center.
DDI has developed a proprietary in-hospital transcription processing system that
is electronically linked with the Company's centralized processing system in its
Virginia Operations Center. This in-hospital system provides totally automated
processing of all incoming transcriptions, enabling the hospital to eliminate
clerical positions formerly assigned to transcription processing. Dictated
reports are transcribed, edited, transmitted to hospitals, printed, up- loaded
to mainframe-based hospital information systems and faxed to physicians, all
under computer control, around the clock.
The Company has refined its operating concept of centralized management of
remote transcription and has developed a proprietary, integrated information
processing and dictation control system to support that operating concept. The
Company's emphasis is on the management and control of the entire dictation and
transcription process for its clients. As such, its services are limited
exclusively to full contract (outsourced) transcription. Unlike most firms in
the industry, the Company does not accept contracts for fill-in or overflow
transcription.
The Company generally enters into written contracts with its clients pursuant to
which the Company provides medical transcription services for a fixed fee per
line of transcription or per transcribed report. These contracts vary in length
from one to four years, with the majority of contracts containing an automatic
annual renewal clause with a price increase generally in the amount of the
consumer price index. Most of the Company's contracts enable the client to
terminate the contract at any time without cause by providing sixty days advance
written notice, although no client has ever exercised this clause.
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.
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The Transcription Process
Physicians are able to dictate relevant patient information into the Company's
recording units via telephone from anywhere in the continental U.S. The
Company's proprietary software then enables its IMT's located anywhere in the
country to dial into the DDI digital dictation systems and transfer dictation
directly onto a personal computer equipped with a DDI-provided voice card. The
IMT transcribes the dictated material into document format.
All transcribed material is subject to review by one of the Company's ten senior
transcriptionists, who function as company transcription editors.
Transcriptionists are required to "flag" any word or phrase for which they do
not understand the meaning. All such "flagged" reports are electronically
transmitted to one of the editors prior to transmission to the hospital. The
editor then listens to the report and corrects or validates all of the "flagged"
words or phrases. The corrected report is returned to DDI for transmission to
the hospital; a copy of the corrections is sent to the transcriptionist via
internal company e-mail.
Market for Medical Transcription Services
The primary users of medical transcription services include hospitals, clinics,
emergency medicine facilities, radiology facilities and HMO's. Industry
estimates are that such users spend approximately $6 billion per year for
medical transcription services with approximately $1 billion of such total
expenditures going to outside medical transcription service companies and the
remainder representing expenditures by users on in-house personnel. As health
care reform continues to force medical institutions to become more efficient,
management believes that the transition from in-house, employee-performed
transcription to the use of outside medical transcription firms will accelerate.
Competition/Market Dynamics
Management believes that the medical transcription services industry is a large,
rapidly-growing and highly fragmented service industry. Industry estimates place
the number of small transcription companies to be as high as 1,500. Management
also believes that this industry is in the beginning stages of a transition from
a clerical- based, local cottage industry to a technology-driven, information
processing environment, which may result in substantial consolidation among the
market participants who are generally ill-equipped and poorly organized to
operate successfully in such an environment.
The companies which comprise the outside medical transcription services industry
are believed by management to include the following: (1) MRC Group (a roll-up of
Medifax/Secrephone, Dictation West and Medical Records Corp.), with estimated
annual revenue of approximately $100 million, (2) MedQuist, Inc., a publicly
held company, with 1996 annual revenue of $60 million, (3) approximately eight
national and regional firms, including the Company, each with estimated annual
revenues of from $5 million to $15 million; and (4) as many as 1,500 small,
local companies, most of them privately held, with annual revenues of less than
$5 million and mostly below $1 million.
To the Company's knowledge, the smaller transcription firms utilize
transcriptionists who work in one office and provide medical transcription
services to the local medical institutions. Although computers may be used for
the word processing function, the fundamental process remains paper-driven.
Transcribed reports are either printed in the local office and delivered by
courier or printed on-site at the hospital using a remote printer.
Management believes that the larger transcription firms continue to embrace this
operating model as well. Although these companies are considered to be
"national" firms, their method of doing business is through a number of small
offices located throughout the country. Each office operates as a local
transcription company, managed by a transcriptionist and servicing the local
institutions with locally-based transcriptionists in a highly decentralized
operating environment, with little technical or management sophistication.
Management believes that this structure inhibits the ability of these companies
to achieve significant economies of scale and also restricts their ability to
achieve any real level of operational control over the business.
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Management believes that as a result of these limitations, the medical
transcription service industry is characterized by an extraordinarily high level
of customer dissatisfaction, although management is not aware of the existence
of published industry statistics to that effect. The Company also understands
that many medical institutions using outside transcription firms change their
vendors every two or three years, indicating a general dissatisfaction with the
services provided by the industry. In the opinion of management, the reputation
of the industry for user dissatisfaction is the primary factor slowing the
transition from in-house transcription to the use of outside services.
Another factor impacting on the market development is the evolving need by
medical institutions to eliminate paper- based systems in favor of electronic
medical records. Currently, an important component of a medical record is the
transcribed document. Management believes that the participants in the medical
transcription services industry have failed to effectively address the need for
electronic interface between the transcription systems and the institutional
patient care computer systems.
For these reasons, the Company believes that the medical transcription services
industry, in its present condition, is unable to meet the needs of its customer
base. The transcription services industry is transcription-driven, technically
unsophisticated and locally oriented, while its customers are seeking
information-driven, technically sophisticated services which are not limited by
geographic boundaries. Management believes that this gap creates enormous
opportunities for the companies such as DDI that are culturally and technically
prepared to meet the rapidly-evolving requirements of the health care industry.
Proprietary Software
All of the Company's applications software has been developed in-house by its
employees, and the rights to such software are held exclusively by the Company.
All software is protected by copyrights through notices that appear on the
computer screen. The Company neither sells nor licenses its software to any
other person or firm, nor does it have any plans to do so in the future. DDI
considers its proprietary software to be an essential element in its ability to
achieve and maintain a competitive advantage. Management believes, however, that
the use of this software is so highly integrated with the organizational
structure of the Company that the software alone would be of little value to a
competing firm.
The Company's Strategy
The fundamental strategy of the Company is to serve the institutional medical
transcription market faster and better than any other firm in the industry. The
three essential components of this strategy are as follows:
o to utilize systems engineering and computer and telecommunications
technology to automate the entire transcription management process;
o to continue to retain one of the most highly skilled groups of IMT's in the
industry; and
o to develop an organizational culture that continually strives to exceed the
service expectations of clients.
The technology component of the DDI strategy is focused on continuing to create
and improve a centralized transcription management and processing system. The
Company's centralized transcription processing system enables DDI to serve a
national client base efficiently with transcriptionists located throughout the
country from a single operations center, while maintaining control of each step
of the transcription process and while gaining a cost advantage over competing
firms operating from local offices.
The transcription component of the Company's strategy recognizes that the IMT is
the producer of the product provided to the clients, and that DDI cannot be
successful without a productive and loyal network of IMT's. The Company's
strategy is to acknowledge dependence upon this group of people and to establish
an environment that not only rewards them financially for their efforts, but
also provides them with respect for their skills and talents, technical and
personal support for their transcription activities and on-going expressions of
gratitude and appreciation for their efforts on behalf of the Company.
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The service component of the Company's strategy is to impress the client with a
high-quality level of service, so superior that it engenders a significant
degree of client loyalty. This focus on customer service will continue to be the
cornerstone of DDI, for it is the essential element of the success of the
Company.
The three components of the DDI strategy are linked together to form a basic
operating approach to the business. Through its commitment to technology, DDI
utilizes machines to handle the transactional processes in a controlled and
dependable manner and at a lower cost, to support the effective production of
transcribed documents by a national transcription network, and to permit
operations personnel to focus on dealing with the non-transactional needs of the
customers. The stategy of maintaining a high quality group of transcriptionists
based upon the principles of respect and appreciation, as well as competitive
compensation, enables DDI to continue to attract and retain the best
transcriptionists and to continue to enlarge the network to meet the needs of
the growing client base.
In an industry characterized, as management believes, by unreliable transaction
processing and non-responsive customer service, the DDI strategy is intended to
differentiate the Company from all of its competitors in a manner that will
support the continuing acquisition of new clients and the on-going retention of
the existing client base.
Marketing Plans
Having solidified its central operating concept and refined its methods of
recruiting and training IMT's, 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 hired one regional manager in
California 1995 and expects to hire an additional regional manager for the East
Coast in April of 1997 to provide new business development and additional client
support. The Company's marketing to date has been conducted primarily by senior
management.
Effects of Governmental Regulations
The Company is aware of the current political climate with respect to proposed
health care reform legislation. While no major national legislation to that
effect has yet been enacted, management believes that, in general, future health
care reform legislation which prompts health care providers to reduce operating
costs to remain competitive should increase the demand for DDI's medical
transcription services.
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Discussion of Operating Results and Financial Condition
Reference is made to the Company's audited financial statements for the years
ended December 31, 1996 and 1995 presented in Part F/S of this report.
The Company has reported average annual growth in revenues over the past five
fiscal years of 31%. 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. 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
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-eight new clients to its original base of
five, while losing only five clients: two small facilities whose revenues were
too small to continue to serve profitably, an emergency facility whose
transcription needs were taken over by its parent hospital, a VA hospital that
was merged into another larger hospital, and an HMO that was sold by its parent
company to a competing facility. This record of adding new clients while
maintaining existing client loyalty has resulted in a stable and generally
predictable annual revenue growth rate. This client base currently stands at 28
clients with five additional clients with signed contracts awaiting installation
in the next ninety days.
As of March 31, 1997, the Company's weekly "run rate" had grown to in excess of
$165,000, with signed contracts representing an additional $20,000 per week
awaiting installation. This run rate indicates that annual revenue for 1997 in
excess of $9 million is likely. 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.
Financial condition
At December 31, 1996, the Company held cash and equivalents of approximately
$89,000, along with trade receivables of approximately $1,157,000.
As necessary to finance its growth rate, the Company may draw upon a $450,000
line of credit obtained during 1995 which remains available through June 30,
1997. The Company expects to renew its line of credit beyond that date.
Borrowings against the line of credit, which totalled approximately $329,000 as
of December 31, 1996, bear interest at prime plus one per cent per annum and are
secured by all the assets of the Company. Given that the Company will continue
to grow at a rate in excess of its net profit margin, the Company will be
required to draw against its line of credit or acquire additional equity
funding. In addition to being collateralized by the assets of the Company, the
line of credit is personally guaranteed by Richard Cameron, the Company's
President. Management further believes that projected increases in future
revenues will be sufficient to fund the associated increases in operating costs
of the Company. Net cash flow from operations was $465,869 in 1996 and $599,690
in 1995.
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Results of operations
Revenues increased by 37% from 1995 to 1996, and by 32% from 1994 to 1995.
Approximately 2% of the increase in revenues in both periods was due to price
increases to current customers; the remainder is due primarily to additional
hospitals being taken on as clients, without any reduction in the existing
client base. Throughout this period, DDI has continued to provide the same basic
level of service at the same general price level, subject to adjustment for CPI
increases, to all of its clients, both existing and new. At the close of fiscal
year 1993, DDI was providing services to 15 health care institutions, 18 at the
close of 1994, 22 at the close of 1995 and 26 at the close of 1996.
Cost of services, which includes all costs related to the IMT's, and telephone
and associated equipment depreciation, represented 64.7% of revenue in 1996 as
compared to 68.0% in the prior year. Costs of services are generally directly
related to revenue and it is expected that such costs will continue at the rate
of approximately two-thirds of total revenue. The decrease of 3.3% as a
percentage of revenue compared to 1995 was due primarily to improved control of
telephone costs. As the Company continues to expand nationally by obtaining
contracts with institutions located outside the local telephone calling area,
the amount of telecommunications services used by the Company will continue to
grow. However, the Company's new, multi-year, volume discount agreement with a
national long distance vendor has resulted in improvements in the overall cost
of telecommunications.
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 as a
percentage of revenue remained relatively consistent in both years (24.7% of
revenue in 1996 versus 25.4% of revenue in 1995).
Interest expense increased from $25,121 in 1995 to $39,187 in 1996, reflecting
increased borrowing against the Company's line of credit to finance larger
average accounts receivable balances resulting from increased revenue.
Employees and Transcriptionists
As of March 31, 1997, the Company had twenty-two full-time employees and two
part-time employees in its principal executive offices and Virginia Operations
Center. None of the Company's employees is represented by a labor organization.
The Company has never experienced a strike or work stoppage, and believes its
relations with its employees are good.
DDI presently 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. The agreements with the transcriptionists have no specified
duration and may be terminated by either party, without notice, for any reason.
The Company, however, has enjoyed productive, long-term relationships with the
majority of its transcriptionists who have continued their association with the
Company well beyond the completion of the sixty- to ninety-day transition period
from the date they began working with the Company.
Recapitalization of the Company
On June 27, 1995, Mr. Richard D. Cameron, the current President and Chief
Executive Officer of the Company, acquired all of the issued and outstanding
common stock of DDI (the "Digital Stock") from his former wife Ms. Jennifer B.
Cameron in connection with the termination of their marriage and incident to
their divorce settlement. Mr. Cameron's payments under the divorce settlement
were financed through a loan, secured by 50% of the Digital Stock acquired by
Mr. Cameron, from Proactive Partners, L.P., a California limited partnership
(together with its affiliates and/or designees referred to as "Proactive") under
an arrangement by which Proactive ultimately would acquire from Mr. Cameron 50%
of the Digital Stock for $2,265,000. (See Item 5 - Security Ownership of
Management and Certain Security Holders.)
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The general partner of Proactive Partners, L.P. is Proactive Investment
Managers, L.P., two of whose general partners, Mr. Charles C. McGettigan and Mr.
Myron A. ("Mike") Wick, III, became directors of Digital on June 27, 1995. Mr.
Cameron, Proactive and Digital executed a Shareholders' Agreement (the
"Shareholders' Agreement") governing issues such as the composition of the board
of directors (See Item 3 - Directors and Executive Officers.), employee and
officer compensation (See Item 4 - Remuneration of Directors and Officers.), and
stock options (See Item 5 - Security Ownership of Management and Certain
Security Holders.).
Effective as of October 10, 1995, the Company was merged (the "Merger") with and
into SonoChem, Inc. ("SonoChem"), with SonoChem being the corporation surviving
the Merger while it was the business of the Company that continued. SonoChem, an
inactive Delaware corporation with no assets or liabilities, was organized in
June 1985 as a subsidiary of Sonex Research, Inc., a Maryland corporation. All
of the 312,874 shares of SonoChem's common stock issued and outstanding prior to
the Merger had been registered previously under the Exchange Act. Mr. McGettigan
and Mr. Wick are also directors of Sonex Research, Inc. In addition, Proactive
is the largest shareholder of Sonex by virtue of holdings of convertible
preferred stock and common stock purchase warrants.
The Merger was effected through the issuance and exchange by SonoChem of
5,944,606 additional shares of its common stock for 100% of the issued and
outstanding shares of Digital stock. As a result of this issuance and exchange
of shares, immediately following the Merger, the holders of 100% of the
pre-Merger issued and outstanding shares of Digital stock became the holders of
95% of the issued and outstanding shares of common stock of the surviving
corporation. In connection with the Merger, the surviving corporation's name was
changed from SonoChem, Inc. to Digital Dictation, Inc. In addition, the
pre-Merger officers and directors of Digital Dictation, Inc. became the initial
officers and directors of the corporation surviving the Merger.
Because it is the business of the Company that survived the Merger, for
financial reporting purposes the Merger was treated as a recapitalization of the
Company in the position of acquirer in a reverse merger. The terms "Company" or
"DDI" are used in this report to refer to both the post-Merger and pre-Merger
corporations known as Digital Dictation, Inc.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company's principal executive offices and its Virginia Operations Center
occupy approximately 4200 square feet of the first floor of 8230 Old Courthouse
Road, Vienna, Virginia, 22182. This facility, which is comprised of two separate
spaces first occupied by the Company in August 1991 and October 1996, is being
leased under two agreements through August 1999 and October 1999, respectively.
The Company has equipped this facility with computer, dictation, telephone and
administrative equipment necessary to support the operation. Management believes
that all of the Company's property is adequately covered by insurance.
ITEM 3 - DIRECTORS AND EXECUTIVE OFFICERS
Directors of the Company do not receive fees for their services, but the Board
of Directors may in the future determine to pay directors' fees. Directors,
however, are eligible to receive stock option grants and are reimbursed for
expenses related to their activities as directors. Executive officers are
appointed and serve at the discretion of the Board of Directors.
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The names, ages, dates terms as directors expire, and principal occupations and
employment of the directors and executive officers of the Company are set forth
below.
Term as
director
Name Age expires Position
---- --- ------- --------
Richard D. Cameron 52 1997 Chief Executive Officer, President
and Director
Bert I. Helfinstein 63 1997 Director
Charles C. McGettigan 52 1997 Director
Myron A. ("Mike") Wick, III 53 1997 Director
Mr. Richard D. Cameron served as the principal operating manager of the Company
from May 1989 through June 27, 1995, and has served as Chief Executive Officer,
President and a director since that date. From 1985 to 1988 Mr. Cameron served
as President and Chief Executive Officer of PRAXIS Group, Inc., the computer
services subsidiary of FPL Group, Inc., a New York Stock Exchange company. Prior
to 1985 Mr. Cameron held a variety of positions in the computer services
industry.
Mr. Bert I. Helfinstein has served as a director of the Company since March
1996. From 1985 until 1989 Mr. Helfinstein was President and Chairman of the
Board of Entre Computer Centers, Inc., a franchisor of retail computer stores.
From 1989 until 1992 he was President and Chairman of the Board of Viteq, Inc.,
a manufacturer of computer peripheral equipment. Since 1993 Mr. Helfinstein has
served as Chairman of the Board of Campus Tech. Inc., a PC software distribution
company.
Mr. Charles C. McGettigan has served as a director of the Company since June 27,
1995. He was a founding partner in 1991 and is a general partner of Proactive
Investment Managers, L.P. In 1988 Mr. McGettigan co-founded McGettigan, Wick &
Co., Inc., an investment banking firm. From 1984 to 1988 he was a Principal,
Corporate Finance, of Hambrecht & Quist, Inc. Prior to that Mr. McGettigan was a
Senior Vice President of Dillon, Read & Co. Inc. Mr. McGettigan currently serves
on the Boards of Directors of I-Flow Company, Modtech, Inc., PMR Company, Sonex
Research, Inc., and Onsite Energy, Inc., of which he is the Chairman.
Mr. Myron A. ("Mike") Wick, III, has served as a director of the Company since
June 27, 1995. He was a founding partner in 1991 and is a general partner of
Proactive Investment Managers, L.P. In 1988 Mr. Wick co-founded McGettigan, Wick
& Co., Inc., an investment banking firm. From 1985 to 1988 Mr. Wick was Chief
Operating Officer of California Biotechnology, Inc. in Mountain View,
California. Mr. Wick currently serves on the Boards of Directors of Children's
Discovery Centers of America, Inc., Modtech, Inc., NDE Environmental, Phoenix
Network, Inc., and WrayTech Instruments, Inc., and serves as the Chairman of the
Board of Directors for Sonex Research, Inc. and Stat-Tech International Company.
The Company has recently hired Mr. Gerald H. Gruber, a certified public
accountant, to serve as Executive Vice President and Chief Financial Officer
beginning on April 8, 1997. Mr. Gruber, 59, was formerly Controller at James
Martin Company, a software engineering consulting firm, from 1993 to 1997. Prior
to that, from 1988 to 1993, he was Executive Vice President of PracSys
Corporation, a financial services company. Mr. Gruber served as Executive Vice
President and Chief Financial Officer of PRAXIS Group, Inc., the computer
services subsidiary of FPL Group, Inc., a New York Stock Exchange company.
Pursuant to the Shareholders' Agreement, Mr. Cameron and Proactive are obligated
to vote their shares of Common Stock to constitute a Board of Directors of the
Company consisting of five members, appointed as follows: Mr. Cameron himself,
two individuals appointed by Mr. Cameron and two individuals appointed by
Proactive. To date, Mr. Cameron has appointed only one of the two directors, Mr.
Helfinstein, while Mr. McGettigan and Mr. Wick were appointed by Proactive.
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ITEM 4 - REMUNERATION OF DIRECTORS AND OFFICERS
The only executive officer is the Company's president and chief executive
officer, Mr. Richard D. Cameron, who was compensated at an annual rate of
$150,000 in 1996. The Company does not have an employment agreement with Mr.
Cameron; however, pursuant to the Shareholders' Agreement, the Company agreed to
continue to employ Mr. Cameron as its president at an annual salary of $165,000
through December 31, 1997. Mr. Cameron's employment and annual salary after that
date will continue to be subject to an annual review by the Board of Directors.
In addition, Mr. Cameron is provided with a company car and customary health
benefits, and is entitled to receive annual cash performance bonuses equal to
25% of any year-to-year increase in pre-tax profits that exceeds 30%. The amount
of such bonus earned by Mr.Cameron for 1996 was $73,000.
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 up to 800,000 shares of the Company's common stock for
issuance upon the exercise of options granted under this plan. Consultants to
the Company are also eligible to receive options pursuant to the Employee Plan.
The options granted to date to eligible individuals 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 December 31, 1996, the Company had granted options to purchase a total of
636,346 shares at exercise prices between $0.75 and $1.00 per share. No portion
of these outstanding options had become exercisable as of that date.
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 up to 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. There have been no further grants of options to directors
since these initial grants, and no portion of these options had become
exercisable as of December 31, 1996.
ITEM 5 - SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY HOLDERS
As of March 31, 1997, there were 6,257,480 shares of DDI Common Stock issued and
outstanding. The following table sets forth as of March 31, 1997 information
relating to beneficial ownership by each of the directors and executive officers
of the Company, the directors and executive officers of the Company as a group,
and any other persons known by the Company to be the beneficial owner of more
than ten percent of the currently issued and outstanding common stock of the
Company. Unless otherwise noted, all shares are beneficially owned and sole
voting and investment power is held by the persons named.
11
<PAGE>
Shares Shares Rights to Total shares %
owned owned acquire beneficially of
Name and address (1) directly indirectly shares(2) owned(3) class
-------------------- -------- ---------- --------- -------- -----
Richard D. Cameron 2,952,703 - 178,035(4) 3,130,738 48.7
Bert I. Helfinstein - - 25,000(6) 25,000 0.4
Charles C. McGettigan 20,000 2,972,303(5) 25,000(6) 2,992,303 47.8
Myron A. ("Mike") Wick, III - 2,972,303(5) 25,000(6) 2,972,303 47.5
All directors and officers,
as a group (four persons) 2,972,703 2,972,303(5) 100,000(6) 6,045,006 95.1
Proactive
50 Osgood Place
San Francisco, CA 94133 2,972,303 - 2,972,303 47.5
- -----------------------------
(1) The business address for each director is 8230 Old Courthouse Road,
Vienna, VA, 22182.
(2) Represents rights to acquire shares which are already outstanding;
accordingly, the exercise of such rights will not result in an increase
in the total of outstanding shares for computing the percentage of
beneficial ownership of the reporting person exercising such rights.
(3) The term "shares beneficially owned" encompasses those shares which the
reporting person currently owns, or has the right to acquire within the
next sixty days, either directly or indirectly. The percentage of
beneficial ownership of a reporting person assumes the exercise of all
such rights held by the reporting person and is computed by increasing
the total number of shares of Common Stock outstanding by the number of
shares issuable to the reporting person upon the exercise of such
rights. Shares which the reporting person has the right to acquire are
not deemed to be outstanding, however, for computing the percentage of
beneficial ownership of any other reporting person.
(4) Includes 153,035 shares which may be acquired upon the exercise of
currently exercisable options to purchase shares from Proactive at an
exercise price of $1.44 per share (See the table below.) and currently
exercisable options to purchase 25,000 shares from the Company at an
exercise price of $.76 per share
(5) Represents shares owned directly by Proactive, which shares could be
deemed to be beneficially owned by both Mr. McGettigan and Mr. Wick, who
are general partners of Proactive Investment Managers, L.P., which is
the general partner of Proactive. Both individuals exercise shared
voting and investment power with respect to such shares.
(6) Represents shares which may be acquired upon the exercise of currently
exercisable options to purchase shares from the Company at an exercise
price of $.76 per share.
In connection with Proactive's purchase of Mr. Cameron's shares in Digital (See
Item 1 - Business - "Recapitalization of the Company"), Mr. Cameron was granted
options to purchase up to 459,105 shares of DDI Common Stock now held by
Proactive, exercisable as follows:
Exercise Number of
Period exercisable price shares
------------------ ----- ------
Currently, through October 30, 1997 $1.44 153,035
October 31, 1997 through October 30, 1998 $2.16 153,035
October 31, 1998 through October 30, 1999 $2.88 153,035
ITEM 6 - INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
None.
12
<PAGE>
PART II
ITEM 1 - MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The authorized capital stock of the Company consists of 20,000,000 shares of
common stock, $.01 par value (the "Common Stock"). There were 6,257,480 shares
of Common Stock issued and outstanding as of March 31, 1997, held by 428 holders
of record. The shares for approximately 370 additional beneficial owners are
held of record (in "street name") by brokers, dealers, banks, and other entities
holding such securities of record in nominee name or otherwise or as a
participant in a clearing agency registered pursuant to Section 17A of the
Securities Exchange Act of 1934 (the "Exchange Act").
The Common Stock trades in the over-the-counter market on the OTC Bulletin Board
service under the symbol "DGDT". The OTC Bulletin Board is an electronic and
screen-based quotation medium, operated and regulated by the National
Association of Securities Dealers, Inc. Quotation information on OTC Bulletin
Board stocks is available on stockbrokers' desktop terminals.
A total of 312,874 shares, or 5%, of the Common Stock currently outstanding,
representing the ownership interest of the stockholders of SonoChem immediately
prior to the Merger (See Part I, Item 1, "Recapitalization of the Company".) are
tradeable in the over-the-counter market. The remaining 5,944,606 of the
outstanding shares of Common Stock issued to Mr. Cameron and Proactive in
connection with the Merger are considered "restricted shares" and may not be
resold currently in public distribution except in compliance with applicable
registration requirements or exemptions therefrom. In addition, these shares are
subject to the terms of the Shareholders' Agreement (See Item 1 - Business -
"Recapitalization of the Company") with respect to certain matters related to
the composition of the Company's Board of Directors and certain employee-related
matters.
The Board of Directors currently has no plans or understandings with regard to
the payment of any cash dividends in the foreseeable future. Holders of Common
Stock are entitled to receive dividends when, as and if declared by the Board of
Directors of the Company out of funds legally available therefor. In the event
of the liquidation, dissolution or winding up of the affairs of the Company,
holders of Common Stock are entitled to receive ratably the net assets of the
Company available for distribution to holders of Common Stock. Holders of Common
Stock have no cumulative voting, preemptive, subscription, redemption sinking
fund or conversion rights. Each share of Common Stock entitles the holder
thereof to one vote on all matters submitted to a vote of the stockholders.
ITEM 2 - LEGAL PROCEEDINGS
As of the date of this report, management is not aware of any legal proceedings
pending against the Company.
ITEM 3 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The Company has had no disagreements with its current independent accountants,
Hozik & Charin, on any matter of accounting principles or practices or financial
statement disclosure. Hozik & Charin have been the Company's independent
accountants since 1993.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The only matter submitted to a vote of security holders during 1996 was the
election of directors.
13
<PAGE>
ITEM 5 - COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Under federal securities laws, upon the December 23, 1995 effectiveness of its
Registration Statement on Form 10- SB filed with the Securities and Exchange
Commission (SEC), the Company's directors, officers, and any other persons
holding more than 10% of the Company's common stock were required to report
their initial ownership of the Company's common stock, and are now also required
to report any subsequent changes in that ownership, to the SEC. Such persons are
also required to furnish the Company with copies of all such reports that they
file. To the best of the Company's knowledge, based solely on a review of the
copies of such reports furnished to the Company and written representations that
no other reports were required, all of those filing requirements have been
satisfied.
ITEM 6 - REPORTS ON FORM 8-K
Not applicable.
PART F/S
FINANCIAL STATEMENTS
Index to financial statements presented on pages 15 to 28:
Report of independent auditors Financial statements:
Balance sheets as of December 31, 1996 and 1995
Statements of income for the years ended December 31, 1996 and 1995
Statements of stockholders' equity for the period from January 1, 1995
through December 31, 1996
Statements of cash flows for the years ended December 31, 1996 and 1995
Notes to financial statements
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Digital Dictation, Inc.
Vienna, Virginia
We have audited the accompanying balance sheets of Digital Dictation, Inc. as of
December 31, 1996 and 1995, and the related statements of income, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Dictation, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
HOZIK & CHARIN
McLean, Virginia
February 15, 1997
15
<PAGE>
DIGITAL DICTATION, INC.
BALANCE SHEETS
December 31,
-------------------
1996 1995
ASSETS - Note 5 ---- ----
Current assets
Cash and cash equivalents $ 88,815 $ 32,534
Accounts receivable - Note 3 1,156,841 714,206
Employee receivables 2,762 23,024
Prepaid expenses and other 28,702 24,580
---------- ----------
Total current assets 1,277,120 794,344
Property and equipment, net - Notes 4 and 8 879,983 845,629
---------- ----------
Total assets $2,157,103 $1,639,973
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Borrowings under line of credit - Note 5 $ 329,029 $ 264,747
Accounts payable 151,485 212,343
Accrued payroll and payroll taxes 115,060 129,100
Dividends payable - Note 11 44,791
Current income taxes payable - Note 10 27,000
Current portion of long-term debt - Note 7 5,931 56,390
Current portion of capital lease
obligations - Notes 8 and 9 33,218 68,798
Current deferred income taxes - Note 10 351,000 152,000
---------- ----------
Total current liabilities 1,012,723 928,169
Long-term debt, non current portion - Note 7 7,127
Capital lease obligations, non current
portion - Notes 8 and 9 23,846 57,064
Non current deferred income taxes - Note 10 69,000 50,000
Commitments - Note 9
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) 410,336 (29,331)
---------- ----------
Total stockholders' equity 1,044,407 604,740
---------- ----------
Total liabilities and stockholders' equity $2,157,103 $1,639,973
========== ==========
See accompanying notes to financial statements.
16
<PAGE>
DIGITAL DICTATION, INC.
STATEMENTS OF INCOME
Years ended December 31,
------------------------
1996 1995
---- ----
Revenues $6,936,730 $5,057,585
Cost of services 4,490,239 3,442,698
---------- ----------
Gross profit 2,446,491 1,614,887
General and administrative expenses 1,716,691 1,284,084
---------- ----------
Operating income 729,800 330,803
Other income (expense)
Interest and other income 2,054 735
Interest expense (39,187) (25,121)
---------- ----------
(37,133) (24,386)
---------- ----------
Income before income taxes 692,667 306,417
Income taxes (benefit) - Note 10 253,000 (18,000)
---------- ----------
439,667 324,417
Income tax adjustment for change in
tax status - Note 10 (220,000)
---------- ----------
Net income $ 439,667 $ 104,417
========== ==========
Net income per share $.07
====
Weighted average shares outstanding 6,257,480
=========
Pro forma data (Unaudited) - Notes 2 and 10
Income before income taxes, as reported $ 306,417
Pro forma provision for income tax 112,000
----------
Pro forma net income $ 194,417
==========
Pro forma net income per share $.03
====
Weighted average shares outstanding 6,257,480
=========
See accompanying notes to financial statements.
17
<PAGE>
DIGITAL DICTATION, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1995 and 1996
Additional Retained Total
Common Paid-in Earnings Stockholders'
Stock Capital (deficit) Equity
----- ------- --------- ------
Balance at January 1, 1995 $62,575 $354,492 $411,621 $ 828,688
Merger costs (51,572) (51,572)
Dividends paid to former
stockholder (232,002) (232,002)
Dividends payable (44,791) (44,791)
Constructive dividend - Note 11 268,576 (268,576)
Net income 104,417 104,417
------- -------- -------- ----------
Balance at December 31, 1995 62,575 571,496 (29,331) 604,740
Net income 439,667 439,667
------- -------- -------- ----------
Balance at December 31, 1996 $62,575 $571,496 $410,336 $1,044,407
======= ======== ======== ==========
See accompanying notes to financial statements.
18
<PAGE>
DIGITAL DICTATION, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31,
-------------------------
1996 1995
---- ----
Cash flows from operating activities
Net income $439,667 $104,417
Charges to operations not affecting cash:
Depreciation and amortization 282,132 247,551
Net deferred income tax provision 218,000 202,000
Loss on disposal of property and equipment 463
Changes in operating assets and liabilities:
Accounts receivable (442,635) (90,110)
Employee receivables 20,262 (11,469)
Due from stockholder 7,463
Prepaid expenses and other (4,122) (21,036)
Accounts payable (60,858) 125,332
Accrued payroll and payroll taxes (14,040)
Current income taxes payable 27,000 35,542
-------- --------
Net cash provided by operating activities 465,869 599,690
Cash flows from investing activities
Additions to property and equipment (316,949) (408,952)
-------- --------
Net cash used by investing activities (316,949) (408,952)
-------- --------
Cash flows from financing activities
Borrowings under line of credit 64,282 264,747
Proceeds from long-term debt 18,000
Merger costs charged to additional paid-in capital (51,572)
Dividends paid to former stockholder (44,791) (232,002)
Principal payments on long-term debt (61,332) (55,386)
Principal payments on capital lease obligations (68,798) (85,713)
-------- --------
Net cash used by financing activities (92,639) (159,926)
-------- --------
Increase in cash and cash equivalents 56,281 30,812
Cash and cash equivalents at beginning of year 32,534 1,722
-------- --------
Cash and cash equivalents at end of year $ 88,815 $ 32,534
======== ========
See accompanying notes to financial statements.
19
<PAGE>
DIGITAL DICTATION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 1 - ORGANIZATION, CHANGE IN OWNERSHIP AND MERGER
Organization:
- -------------
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.
Change in Ownership:
- --------------------
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, among other things, 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.
Merger:
- -------
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 became the holders of 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 information is not presented because a
business combination did not occur. The recapitalization of the Company's
authorized, issued and outstanding common stock has been given retroactive
effect in the accompanying financial statements.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates:
- -----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates that affect certain
reported amounts and disclosures. Accordingly, actual results could differ from
those estimates.
Revenue Recognition:
- --------------------
Revenue for transcription services is recognized when the services are provided.
Property and Equipment:
- -----------------------
Property and equipment is stated at cost or, in the case of equipment acquired
under capital leases, at the present value of future lease payments, less
accumulated depreciation and amortization. Repair and maintenance expenditures
are charged to operations in the period incurred. Depreciation is computed under
the straight line method for financial reporting purposes and accelerated
methods for income tax purposes. Equipment, furniture, fixtures, automobile, and
leasehold improvements are depreciated over five to seven years. Software is
amortized using the straight line method over five years.
20
<PAGE>
Income Taxes:
- -------------
For periods through October 9, 1995, the Company was taxed as an S
corporation. Accordingly, federal and state income taxes were the personal
responsibility of the stockholder, and no provision for income taxes was
necessary. Effective October 10, 1995, as a result of the reverse acquisition,
the Company is taxed as a C corporation.
Effective October 10, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Under SFAS
No. 109, deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Cash and Cash Equivalents:
- --------------------------
The Company considers all highly liquid securities purchased with a
maturity of three months or less to be cash equivalents.
Net Income Per Share:
- ---------------------
Net income per share is based on the weighted average of shares outstanding
during 1996.
Pro Forma Net Income Per Share:
- -------------------------------
Pro forma net income per share is based on the weighted average of shares
outstanding during 1995 after giving effect to the recapitalization discussed in
Note 1.
Stock Options:
- --------------
The Company applies APB Opinion 25 and related Interpretations in accounting for
its stock option plans.
NOTE 3 - CONCENTRATION OF CREDIT RISK
The Company provides services on credit to its clients, which are medical
facilities located throughout the United States. The Company performs ongoing
credit evaluation of its clients and requires no collateral. The Company has had
minimal credit losses on its accounts receivable and no allowance for doubtful
accounts is considered necessary at December 31, 1996 and 1995.
21
<PAGE>
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
December 31,
------------------
1996 1995
---- ----
Dictation and other equipment $1,706,294 $1,479,526
Furniture and fixtures 84,069 65,860
Leasehold improvements 55,083 44,343
Automobile 23,400 23,400
Software 44,850 45,894
---------- ----------
1,913,696 1,659,023
Accumulated depreciation and amortization (1,033,713) (813,394)
---------- ----------
$ 879,983 $ 845,629
========== ==========
NOTE 5 - BORROWINGS UNDER LINE OF CREDIT
The Company has a $450,000 line of credit with Merrill Lynch Business Financial
Services, Inc. which expires June 30, 1997. Borrowings under this line of credit
at December 31, 1996 and 1995 amounted to $329,029 and $264,747, respectively.
Interest is payable at prime plus one per cent per annum (9.2% at December 31,
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 - TRANSACTIONS WITH RELATED PARTY
During May 1996 Mr. Cameron repaid, on behalf of the Company, unsecured
installment notes, totaling $36,035 (See Note 7). The balance was repaid to Mr.
Cameron in installments through December 1996 including interest totaling $1,037
calculated at 10% annum. This repayment is on the same terms as the original
notes.
22
<PAGE>
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
------------------
1996 1995
---- ----
Automobile installment loan, 10% interest
due December 1998 $ 13,058 $ -
Unsecured installment notes, 10% interest,
due December 1996, prepaid in May 1996
(See Note 6) 56,390
-------- --------
13,058 56,390
Less current portion (5,931) (56,390)
-------- --------
$ 7,127 $ -
======== ========
NOTE 8 - CAPITAL LEASES
The Company leases various equipment under long-term contracts. Property and
equipment includes the following amounts for leases that have been capitalized:
December 31,
------------------
1996 1995
---- ----
Dictation and other equipment $104,515 $464,303
Allowance for depreciation (37,301) 277,085)
-------- --------
$ 67,214 $187,218
======== ========
Depreciation of these assets, computed by the straight line method over five
years, is included in depreciation expense.
NOTE 9 - COMMITMENTS
The Company rents office space under two agreements which expire August 31, 1999
and October 31, 1999. DDI leases an automobile under a three year operating
lease through July 1998 at a cost of $461 per month. The Company also leases a
copier under a three year operating lease through November 1998 at a cost of
$175 per month.
23
<PAGE>
The future minimum lease payments under capital leases (see Note 8) and
non-cancelable operating leases for office space, equipment, and automobile as
of December 31, 1996 are as follows:
Capital Operating
Leases Leases Total
------ ------ -----
Year Ending December 31,
1997 $ 37,913 $ 98,067 $135,980
1998 24,980 93,452 118,432
1999 64,365 64,365
-------- -------- --------
Total minimum lease payments 62,893 $255,884 $318,777
======== ========
Amount representing interest (5,829)
--------
Present value of net minimum
lease payments (including
$33,218 classified as current) $ 57,064
========
Rent expense under operating leases for the years ended December 31, 1996 and
1995 totaled $65,827 and $50,364, respectively.
NOTE 10 - 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.
The components of the deferred tax expense (benefit) for the year ended December
31, 1996 and the period from October 10, 1995 to December 31, 1995 consist of
the following:
1996 1995
---- ----
Current tax expense
Federal $ 27,000
State 8,000
--------
35,000
--------
Deferred tax expense (benefit)
Federal $183,000 $(15,000)
State 35,000 (3,000)
-------- --------
218,000 (18,000)
-------- --------
Total $253,000 $(18,000)
======== ========
24
<PAGE>
Components of the Company's net deferred tax assets and liabilities as of
December 31, 1996 and 1995 are as follows:
1996 1995
---- ----
Deferred tax assets:
Accounts payable $ 53,000 $ 50,000
Accrued payroll 44,000 41,000
Net operating loss carry forward 28,000
-------- --------
Total deferred tax assets 97,000 119,000
-------- --------
Deferred tax liabilities:
Accounts receivable 440,000 270,000
Prepaid expenses 2,000 1,000
Prepaid income taxes 6,000
Property and equipment 69,000 50,000
-------- --------
Total deferred tax liabilities 517,000 321,000
-------- --------
Net deferred tax liabilities 420,000 202,000
Less valuation allowance - -
-------- --------
Net deferred tax liabilities as of
December 31, 1996 and 1995 (including
$351,000 and $152,000, respectively
classified as current) $420,000 $202,000
======== ========
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 in 1995, assuming the Company had been
subject to corporate income tax.
Income tax expense and pro forma income tax expense for the years ended December
31, 1996 and 1995, respectively, differ from the Federal statutory rate as
follows:
December 31,
------------------
1996 1995
---- ----
Statutory Federal income tax rate 34.0% 34.0%
Effect of graduated rates (1.5) (1.4)
State income taxes, net of Federal tax benefit 4.0 4.0
---- ----
36.5% 36.6%
==== ====
NOTE 11 - DIVIDENDS
On October 9, 1995, the Company's S corporation election terminated. At that
time the retained earnings balance representing undistributed earnings of
$268,576 was reclassified as additional paid-in capital as a constructive
distribution to the stockholder followed by a contribution by the stockholder to
the capital of the Company. The dividend payable of $44,791 as of December 31,
1995 represents the income tax liability of the S corporation stockholder's
proportionate share of the undistributed taxable earnings through October 9,
1995.
25
<PAGE>
NOTE 12 - FIXED STOCK OPTION PLANS
At December 31, 1996, the Company has two stock-based compensation plans, which
are described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed option plans. Had compensation cost for the
Company's two stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the method
of FASB Statement 123, the Company's net income and earnings per share (EPS) for
1996 would have been reduced to the pro forma amounts indicated below:
Net income EPS
---------- ---
As reported $439,667 $.07
Pro forma $408,667 $.07
The effect of applying FASB statement 123 is not likely to be representative of
the effects on reported net income for future years due to the effects of
vesting.
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. 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. 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.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996: expected volatility of 60 percent;
risk-free interest rate of 6.2 percent for the Employee Plan and 6.3 percent for
the Director Plan; expected lives of 5 years for the Employee Plan options and 7
years for the Director Plan options; no dividends are anticipated.
A summary of the status of the Company's two stock option plans as of December
31, 1996 and changes during the year is presented below:
Weighted-Average
Fixed options Shares Exercise Price
------------- ------ --------------
Granted 936,796 $.76
Forfeited (450) .75
------- ----
Outstanding at end of year 936,346 $.76
======= ====
Weighted-average fair value of
options granted during the year $.23
====
26
<PAGE>
No options were exercisable at December 31, 1996. The following table summarizes
information about fixed stock options outstanding at December 31, 1996:
Range of Number Weighted-Average Weighted-
Exercise Outstanding at Remaining Average
Price December 31, 1996 Contractual Life Exercise Price
----- ----------------- ---------------- --------------
$.75 - $.76 931,600 9.3 years $ .76
$1.00 4,746 9.9 years 1.00
-------
936,346 9.3 years
=======
NOTE 13 - EMPLOYEE BENEFITS
During 1996, the Company 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. The
Company contributes 20% of the amount contributed by employees, limited to 5% of
the employee's salary. Employer contributions to this plan for the year ended
December 31, 1996 totaled $3,314.
NOTE 14 - CASH FLOW INFORMATION
Non cash investing and financing activities excluded from the statements of cash
flows consist of property and equipment acquired under capital leases totaling
$104,390 for the year ended December 31, 1997. Net cash provided by operating
activities includes interest payments of $39,187 and $25,121 for the years ended
December 31, 1996 and 1995, respectively. The Company made a $25,000 income tax
payment during 1996.
NOTE 15 - MAJOR CUSTOMERS
Revenues from several contracts with the U.S. Naval and two Veterans
Administration hospitals aggregated approximately $928,000 and $896,000 for the
years ended December 31, 1996 and 1995, respectively. Revenues exceeding 10% of
total revenues from one non-profit hospital group aggregated approximately
$867,000 and $506,000 for the years ended December 31, 1996 and 1995,
respectively. Revenues exceeding 10% of total revenues from one for-profit
hospital group aggregated approximately $750,000 for the year ended December 31,
1996.
27
<PAGE>
PART III
EXHIBITS LIST
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)
27 Financial Data Schedule
(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.
28
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DIGITAL DICTATION, INC.
April 9, 1997 By: /s/ Richard D. Cameron
-----------------------------------
Richard D. Cameron
Principal Executive Officer, Principal Financial
and Accounting Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
April 9, 1997 /s/ Myron A. Wick, III
-----------------------------------
Myron A. Wick, III
Chairman of the Board of Directors
April 9, 1997 /s/ Charles C. McGettigan
-----------------------------------
Charles C. McGettigan
Director
April 9, 1997 /s/ Bert I. Helfinstein
-----------------------------------
Bert I. Helfinstein
Director
The Registrant will furnish its shareholders with copies of its annual report
and proxy statement after the date of this report.
29
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 88,815
<SECURITIES> 0
<RECEIVABLES> 1,156,841
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,277,120
<PP&E> 1,913,696
<DEPRECIATION> 1,033,713
<TOTAL-ASSETS> 2,157,103
<CURRENT-LIABILITIES> 1,012,723
<BONDS> 0
0
0
<COMMON> 62,575
<OTHER-SE> 981,832
<TOTAL-LIABILITY-AND-EQUITY> 2,157,103
<SALES> 6,936,730
<TOTAL-REVENUES> 6,936,730
<CGS> 4,490,239
<TOTAL-COSTS> 6,206,930
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,187
<INCOME-PRETAX> 692,667
<INCOME-TAX> 253,000
<INCOME-CONTINUING> 439,667
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 439,667
<EPS-PRIMARY> $.07
<EPS-DILUTED> $.07
</TABLE>
