U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
DIGITAL DICTATION, INC.
Incorporated in the State of Delaware
8230 Old Courthouse Road
Vienna, Virginia, 22182
Telephone : (703) 848-2830
I.R.S. Employer Identification No. 52-1451022
Commission file number 0-27052
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
----- -----
The number of shares outstanding of the Issuer's $.01 par value Common Stock as
of April 22, 1998 was 6,325,503.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index to unaudited condensed financial statements presented on pages 3 to 8:
Condensed balance sheets as of March 31, 1998 and December 31, 1997
Condensed statements of income for the three months ended March 31, 1998
and 1997
Condensed statements of cash flows for the three months ended March 31,
1998 and 1997
Notes to condensed financial statements
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 1998 1997
Current Assets --------------- ---------------
Cash and equivalents $ 171,140 $ 2,530
Accounts receivable 1,481,326 1,709,503
Employee receivables 13,626 7,605
Prepaid expenses and other 41,998 22,898
-------------- --------------
Total current assets 1,708,090 1,742,536
-------------- --------------
Property and equipment, net 1,863,093 1,546,079
-------------- --------------
Total assets $ 3,571,183 $ 3,288,615
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Borrowings under line of credit $ 214,000 $ 132,318
Accounts payable 398,830 313,113
Accrued payroll and payroll taxes 418,784 325,894
Current portion of long-term debt 5,543 6,547
Current potion of capital lease
obligations 15,395 24,314
Current income taxes payable 228,050 405,575
Current deferred income taxes 41,000 41,000
--------------- --------------
Total current liabilities 1,321,602 1,248,761
Long-term debt, non-current portion - 576
Non-current deferred income taxes 290,000 339,000
Stockholders' equity
Common stock, par value $0.01 per share,
20,000,000 Authorized, 6,325,503 shares
issued and outstanding at March 31, 1998 63,255 62,816
Additional paid-in capital 672,915 610,900
Retained earnings 1,223,411 1,026,562
--------------- --------------
Total stockholders' equity 1,959,581 1,700,278
--------------- --------------
Commitments - Note 8 - -
--------------- --------------
Total liabilities & stockholders' equity $ 3,571,183 $ 3,288,615
=============== ==============
See accompanying notes to condensed financial
statements.
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED STATEMENT OF INCOME
(Unaudited)
Three months ended March 31,
1998 1997
---------------- ----------------
Revenues $ 2,996,787 $ 1,994,391
Cost of services 1,960,296 1,275,589
-------------- --------------
Gross profit 1,036,491 718,802
General and administrative expenses 716,019 524,128
-------------- --------------
Operating income 320,472 194,674
Other income (expense)
Interest and other income 3,415 958
Interest expense (4,038) (4,507)
-------------- --------------
Income before income taxes 319,849 191,125
Provision for income taxes 123,000 72,000
-------------- --------------
Net income $ 196,849 $ 119,125
============== ==============
Basic net income per share $ .03 $ .02
============== ==============
Weighted average shares outstanding 6,289,401 6,257,480
============== ==============
Diluted net income per share $ .03 $ .02
============== ==============
See accompanying notes to condensed financial
statements.
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
1998 1997
--------------- --------------
Cash flows from operating activities
Net income $ 196,849 $ 119,125
Changes to operations not affecting cash
Depreciation and amortization 126,466 74,210
Deferred income tax provision (49,000) -
Changes in operating assets and liabilities
Accounts receivable 228,177 148,631
Employee receivables (6,021) 1,372
Prepaid expenses and other (19,100) (11,762)
Accounts payable 85,719 127,494
Accrued payroll and payroll taxes 92,890 189,707
Current income taxes payable (177,525) (10,000)
-------------- -------------
Net cash provided by operating activities 478,455 638,777
-------------- -------------
Cash flows from investing activities
Additions to property and equipment (443,480) (156,953)
-------------- -------------
Net cash from investing activities (443,480) (156,953)
-------------- -------------
Cash flows from financing activities
Net (decrease) in borrowing under line of credit 81,682 (329,029)
Issue of common stock -
Employee Stock Purchase Plan 39,932 -
Exercise of stock options 22,522 -
Increase (reduction) of long-term debt (1,582) 31,905
Reduction of capital lease obligations (8,919) (3,649)
-------------- -------------
Net cash used by financing activities 133,635 (300,773)
-------------- -------------
Increase in cash 168,610 181,051
Cash and cash equivalents at beginning of period 2,530 88,815
-------------- -------------
Cash and cash equivalents at end of period $ 171,140 $ 269,866
============== =============
See accompanying notes to condensed financial statements
<PAGE>
DIGITAL DICTATION, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - THE COMPANY
Digital Dictation, Inc. (the "Company" or "DDI") provides transcription
services for various medical facilities. The Company is incorporated in the
State of Delaware and commenced operations during 1989.
NOTE 2 - PRESENTATION OF FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, these financial statements do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. 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, 1997.
NOTE 3 - PROPERTY AND EQUIPMENT
March 31, December 31,
1997 1997
Dictation and other equipment $ 2,798,267 $ 2,480,673
Furniture and fixtures 96,280 94,157
Leasehold improvements 67,146 64,671
Automobile 23,400 23,400
Software 377,269 255,981
-------------- --------------
Total Property Assets 3,362,362 2,918,882
Accumulated depreciation and
amortization (1,499,269) (1,372,803)
-------------- --------------
$ 1,863,093 $ 1,546,079
============== ==============
NOTE 4 - BORROWINGS UNDER LINE OF CREDIT
The Company has a $700,000 line of credit available from Crestar Bank
subject to annual reviews and expires December 3, 2002. Interest is payable at
prime plus one per cent per annum (9.5% at March 31, 1998). The line of credit
is secured by all assets of the Company. There were borrowings of $214,000 under
this line of credit at March 31, 1998.
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 20 days after the
end of each fiscal quarter. The Company is in compliance with these reporting
covenants.
<PAGE>
NOTE 5 - LONG-TERM DEBT
March 31, December 31,
1998 1997
Automobile installment loan, 10%
interest, due December 1998 $ 5,543 $ 7,123
------------- ---------------
5,543 7,123
Less current portion (5,543) (6,547)
-------------- ---------------
$ - $ 576
============== ===============
NOTE 6 - CAPITAL LEASES
The Company leases various equipment under long-term contracts. Property
and equipment includes the following amounts for leases that have been
capitalized:
March 31, December 31,
1998 1997
Dictation and other equipment $ 104,515 $ 104,515
Allowance for depreciation (63,430) (58,204)
--------------- ---------------
$ 41,085 $ 46,311
=============== ===============
NOTE 7 - STOCK OPTION PLANS
In March 1996 the Board of Directors authorized the establishment of a
non-qualified stock option plan for its directors, full-time employees and
consultants (the "Plan") and reserved 1,300,000 shares of the Company's common
stock for issuance upon the exercise of options granted under this plan. In
September, 1997, the Board of Directors approved reserving an additional 300,000
shares of the Company's common stock for issuance upon the exercise of options
granted under this Plan. All options granted to date under the Plan are granted
at fair market value as of the date of the grant, and have a maximum term of ten
years.
NOTE 8 - COMMITMENTS
The Company rents office space under two agreements which expire August 31,
1999 and October 31, 1999. Future minimum lease payments under capital leases
for equipment and non-cancelable operating leases for office space, equipment
and an automobile as of March 31, 1998 are as follows:
Year ending Capital Operating
MARCH 31, LEASES LEASES TOTAL
1999 $ 15,995 $ 97,479 $ 113,474
2000 42,967 42,967
---------- --------- ------------
Total minimum lease payments 15,995 $ 140,446 $ 156,441
========= ============
Amount representing interest (600)
Present value of net minimum
lease payments $ 15,395
==========
Rent expense under operating leases for the three months ended March 31,
1998 and 1997 totaled $24,967 and $23,921, 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.
Management has evaluated opportunities to expand the Company through
acquisitions, to expand its service offerings to include overflow transcription
services, to diversify its client base to serve physicians' offices, and to sell
or license its technology to other companies. Management strongly believes,
however, that the growth and profitability of the Company can best be optimized
by continuing to focus on DDI's core business and resist the temptation to
diversify into other areas.
EMPLOYEES AND TRANSCRIPTIONISTS
As of March 31, 1998, the Company had twenty-nine full-time employees.
DDI also has arrangements with more than 250 home-based transcriptionists who
are either CMT-certified or in the process of becoming certified.
Transcriptionists work from their homes, setting their own hours any time during
the day or night. The transcriptionists are paid bi-weekly in accordance with
the amount of transcription they produce, as opposed to an hourly rate. The
Company has subcontract agreements with all of the transcriptionists which
specify the quality and delivery requirements and set forth the method and rate
for payment.
DISCUSSION OF OPERATING RESULTS AND FINANCIAL CONDITION
OPERATING RESULTS
The Company has reported average annual growth in revenues over the past
four fiscal years of 38%. DDI focuses on securing long-term contracts for
full-service (outsourced) medical transcription services rather than overflow
services from medical institutions. As a result, each client contract produces a
fairly consistent stream of revenue.
Total revenue from all contracts each week (the "run rate") is
management's key indicator of current financial performance. The acquisition of
a new client requires initial start-up expenses prior to the cut-over of
service, and thereafter results in an immediate positive impact on the weekly
run rate, as revenue is increased by the full weekly amount of the new contract.
The Company has been able to maintain its existing client base. The weekly run
rate was approximately $225,000 as of March 31, 1998 as compared to
approximately $160,000 as of as of March 31, 1997. The current run rate
indicates total revenues for 1998 in excess of $11.8 million is likely.
Annual revenues for the preceding five fiscal years were as follows:
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
------------- ------------ ------------ ------------ ------------
Revenues $ 10,025,825 $ 6,936,730 $ 5,057,585 $ 3,838,076 $ 2,745,897
<PAGE>
The fact that the Company does not accept overflow contracts permits it
to anticipate a continuous stream of revenue and to plan and execute
improvements in technology and services which are designed to enhance client
satisfaction and retention. The Company's record of adding new clients while
maintaining existing client loyalty has resulted in a stable and generally
predictable annual revenue growth rate. As DDI continues to expand its market
nationally and exploit its technology and client support, management anticipates
the ability to continue to increase annual revenue in line with historic trends,
although there can be no assurances that such annual revenue growth rates will
be sustained.
Revenues for the first quarter of 1998 were 50.3% higher than revenues
for the first quarter of 1997 primarily as a result of net additions of
hospitals obtained as new clients, and by expansion of services among clients in
the existing client base. Quarter-to-quarter price increases have also occurred,
but are not a significant reason for the increase in revenues.
Cost of services, which includes all costs related to transcriptionists,
telephone and associated equipment depreciation, represented 63.9% of revenues
in the first quarter of 1997 as compared to 65.4% in the first quarter of 1998.
The increase in cost of services as a percentage of revenues is attributable
primarily to telecommunications costs. Telecommunications costs increased
substantially throughout calendar year 1997. During the second half of 1997, an
extensive software development program and re-design of the Company's
telecommunications network was undertaken. During the first quarter of 1998
there is redundant telecommunications expense as the shift in network facilities
begins. Costs of services are and will remain to be directly related to revenue
and it is expected that such costs will continue at the rate of approximately
two-thirds of total revenue.
General and administrative ("G&A") expenses consist primarily of salaries
and benefits of all technical, marketing, operations and client support,
administrative and executive personnel, occupancy costs, marketing and
promotional costs, and other administrative expenses. G&A expenses were 26.3% of
revenue in the first quarter of 1997 versus 23.9% of revenue in the first
quarter of 1998. G&A expenses decreased as a percentage of revenues because of
the spreading of fixed costs over a larger amount of revenue in 1998.
Operating income increased from 9.8% of revenue in the first quarter of
1997 to 10.7% of revenue in the first quarter of 1998. The increase in margin
illustrates the Company's ability to increase its revenue base without a similar
percentage increases in fixed expenses, which is in part due to its strategy of
nationwide expansion from a central operating facility. This is indicated by the
fact that revenues increased 50% compared to the first quarter of 1997 while G&A
expenses increased from the comparable quarter by approximately 37%.
FINANCIAL CONDITION
At March 31, 1998, the Company held cash and equivalents of approximately
$170,000, along with trade receivables of approximately $1,480,000. As necessary
to meet temporary cash flow shortages, the Company may draw upon a $700,000 line
of credit ($450,000 as of March 31, 1997) which remains available through
December 3, 2002; management expects to be able to renew the line. There were no
borrowings against the line of credit as of March 31, 1997 compared to
borrowings of $214,000 as of March 31, 1998. Net cash flow from operations was
$638,777 for the three months ending March 31, 1997 and $478,455 in 1998. A
major reason for the decrease in cash flow relates to the manner in which income
taxes were paid in prior years. Until 1996, the Company qualified to use cash
basis tax accounting, and thereafter was required to adopt accrual basis tax
accounting. The deferred tax liability is being paid over a four year period.
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)
By: /s/RICHARD D. CAMERON
---------------------
Richard D. Cameron
Chief Executive Officer
/s/GERALD H. GRUBER
---------------------
By: Gerald H. Gruber
Chief Financial Officer
April 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FDS for Quarter End 10-QSB
</LEGEND>
<CIK> 0001002665
<NAME> Digital Dictation, Inc.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 171,140
<SECURITIES> 0
<RECEIVABLES> 1,521,326
<ALLOWANCES> (40,000)
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<CURRENT-ASSETS> 55,624
<PP&E> 3,362,362
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<CURRENT-LIABILITIES> 1,321,602
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<COMMON> 63,255
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<TOTAL-COSTS> 2,676,315
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