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, 1997
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, 1997 were $10,025,895.
The number of shares outstanding of the Issuer's $.01 par value Common Stock as
of January 1, 1998 was 6,281,612. The aggregate market value of voting stock
held by non-affiliates of the Registrant as of January 1, 1998 was approximately
$674,012.
Documents Incorporated by Reference
None.
Transitional Small Business Disclosure Format: YES [X] NO [ ]
<PAGE>
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
The Company
Digital Dictation, Inc. ("DDI", or the "Company"), a Delaware corporation,
provides electronic medical information processing 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 four-year record of 38% average per
year revenue growth, although there can be no assurances that such annual
revenue growth rates will be sustained.
The Company presently serves major hospitals located in Washington, D.C.,
Virginia, California, Pennsylvania, Washington State, New Jersey, Maryland,
Ohio, New York, Michigan, Florida, and Illinois. Representative 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.
<PAGE>
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.
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, which has produced growth rates
in excess of 38% per year for more than four years' running, and resist the
temptation to diversify into other areas.
<PAGE>
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 prescribed document format.
All transcribed material is subject to review by one of the Company's 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 $80 million, (3) approximately eight
national and regional firms, including the Company, each with estimated annual
revenues of from $5 million to $25 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.
<PAGE>
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.
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.
Indeed, during the last two years, at least two, and possibly more venture
capital-backed companies have evolved and are developing business models along
the lines of ddi's network.
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. Moreover, Management believes, the
use of this software is highly integrated with the organizational structure of
the Company, thereby enhancing its operational value to the Company.
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:
|X| to utilize systems engineering and computer and telecommunications
technology to automate the entire transcription management process;
|X| to continue to retain one of the most highly skilled groups of IMT's in the
industry; and
|X| to develop an organizational culture that continually strives to exceed the
service expectations of clients.
<PAGE>
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. It does not appear there is a cost advantage over
traditional one-office medical transcription businesses, or combinations of
several local offices into national networks of local businesses. However, the
Company believes it obtains several non-cost advantages. For example, DDI is
able to develop interfaces to download and upload information from each client's
health information and administrative system, and be able to use a standard
interface to the DDI side while competitors using many different systems and
technologies throughout their national network may be discouraged by having to
invent each interface independently. Similarly, centralization permits DDI to
manage the consistency of the quality of its services delivered to all clients
more easily than if it were to have to manage each location individual office
location separately
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. A
tangible example of these efforts includes IMT's participate in the Company
Stock Option Plan.
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. In part, the service component of the strategy relies
on the fact that DDI is not limited in its geographic recruitment for quality
IMTs by the location of its clients. This means that all transcription resources
are collectively available to service all clients instead of pools of local
transcriptionists each available only to specific local clients. This helps to
insure that transcription services are available twenty-four hours per day,
seven days a week, without regard to vacation schedules, holidays, weather
interruptions and the like which impact upon local firms dependent upon smaller
numbers of IMTs in a limited geographic area. 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 strategy 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.
<PAGE>
Marketing Plans And Sales Service
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's marketing to date has been
conducted primarily by senior management.
The Company intends to continue the same aggressive sales service
techniques that have contributed to its substantial previous growth.
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.
Effects of Year 2000 (Y2K) Millenium Date-Change Issues
The Company has conducted a survey of the hardware and software currently being
used in the business and has audited how the software was created, either as
software created by DDI or hardware and software purchased from vendors. With
respect to the software created by the Company, the tools used to create these
programs are Y2K compliant. Furthermore, where changes to the systems are
necessary, DDI has current and accurate copies of the source code, and there has
been virtually no turnover in the staff that developed these internal systems,
so there is a current knowledge base of the smallest details of the systems
developed. The software and hardware developed by vendors and used in DDI's
business are mostly compliant or have patches available from the vendors to
solve the problems for at least two decades into the twenty-first century.
Nevertheless, the Company is not currently free of Y2K problems, for the patches
have not all been installed, adequate testing to confirm that no unintended
consequences will result have not been conducted, and interfaces with hospital
systems have not been investigated.
Discussion of Operating Results and Financial Condition
Revenues
Reference is made to the Company's audited financial statements for the years
ended December 31, 1997 and 1996 presented in Part F/S of this report.
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 paid on a weekly basis. Annual revenues for
the current and preceding four fiscal years were as follows:
For the year ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues $10,025,895 $6,936,730 $5,057,585 $3,838,076 $2,754,897
<PAGE>
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. As of December 31,
1997, the Company's weekly "run rate" had grown to in excess of $215,000,
compared to a rate of approximately $140,000 as of December 31, 1996. The
year-to-year "run rate" increase is approximately fifty-four percent (54%). 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, 1997, the Company held cash and equivalents of approximately
$2,500, along with net trade receivables of approximately $1,710,000.
As necessary to finance its growth rate, the Company may draw upon a $500,000
line of credit obtained during 1997 which remains available through December 3,
2002, subject to annual reviews. The Company expects to renew its line of credit
beyond that date. Borrowings against the line of credit, which totaled
approximately $132,000 as of December 31, 1997, 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. 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 approximately
$1,147,000 in 1997 and $465,000 in 1996.
Results of operations
Revenues increased by 45% from 1996 to 1997, and by 37% from 1995 to 1996.
Approximately 2% of the increase in revenues in both periods was due to price
increases to current customers; the remainder is due primarily to net additional
hospitals being taken on as clients. 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. During 1997, DDI was successful in obtaining new clients that were
larger in size than the historical average of the "run rate" for its existing
clients. This resulted in favorable changes in operating margin, as described
below.
Cost of services, which includes all costs related to the IMT's, and telephone
and associated equipment depreciation, represented 63.8% of revenue in 1997 as
compared to 64.7% 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 .9% as a
percentage of revenue compared to 1996 was due primarily to spreading
partially-fixed costs, such as depreciation, over a larger value of revenues. As
the Company continues to expand nationally by obtaining contracts with
institutions located outside the local telephone calling area, and because these
new clients are larger in size and require more sophisticated services, the
amount of telecommunications services used by the Company will continue to grow
as a percentage of revenue. However, the Company instituted a major internal
software development project during 1997 to convert its telecommunications
facilities from variable cost (based on minutes of usage) to fixed cost of a
virtual private network. If this conversion of facilities and software
development is successful, and the Company continues to increase its revenues,
it will result in future increases in margin as a result of spreading fixed
costs over a larger base of revenues.
<PAGE>
General and administrative ("G&A") expenses consist primarily of salaries and
benefits of all technical, marketing, operations and client support,
administrative and executive personnel, occupancy costs, marketing and
promotional costs, recruiting and other administrative expenses. G&A expenses as
a percentage of revenue increased to 25.9% of revenue in 1997 versus 24.7% of
revenue in 1996. There were two primary reasons for the increase, and one reason
the increase was not greater than it otherwise would have been. The reasons for
the increase are: a) each addition of a new hospital client results in one-time
expenses for marketing, sales service, systems and procedures set-up, and
commission expenses related to securing the hospital as a client and assuring a
smooth and successful cut-over of services to DDI, and b) recruiting expenses
and salaries to increase the size and capability of the Company's software
systems staff. These expenses are estimated to represent an increase in G&A
expense from 1996 to 1997 of 3.0% of revenue. During 1997, DDI initiated a
comprehensive re-engineering of its telecommunications platforms and software.
The project has not been completed, and some systems development salary and
other expense has been deferred until the project is completed and placed in
service. The capitalized project costs, if expensed in 1997 would have increased
G&A by 1.7% of revenue. There were no such costs in 1996. All other expenses
amounted to a decrease of .1% of revenue and were due to spreading of fixed
expenses over a larger amount of revenue.
Operating income increased by 41% from $729,800 in 1996 to $1,029,503 in 1997.
As a percentage of revenue, the operating margin was 10.5% and 10.3%
respectively in the two years.
Interest expense decreased from $39,187 in 1996 to $23,169 in 1997, primarily
reflecting decreased borrowing against the Company's line of credit to finance
accounts receivable balances.
Employees and Transcriptionists
As of December 31, 1997, the Company had twenty-eight full-time employees in its
principal business office in Vienna, Virginia and its Western Regional Office.
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 275 home-based transcriptionists
who are either CMT-certified or are financially incented by DDI to become
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 independent contractor 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.
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.
<PAGE>
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.
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
-------------------------------- --- ---------- ----------------------------
Mr. Richard D. Cameron 52 1998 Chief Executive Officer,
President and Director
Mr. Bert I. Helfinstein 64 1998 Director
Mr. Charles C. McGettigan 52 1998 Director
Mr. Myron A. ("Mike") Wick III 53 1998 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 franchiser 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 Corporation since June
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 Corporation, Modtech, Inc., PMR
Corporation, Sonex Research, Inc., Phoenix Network, Inc, Tanknology - NDE
Corporation, Vie de France Corporation, Wray Tech Instruments, Inc., and Onsite
Energy, Inc., of which he is the Chairman.
Mr. Myron A. ("Mike") Wick III has served as a director of the Corporation
since June 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., Tanknology - NDE Corporation,
and serves as the Chairman of the Board of Directors of Sonex Research, Inc. and
Wray Tech Instruments, Inc.
<PAGE>
Mr. Gerald H. Gruber, a certified public accountant, became Executive Vice
President and Chief Financial Officer beginning on April 8, 1997. Mr. Gruber,
60, 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.
ITEM 4 - REMUNERATION OF DIRECTORS AND OFFICERS
The Chief Executive Officer is the Company's president, Mr. Richard D. Cameron,
who was compensated at an annual rate of $165,000 in 1997. The Company does not
have an employment agreement with Mr. Cameron, and his employment and annual
salary are subject to annual review by the Board of Directors. On December 11,
1997 the Board of Directors increased Mr. Cameron's salary to $200,000 annually.
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 1997 was $36,000.
In March 1996 the Board of Directors authorized the establishment of a
non-qualified stock option plan for its full-time employees, directors,
transcriptionists and consultants (the "Option Plan") and reserved up to
1,300,000 shares of the Company's common stock for issuance upon the exercise of
options granted under this plan. The right to purchase shares under the existing
Option Plan typically vest over a four-year period beginning on the option's
date of grant. Stock options must be exercised within ten years from date of
grant. Options have been issued at fair market value. On September 11, 1997, the
Board of Directors approved an additional 300,000 shares of common stock
reserved under the same terms as described above.
ITEM 5 - SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY HOLDERS
As of December 31, 1997, there were 6,281,612 shares of DDI Common Stock issued
and outstanding. The following table sets forth as of December 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.
<PAGE>
Total Shares
Name and Address (1) Beneficially Owned (2) % Of Class (2)
- -------------------------------- ------------------------ --------------
Mr. Richard D. Cameron 3,156,738 (3) (4) (5) 50.21%
Mr. Bert I. Helfinstein 26,000 (5) .40%
Mr. Charles C. McGettigan 1,859,630 (4) (5) (6) 29.58%
Mr. Myron A. ("Mike") Wick III 1,839,630 (4) (5) (6) 29.26%
Mr. Gerald H. Gruber 95,000 (7) 1.49%
All directors and officers as a
group (five persons) 5,136,368 79.54%
Proactive Partners, L.P.
50 Osgood Place
San Francisco, CA 94133 1,814,630 (8) 28.98%
Lagunitas Partners, L.P.
50 Osgood Place
San Francisco, CA 94133 2,714,268 (8) 43.34%
Gruber & McBaine International
50 Osgood Place
San Francisco, CA 94133 1,919,630 (8) 30.65%
- -------------------------------------------------------------------------------
(1) The business address for each Officer and/or Director is 8230 Old
Courthouse Road, Vienna, VA 22182.
(2) The term "shares beneficially owned" encompasses those shares which the
reporting person currently owns, or has the right to acquire or the
obligation to sell 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.
(3) Includes 30,000 shares owned by Mr. Cameron's daughter and 72,203 shares
owned by Mr. Cameron's wife.
(4) Includes 153,035 shares which may be acquired by Mr. Cameron upon the
exercise of currently exercisable options to purchase shares from Proactive
at a price of $1.44 per share. Because this agreement relates to shares
which have already been issued by the Corporation, the exercise of such
rights will not result in an increase in the total number of the
Corporation's outstanding shares for purposes of computing the percentage
of beneficial ownership of the reporting persons. The right to exercise the
options on these shares expires October 30, 1998.
(5) Includes 25,000 shares which may be acquired from authorized but unissued
shares of the Corporation, and therefore will result in an increase in the
total number of the Corporation's outstanding shares for purposes of
computing the percentage of beneficial ownership of the reporting person.
The option price of the shares is $.76 per share and the option has a term
of ten years.
(6) Represents shares owned directly by Proactive Partners, L.P., 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. , the
general partner of Proactive Partners, L.P. Messrs. McGettigan and Wick
exercise shared voting and investment control with respect to such shares.
<PAGE>
(7) Includes 95,000 shares which may be acquired from authorized but unissued
shares of the Corporation, and therefore will result in an increase in the
total number of the Corporation's outstanding shares for purposes of
computing the percentage of beneficial ownership of the reporting person.
The option price of the shares is $1.50 and the option expires June 25,
1998.
(8) Messrs. Gruber and McBaine are general partners of Proactive Investment
Managers, L.P., Lagunitas Partners, L.P., and Gruber & McBaine
International, and accordingly all of the shares owned by Proactive
Partners, L.P., Lagunitas Partners, L.P. and Gruber & McBaine International
could be deemed to be beneficially owned by both Mr. McBaine and Mr.
Gruber. Messrs. McBaine and Gruber exercise shared voting and investment
power with respect to such shares. Proactive Partners, L.P. owns 1,967,665
shares directly and is indirectly attributed to have granted 153,035 shares
pursuant to the Agreement described in (4). Lagunitas owns 899,638 shares
directly, 1,967,665 shares indirectly through Proactive Partners, L.P., and
is indirectly attributed to have granted options requiring sale of 153,035
shares pursuant to the Agreement described in (4). Gruber & McBaine
International owns 105,000 shares directly, 1,967,665 shares indirectly
through Proactive Partners, L.P., and is indirectly attributed to have
granted options requiring sale of 153,035 shares pursuant to the Agreement
described in (4).
In connection with Proactive's purchase of Mr. Cameron's shares in Digital, Mr.
Cameron was initially granted options to purchase up to 459,105 shares of DDI
Common Stock now held by Proactive. The right to purchase 153,035 shares expired
unexercised. The remaining 306,070 options are exercisable as follows:
Exercise Number of
Period exercisable price shares
------------------------------------------ ---------- ----------
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.
<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 6,281,612 shares
of Common Stock issued and outstanding as of December 31, 1997, held by
approximately 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 337,006 shares, or 5.4%, of the Common Stock currently outstanding
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 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 matters submitted to a vote of security holders during 1997 were the
election of directors and ratification of the Company's independent accountants.
<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, 1997 and 1996 Statements of income
for the years ended December 31, 1997 and 1996 Statements of
stockholders' equity for the years ended December 31, 1997 and 1996
Statements of cash flows for the years ended December 31, 1997 and 1996
Notes to financial statements
<PAGE>
DIGITAL DICTATION, INC.
AUDITED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
<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, 1997 and 1996, 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, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
McLean, Virginia
January 26, 1998
<PAGE>
DIGITAL DICTATION, INC.
BALANCE SHEETS
December 31,
ASSETS - Note 5 1997 1996
-------------- --------------
Current assets
Cash and cash equivalents $ 2,530 $ 88,815
Accounts receivable (net of $40,000
allowance for doubtful accounts at
December 31, 1997) - Note 3 1,709,503 1,156,841
Employee receivables 7,605 2,762
Prepaid expenses and other 22,898 28,702
-------------- --------------
Total current assets 1,742,536 1,277,120
Property and equipment, net - Notes 4 and 8 1,546,079 879,983
-------------- --------------
Total assets $ 3,288,615 $ 2,157,103
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Borrowings under line of credit - Note 5 $ 132,318 $ 329,029
Accounts payable 313,113 151,485
Accrued payroll and payroll taxes 325,894 115,060
Current income taxes payable - Note 6 405,575 27,000
Current portion of long-term debt - Note 7 6,547 5,931
Current portion of capital lease
obligations - Notes 8 and 14 24,314 33,218
Current deferred income taxes - Note 6 41,000 351,000
-------------- --------------
Total current liabilities 1,248,761 1,012,723
Long-term debt, non current portion - Note 7 576 7,127
Capital lease obligations, non current
portion - Notes 8 and 14 23,846
Non current deferred income taxes - Note 6 339,000 69,000
Commitments - Note 14
Stockholders' equity
Common stock, par value $.01 per share,
20,000,000 shares authorized, 6,281,612
and 6,257,480 shares issued and outstanding
at December 31, 1997 and 1996, respectively 62,816 62,575
Additional paid-in capital 610,900 571,496
Retained earnings 1,026,562 410,336
-------------- --------------
Total stockholders' equity 1,700,278 1,044,407
Total liabilities and stockholders' equity $ 3,288,615 $ 2,157,103
============== =============
See accompanying notes to financial statements
<PAGE>
DIGITAL DICTATION, INC.
STATEMENTS OF INCOME
Years ended December 31,
--------------------------------------
1997 1996
--------------- ---------------
Revenues $ 10,025,895 $ 6,936,730
Cost of services 6,398,276 4,490,239
-------------- --------------
Gross profit 3,627,619 2,446,491
General and administrative expenses 2,598,116 1,716,691
-------------- --------------
Operating income 1,029,503 729,800
Other income (expense)
Interest and other income 2,892 2,054
Interest expense (23,169) (39,187)
-------------- --------------
(20,277) (37,133)
-------------- --------------
Income before income taxes 1,009,226 692,667
Income taxes - Note 6 393,000 253,000
-------------- --------------
Net income $ 616,226 $ 439,667
============== ==============
Basic earnings per share - Note 13 $ .10 $ .07
============== ==============
Diluted earnings per share - Note 13 $ .09 $ .07
============== ==============
See accompanying notes to financial statements
<PAGE>
DIGITAL DICTATION, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996 and 1997
-------------------------------------------------
Additional Retained Total
Common Paid-in Earnings Stockholders'
Stock Capital (deficit) Equity
--------- --------- --------- ---------
Balance at January 1, 1996 $ 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
Issue of Common Stock - Employee
Stock Purchase Plan
(18,733 shares) 187 31,659 31,846
Issue of Common Stock upon
exercise of Stock Options
(5,399 shares) 54 7,745 7,799
Net income 616,226 616,226
----------- ----------- ----------- -----------
Balance at December 31, 1997 $ 62,816 $ 610,900 $ 026,562 $1,700,278
=========== =========== =========== ===========
See accompanying notes to financial statements
<PAGE>
DIGITAL DICTATION, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31,
1997 1996
------------ ------------
Cash flows from operating activities
Net income $ 616,226 $ 439,667
Charges to operations not affecting cash:
Depreciation and amortization 371,209 282,132
Provision for doubtful accounts 40,000
Net deferred income tax provision (40,000) 218,000
Changes in operating assets and liabilities:
Accounts receivable (592,662) (442,635)
Employee receivables (4,843) 20,262
Prepaid expenses and other 5,804 (4,122)
Accounts payable 161,628 (60,858)
Accrued payroll and payroll taxes 210,834 (14,040)
Current income taxes payable 378,575 27,000
------------- -------------
Net cash provided by operating activities 1,146,771 465,406
------------- -------------
Cash flows from investing activities
Additions to property and equipment (1,037,305) (316,486)
------------- -------------
Net cash used by investing activities (1,037,305) (316,486)
------------- -------------
Cash flows from financing activities
Borrowings under line of credit (196,711) 64,282
Proceeds from long-term debt 18,000
Issue of Common Stock - Employee Stock
Purchase Plan 31,846
Issue of Common Stock -- Stock Option Plan 7,799
Dividends paid to former stockholder (44,791)
Principal payments on long-term debt (5,935) (61,332)
Principal payments on capital lease obligations (32,750) (68,798)
------------- -------------
Net cash used by financing activities (195,751) (92,639)
------------- -------------
Increase (decrease) in cash and cash equivalents (86,285) 56,281
Cash and cash equivalents at beginning of year 88,815 32,534
------------- -------------
Cash and cash equivalents at end of year $ 2,530 $ 88,815
============= =============
See accompanying notes to financial statements
<PAGE>
DIGITAL DICTATION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - 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.
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. Internally developed
software costs of $170,596 incurred in 1997 have been capitalized in accordance
with an AICPA exposure draft dated December 17, 1996 of a Statement of Position,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." These costs include $141,989 of salaries and fringe benefits for
software developers and $28,607 of telecommunications and outside consultant
costs. 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. Purchased software is amortized using the
straight line method over five years. Internally developed software will be
amortized over five years when the system is placed in operation.
Income Taxes: The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
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: The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share" as of December 31, 1997 and
restated 1996 earnings per share. Earnings per common share is based on the
weighted average shares outstanding during the year. Diluted earnings per common
share gives effect to all dilutive potential common shares outstanding during
the year.
Stock Options: The Company applies APB Opinion 25 and related Interpretations
in accounting for its stock option plans.
<PAGE>
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 the allowance for doubtful
accounts is considered adequate at December 31, 1997. No allowance was
considered necessary at December 31, 1996.
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
December 31,
1997 1996
------------ ------------
Dictation and other equipment $ 2,480,673 $ 1,706,294
Furniture and fixtures 94,157 84,069
Leasehold improvements 64,671 55,083
Automobile 23,400 23,400
Software 255,981 44,850
-------------- --------------
2,918,882 1,913,696
Accumulated depreciation and amortization (1,372,803) (1,033,713)
-------------- --------------
$ 1,546,079 $ 879,983
============== ==============
NOTE 5 - BORROWINGS UNDER LINE OF CREDIT
The Company has a $500,000 revolving line of credit with Crestar Bank subject to
annual reviews and expires December 3, 2002. This replaces a $450,000 line of
credit with Merrill Lynch Business Financial Services, Inc as of June 30, 1997.
Borrowings under these lines of credit at December 31, 1997 and 1996 amounted to
$132,318 and $329,029, respectively. Interest is payable at prime plus one per
cent per annum (9.5% at December 31, 1997). 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, among other
things, 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 month. The Company is in compliance with these
reporting covenants.
NOTE 6 - INCOME TAXES
The Company is taxed as a C corporation. Effective January 1, 1997 the Company
converted from the cash method to the accrual method of reporting for Federal
income tax purposes. The cumulative difference between cash and accrual basis
tax reporting as of December 31, 1996 is $935,961. One quarter of this amount is
required to be included in the Company's taxable income during each of the four
years 1997 to 2000.
The provision (benefit) for income taxes for the year ended December 31, 1997
and December 31, 1996 consists of the following:
<PAGE>
NOTE 6 - INCOME TAXES (CONTINUED)
1997 1996
-------------- --------------
Current tax expense
Federal $ 364,000 $ 27,000
State 69,000 8,000
-------------- --------------
433,000 35,000
-------------- --------------
Deferred tax expense (benefit)
Federal (34,000) 183,000
State (6,000) 35,000
-------------- --------------
(40,000) 218,000
-------------- --------------
Total $ 393,000 $ 253,000
============== ==============
Components of net deferred tax assets and liabilities as of December 31, 1997
and 1996 are as follows:
1997 1996
-------------- --------------
Deferred tax liabilities:
Accounts receivable $ $ 440,000
Prepaid expenses 2,000
Prepaid income taxes 6,000
Property and equipment 161,000 69,000
Cash to accrual 267,000
-------------- --------------
Total deferred tax liabilities 428,000 517,000
Deferred tax assets:
Accounts receivable allowance 15,000
Moving reserve 19,000
Accounts payable 53,000
Accrued payroll 14,000 44,000
-------------- --------------
Total deferred tax assets 48,000 97,000
-------------- --------------
Less valuation allowance - -
-------------- --------------
Net deferred tax assets 48,000 97,000
-------------- --------------
Net deferred tax liabilities as of
December 31, 1997 and 1996 (including
$41,000 and $351,000, respectively,
classified as current) $ 380,000 $ 420,000
============== ==============
<PAGE>
NOTE 6 - INCOME TAXES (CONTINUED)
Income tax expense for the years ended December 31, 1997 and 1996, respectively,
differ from the Federal statutory rate as follows:
Years ended December 31,
1997 1996
--------- ---------
Statutory Federal income tax rate 34.0% 34.0%
Effect of graduated rates (1.5)
State income taxes, net of Federal tax benefit 4.0 4.0
Other 0.6 0.0
--------- ---------
38.6% 36.5%
========= =========
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
1997 1996
----------- -----------
Automobile installment loan, 10% interest
due December 1998 $ 7,123 $ 13,058
Less current portion (6,547) (5,931)
-------------- --------------
$ 576 $ 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,
1997 1996
----------- -----------
Dictation and other equipment $ 104,515 $ 104,515
Allowance for depreciation (58,204) (37,301)
-------------- --------------
$ 46,311 $ 67,214
============== ==============
Depreciation of these assets, computed by the straight line method over five
years, is included in depreciation expense.
<PAGE>
NOTE 9 - FIXED STOCK OPTION PLANS
At December 31, 1997 and 1996, the Company has a stock-based compensation plan,
which is described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized for its fixed option plan. Had compensation cost for the
Company's stock-based compensation plan been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
SFAS No. 123, Accounting for Stock Based Compensation, the Company's net income
and earnings per share (EPS) for 1997 and 1996 would have been reduced to the
pro forma amounts indicated below:
1997 1996
--------------- ---------------
Net income as reported $ 616,226 $ 439,667
Pro forma $ 563,226 $ 408,667
Basic EPS as reported $ .10 $ .07
Pro forma $ .09 $ .07
Diluted EPS as reported $ .09 $ .07
Pro forma $ .08 $ .07
The effect of applying SFAS No.123 is not likely to be representative of the
effects on reported net income for future years due, among other things, to the
effects of vesting.
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.
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:
1997 1996
-------- ---------
Expected volatility 60% 60%
Risk-free interest rate 5.4% 6.3%
Expected lives 4 years 5 years
Dividend yield - -
<PAGE>
NOTE 9 - FIXED STOCK OPTION PLANS (CONTINUED)
A summary of the status of the Company's stock option plans as of December 31,
1997 and 1996, and changes during the year, is presented below:
1997 1996
-------------------------- --------------------------
Weighted Weighted
Fixed options Shares Average Price Shares Average Price
------------------- ----------- ----------- ----------- -----------
Outstanding at
beginning of year 936,346 $ 0.76 - -
Granted 549,925 1.50 936,796 $ 0.76
Exercised (5,399) 1.44 - -
Forfeited (110,423) .79 (450) 0.75
----------- -----------
Outstanding end of year 1,370,449 1.06 936,346 $ 0.76
=========== ===========
Options exercisable
at end of year 352,421 -
Weighted-average fair value
of options granted
during the year $ 0.48 $ 0.23
=========== ===========
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
Options Outstanding Options Exercisable
------------------------------------- ------------------------
Number Weighted- Weighted- Number Weighted-
Range of Outstanding at Average Average Exercisable Average
Exercise December 31, Remaining Exercise December 31, Exercise
Prices 1997 Contract Life Price 1997 Price
- ------------- ------------ ------------- -------- ---------- ----------
$ .75 - $1.00 1,020,975 8.45 years $ .77 257,421 $ .77
$1.01 - $1.75 166,122 4.33 years 1.50 95,000 1.50
$1.76 - $2.50 183,352 9.83 years 2.27
---------- --------
1,370,449 8.13 years $ 1.06 352,421 $ .97
========== ========
NOTE 10 - 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, 1997 and 1996 totaled $7,801 and $3,314 respectively.
In December 1996, the Board of Directors approved an Employee Stock Purchase
Plan and reserved 150,000 shares of the Company's common stock. The Company has
issued 18,733 shares under the Plan as of December 31, 1997.
In March 1997, the Board of Directors authorized establishing a Section 125
Cafeteria Plan for the Company's employees.
<PAGE>
NOTE 11 - 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, 1996. Net cash provided by operating
activities includes interest payments of $23,169 and $39,187 for the years ended
December 31, 1997 and 1996, respectively. The Company made income tax payments
of $35,425 and $25,000 during 1997 and 1996 respectively.
NOTE 12 - MAJOR CUSTOMERS
The Company has no customer exceeding 10% of total revenues for the year ended
December 31, 1997. Revenues from several contracts with the U.S. Naval and two
Veterans Administration hospitals aggregated approximately $928,000 for the year
ended December 31, 1996. Revenues exceeding 10% of total revenues from one
nonprofit hospital group aggregated approximately $867,000 for the year ended
December 31, 1996. Revenues exceeding 10% of total revenues from one for-profit
hospital group aggregated approximately $750,000 for the year ended December 31,
1996.
NOTE 13 - EARNINGS PER SHARE DISCLOSURE
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ----------- -----------
For Year Ended December 31, 1997
- --------------------------------
Basic earnings per share
Income available to common
stockholders $ 616,266 6,259,765 $ .10
Effect of Dilutive Securities
Stock options 568,018
----------- ----------- -----------
Diluted earnings per share
Income available to common stockholders,
including assumed conversions $ 616,266 6,827,783 $ .09
=========== ========== ==========
For Year Ended December 31, 1996
- --------------------------------
Basic earnings per share
Income available to common
stockholders $ 439,667 6,257,480 $ .07
Effect of Dilutive Securities
Stock options 95,188
Diluted earnings per share
Income available to common stockholders,
including assumed conversions $ 439,667 6,352,668 $ .07
=========== ========== ==========
Options to purchase 183,550 shares of common stock at $2.25 to $2.38 per share
were outstanding during October to December, 1997 but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares. The options, which expire from
October to December, 2007, were still outstanding at the end of 1997.
<PAGE>
NOTE 14 - COMMITMENTS
The Company rents office space under two agreements that 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 March 18, 2000 at a cost of
$554 per month.
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, 1997 are as follows:
Capital Operating
Leases Leases Total
Year Ending December 31,
1998 $ 25,448 $ 101,693 $ 127,141
1999 - 72,845 72,845
2000 - 1,661 1,661
------------ -------------- -----------
Total minimum lease payments 25,448 $ 176,199 $ 201,647
============== ===========
Amount representing interest (1,134)
Present value of net minimum
lease payments $ 24,314
============
Rent expense under operating leases for the years ended December 31, 1997 and
1996 totaled $96,356 and $65,827, respectively.
<PAGE>
PART III
EXHIBITS LIST
None
<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.
February _, 1998 By: /s/ Richard D. Cameron
----------------------
Richard D. Cameron
Principal Executive Officer
February 4, 1998 By: /s/ Gerald H. Gruber
----------------------
Gerald H. Gruber
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.
February __, 1998 /s/ Myron A. Wick III
-------------------------
Myron A. Wick III
Chairman of the Board of Directors
February __, 1998 /s/ Charles C. McGettigan
--------------------------
Charles C. McGettigan
Director
February 4, 1998 /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.
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<NAME> Not Applicable, Not Required
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,530
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0
<COMMON> 62,816
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