<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1996
REGISTRATION NO. 333-3050
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MEDQUIST INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
New Jersey 8741 22-2531298
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
Five Greentree Centre
Suite 311
Marlton, New Jersey 08053
(609) 596-8877
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
------------------------
John M. Suender
Vice President & General Counsel
MedQuist Inc.
Five Greentree Centre
Suite 311
Marlton, New Jersey 08053
(609) 596-8877
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
James D. Epstein, Esq. Alexander D. Lynch, Esq.
Pepper, Hamilton & Scheetz Brobeck, Phleger & Harrison LLP
3000 Two Logan Square 1301 Avenue of the Americas
Philadelphia, PA 19103-2799 New York, NY 10019
(215) 981-4000 (212) 581-1600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
MEDQUIST INC.
CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS
---------------------------------------------------- ----------------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of
Prospectus........................................ Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Inside Front Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges......................... Summary; Risk Factors
4. Use of Proceeds..................................... Summary; Risk Factors; Use of Proceeds; Management's
Discussion and Analysis of Financial Condition and
Results of Operations
5. Determination of Offering Price..................... Outside Front Cover Page of Prospectus; Price Range
of Common Stock
6. Dilution............................................ Not Applicable
7. Selling Security Holders............................ Outside Front Cover Page of Prospectus; Use of
Proceeds; Principal Shareholders; Underwriting
8. Plan of Distribution................................ Outside Front Cover Page of Prospectus; Underwriting
9. Description of Securities to be Registered.......... Summary; Capitalization; Description of Capital
Stock
10. Interests of Named Experts and Counsel.............. Not Applicable
11. Information with Respect to the Registrant.......... Outside Front Cover Page of Prospectus; Summary;
Risk Factors; Use of Proceeds; Price Range of
Common Stock; Dividend Policy; Capitalization;
Selected Consolidated Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management;
Certain Transactions; Principal Shareholders;
Description of Capital Stock; Shares Eligible for
Future Sale; Available Information; Consolidated
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities....................................... Not Applicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 20, 1996
[MEDQUIST LOGO]
2,200,000 SHARES
COMMON STOCK
All of the 2,200,000 shares of Common Stock offered hereby are being
issued and sold by MedQuist Inc. ('MedQuist' or the 'Company'). On May 9, 1996,
the last sale price of the Company's Common Stock, as reported on the American
Stock Exchange Composite Tape, was $19.875 per share. See 'Price Range of Common
Stock.' The Common Stock is traded on the American Stock Exchange under the
symbol 'MBS.' The Common Stock has been approved for listing on the Nasdaq
National Market under the symbol 'MEDQ.' Approximately $18,375,000 of the net
proceeds from the Offering will be used to pay certain indebtedness to related
parties, including an aggregate of approximately $13,100,000 payable to the
Company's Chief Executive Officer and to its Chief Operating Officer.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE 'RISK FACTORS' BEGINNING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS COMPANY (1)
<S> <C> <C> <C>
Per Share............................ $ $ $
Total (2)............................ $ $ $
</TABLE>
(1) Before deducting expenses payable by the Company, estimated at $400,000.
(2) The Company and certain Selling Shareholders have granted to the
Underwriters a 30-day option to purchase up to an additional 307,160 and
22,840 shares of Common Stock, respectively, solely to cover
over-allotments, if any. See 'Underwriting.' If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ , respectively, and
the proceeds to the Selling Shareholders will be $ .
------------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ('Robertson, Stephens &
Company'), San Francisco, California, on or about , 1996.
ROBERTSON, STEPHENS & COMPANY
VOLPE, WELTY & COMPANY
PENNSYLVANIA MERCHANT GROUP LTD
The date of this Prospectus is May , 1996.
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS; AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Summary................................................................................................... 3
Risk Factors.............................................................................................. 6
Use of Proceeds........................................................................................... 11
Dividend Policy........................................................................................... 11
Price Range of Common Stock............................................................................... 12
Capitalization............................................................................................ 13
Selected Consolidated Financial Data...................................................................... 14
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................................... 16
Business.................................................................................................. 21
Management................................................................................................ 29
Certain Transactions...................................................................................... 39
Principal Shareholders.................................................................................... 40
Description of Capital Stock.............................................................................. 42
Shares Eligible for Future Sale........................................................................... 45
Underwriting.............................................................................................. 46
Legal Matters............................................................................................. 47
Experts................................................................................................... 47
Available Information..................................................................................... 47
Index to Consolidated Financial Statements................................................................ F-1
</TABLE>
------------------------
The Company furnishes to its shareholders annual reports containing
financial statements audited by independent public accountants.
'MedQuist(Registered)' is a registered trademark of the Company, and 'MTS,'
'DTS' and 'Transcriptions, Ltd.' are trademarks of the Company.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
SUMMARY
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus, including the matters set forth under the
caption 'Risk Factors,' which could cause actual results to differ materially
from those indicated by such forward-looking statements. The following summary
is qualified in its entirety by the more detailed information, including 'Risk
Factors' and Consolidated Financial Statements and Notes thereto, appearing
elsewhere in this Prospectus.
THE COMPANY
The Company is a leading national provider of electronic transcription and
document management services to the healthcare industry. Through its proprietary
software, open architecture environment and network of more than 1,500 trained
transcriptionists, the Company converts free-form medical dictation into
electronically formatted patient records which healthcare providers use in
connection with patient care and for administrative purposes. The Company's
customized outsourcing services enable clients to improve the accuracy of
transcribed medical reports, reduce report turnaround times, shorten billing
cycles and reduce overhead and other administrative costs. The Company believes
that the electronic capture and delivery of free-form dictation are key
components in the increasing implementation by healthcare providers of
electronic medical record systems.
The Company develops long term client relationships due to its
technological expertise, efficient and cost-effective services and experienced
management team. The Company's diversified client base includes more than 400
hospitals and other healthcare organizations such as outpatient clinics, health
maintenance organizations and physician practice groups. The Company has a
history of customer satisfaction and retention and has provided services for an
average of over five years for its 25 largest clients in 1995. The Company
performed services in 1995 for 88%, 92% and 100% of those clients which were its
25 largest clients in 1992, 1993 and 1994, respectively.
Growth in the demand for medical transcription services is directly
impacted by the number of hospital admissions and outpatient visits. Each
hospital admission or outpatient visit generates dictated or written data which
must be entered into a patient's record. For the quarter ended September 30,
1995, the American Hospital Association estimated that the numbers of hospital
admissions and outpatient visits in the United States were 8.3 million (an
increase of approximately 3% over the corresponding period in 1992) and 112
million (an increase of approximately 22% over the corresponding period in
1992), respectively.
The Company continues to implement advances in technology to improve the
delivery of its services. The Company utilizes its Medical Transcription System
('MTS'), an integrated transcription and document management system based upon
proprietary software, to service the transcription and document management needs
of its clients. The Company's technical staff customizes MTS to address initial
data capture, conversion of data into electronic format, editing of data and
routing of electronically formatted reports to the client's host computer
system. For electronic data interchange MTS incorporates the HL-7 format or
other interface protocols. The Company's Dictation Tracking System ('DTS')
enables the Company and its clients to track the status of particular patient
data and transcribed reports at any point in time and to evaluate the Company's
on-time performance. Clients also use DTS as an integral management tool to
monitor physician timeliness in the dictation, review and sign-off process.
The Company's objectives are to maintain its leadership position as a
provider of electronic transcription and document management services to the
healthcare industry and to enhance that position as the information needs of
healthcare providers continue to expand and evolve. The key elements of the
Company's strategy include: expanding relationships with existing clients to
capture their growing transcription requirements; extending its current client
base by attracting new hospital clients, health maintenance organizations,
outpatient clinics and physician practice groups; leveraging its technological
leadership to create customized solutions to client needs and changing industry
standards; capitalizing on emerging technologies such as voice recognition and
Internet based communications; and pursuing strategic acquisitions.
The executive offices of the Company are located at Five Greentree Centre,
Suite 311, Marlton, New Jersey 08053, and its telephone number is (609)
596-8877.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company...................... 2,200,000 shares
Common Stock Outstanding after the Offering.............. 6,522,338 shares (1)
Use of Proceeds.......................................... To repay existing indebtedness (including a
subordinated payable to related parties) incurred in
the acquisition of Transcriptions, Ltd.
Proposed Nasdaq Symbol................................... MEDQ
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues (2)................................................. $ -- $ 24,841 $ 45,127 $ 10,426 $ 13,978
Operating income (loss) (2).................................. (1,760) 2,463 4,733 762 1,790
Income (loss):
Continuing operations..................................... (1,896) (166) 607 (115) 546
Discontinued operations (3)............................... 3,746 1,612 (1,729) 441 --
Extraordinary item (4).................................... -- -- (545) -- --
--------- --------- --------- --------- ---------
Net income (loss)....................................... $ 1,850 $ 1,446 $ (1,667) $ 326 $ 546
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per share (5):
Continuing operations..................................... $ (0.40) $ 0.09 $ 0.30 $ -- $ 0.14
Discontinued operations (3)............................... 1.02 0.49 (0.52) 0.13 --
Extraordinary item (4).................................... -- -- (0.16) -- --
--------- --------- --------- --------- ---------
Net income (loss) per share............................. $ 0.62 $ 0.58 $ (0.38) $ 0.13 $ 0.14
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in computing net income (loss) per share (5)..... 3,656 3,316 3,335 3,130 4,363
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
TRANSCRIPTIONS, LTD. DATA:
Revenues(6).............................................. $ 20,020 $ 23,025 $ 27,103 $ 36,634 $ 45,127
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------------------
ACTUAL PRO FORMA (7) AS ADJUSTED (8)
--------- -------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital..................................................... $ 6,104 $ 6,104 $ 19,481
Total assets........................................................ 59,082 59,082 69,122
Current portion of long-term debt................................... 3,337 3,337 --
Long-term debt, net of current portion.............................. 16,054 9,599 --
Subordinated payable to related parties............................. 17,726 17,726 --
Total shareholders' equity.......................................... 15,572 22,027 62,729
</TABLE>
4
<PAGE>
------------------
(1) Includes: (a) 962,675 shares of Common Stock to be issued to Heller Equity
Capital Corporation ('Heller') upon the closing of this Offering pursuant to
the exercise of warrants to purchase Preferred Stock (the 'Heller Warrants')
by cancelling the $7,000 principal amount of a senior subordinated note
(carrying value of $6,455 at March 31, 1996 due to original issue discount)
and the simultaneous conversion of such Preferred Stock into Common Stock
(the Heller Warrants were originally issued in December 1992 and currently
have an exercise price of $7.27 per share), and 42,500 shares of Common
Stock to be issued to Heller in connection therewith (collectively, the
'Heller Transaction'); and (b) 861,463 shares of Common Stock to be issued
in connnection with the payment of the deferred purchase price for
Transcriptions, Ltd. Excludes: (i) 689,202 shares of Common Stock which may
be issued upon exercise of outstanding options; (ii) 320,296 shares of
Common Stock which may be issuable upon exercise of options to purchase
Common Stock which may be granted in the future; and (iii) 75,351 shares of
Common Stock reserved for issuance pursuant to the exercise of warrants (at
$6.74 per share as of March 31, 1996) held by Chemical Bank ('Chemical').
The weighted average exercise price of all outstanding options as of March
31, 1996 was $7.19 per share. See 'Management -- Director Compensation,'
'--Executive Compensation,' 'Certain Transactions,' and Notes 2, 6, 8 and 9
of Notes to Consolidated Financial Statements of the Company.
(2) Transcriptions, Ltd. was acquired by the Company effective May 1, 1994 and
its business is the only operating business of the Company. All of the
Company's prior businesses have been treated as discontinued operations. See
(3) below.
(3) On November 14, 1995, the Company signed a letter of intent to sell its
receivables management business. The operations and net assets of the
Company's receivables management business and previously divested businesses
have been accounted for as discontinued operations. Discontinued operations
are presented net of tax and include a gain on disposal of $1,749 in 1993
and a loss on disposal of $3,180 in 1995. See Note 3 of Notes to
Consolidated Financial Statements of the Company.
(4) Represents the loss on early extinguishment of debt, net of income taxes.
(5) The Company's total outstanding options and warrants to purchase Common
Stock exceed 20% of the total outstanding Common Stock. Therefore, the
income (loss) per share computations are modified as required under
Accounting Principle Board Opinion No. 15. Upon the completion of this
Offering and the closing of the Heller Transaction, the Company will no
longer be subject to the modified treasury stock method of Accounting
Principle Board Opinion No. 15. See Note 1 of Notes to Consolidated
Financial Statements of the Company.
(6) The revenues for Transcriptions, Ltd. prior to its acquisition by the
Company on May 1, 1994 have been derived from its historical financial
statements. The 1994 revenues reflect Transcriptions, Ltd.'s revenues for
four months and the Company's revenues for eight months. See 'Business --
Company History' and the Combined Financial Statements of Transcriptions,
Ltd.
(7) Pro forma to reflect the Heller Transaction, including an estimated
non-recurring deduction of $718 from net income available to common
shareholders to be incurred in connection with issuance of 42,500 shares of
common stock to Heller to induce Heller to exercise the warrants and
simultaneously convert the Preferred Stock into Common Stock. The actual
non-recurring deduction will be based on the discounted fair value of the
Common Stock at the date of issuance.
(8) Adjusted to reflect the Heller Transaction, and the sale of 2,200,000 shares
of Common Stock offered by the Company hereby at an assumed public offering
price of $19.875 per share and the application of the estimated net proceeds
therefrom. See 'Use of Proceeds.'
------------------------
Unless otherwise noted, all information in this Prospectus assumes that (i) the
Underwriters' over-allotment option has not been exercised and (ii) the Heller
Transaction has been completed. As used in this Prospectus, except where the
context otherwise requires, the terms 'MedQuist' and the 'Company' include all
of its subsidiaries, including Transcriptions, Ltd., the current subsidiary of
the Company, as well as Transcriptions, Ltd., the predecessor acquired by the
Company in May 1994.
5
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing shares of the Common Stock offered hereby.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus.
RISKS ASSOCIATED WITH THE BUSINESS
Dependence on Single Line of Business. The Company's revenues are derived
primarily from the provision of electronic transcription services to hospitals
and other healthcare organizations on an outsourced basis. The Company's future
success will depend on the continued market acceptance of its transcription
services and the continued trend towards outsourcing of transcription services.
A reduction in demand or increase in competition in the market for its
transcription services would have a material adverse effect on the Company's
business, financial condition and results of operations. See 'Business.'
Rapid Technological Change. The healthcare information services industry
is characterized by rapid technological change, evolving client needs and
emerging technical standards. The introduction of competing services or products
incorporating new technologies, such as voice recognition capabilities, and the
emergence of new technical standards could render some or all of the Company's
services unmarketable. The Company believes that its future success depends on
its ability to enhance its current services and develop new services that
address the increasingly sophisticated needs of its customers. The failure of
the Company to develop and introduce service enhancements and new services in a
timely and cost-effective manner in response to changing technologies or client
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations. See 'Business -- Technology
Development' and '-- Strategy.'
Inability to Expand Into New Markets. To date, the Company's services have
been provided primarily to the medical record departments of hospitals. However,
healthcare services are increasingly being provided at sites other than
hospitals, such as outpatient clinics and physician practice groups. As part of
its strategy, the Company intends to increase its presence in these new markets
and to expand its services to direct patient care departments within hospitals.
However, the Company has limited experience in such markets and departments,
which may require significant modifications to the Company's services or
adjustments to its pricing. The Company's business, financial condition and
results of operations may be materially and adversely affected if its efforts to
expand into new markets and departments are not successful. See 'Business --
Strategy.'
Dependence on Key Personnel. The Company's future success depends upon its
ability to attract and retain its key managerial personnel. The loss of services
of certain of the Company's executive officers or the inability of the Company
to attract additional management personnel could have a material adverse effect
upon the Company's business, financial condition and results of operations.
Certain of its key executive officers, including David A. Cohen, the President
and Chief Executive Officer, John A. Donohoe, Jr., the Chief Operating Officer,
and Ronald Scarpone, the Chief Information Officer, have employment agreements
with the Company. Mr. Scarpone's employment agreement terminates on December 31,
1997, and Mr. Cohen's and Mr. Donohoe's employment agreements terminate on
December 31, 1998. Each such agreement permits the executive to resign, at any
time, by giving the Company at least three months prior notice. The Company does
not have key-man insurance on any of its executive officers. See 'Management.'
Potential for Significant Fluctuations in Quarterly Operating Results. The
Company has experienced, and may in the future experience, significant quarter
to quarter fluctuations in its results of operations. Such fluctuations may
result in volatility in the price of the Common Stock. Quarterly results of
operations may fluctuate as a result of a variety of factors, including demand
for the Company's services, the opening of new offices, the timing of
introduction of new services and service enhancements by the Company or its
competitors, the market acceptance of new services, the size and timing of
client contracts, changes in client budgets, the size and timing of
acquisitions, the integration of acquired businesses into the Company's
operations, the number and timing of new hires, competitive conditions in the
industry and general economic
6
<PAGE>
conditions. Further, the Company's contracts generally involve significant
client commitment and may require time-consuming authorization procedures within
the client's organization. For these and other reasons, the sales cycles for the
Company's services are typically lengthy and subject to a number of factors
outside of the Company's control. As a result, the Company's revenues are
difficult to forecast, and the Company believes that period to period
comparisons of results of operations are not necessarily meaningful and should
not be relied upon as an indication of future results of operations. In
addition, the Company's transcription business has experienced substantial
growth in recent periods and there can be no assurance that such rate of growth
in revenues and profits can be maintained in the future. Due to the foregoing
factors, it is possible that in future quarters the Company's operating results
will be below the expectations of public market analysts and investors. Such an
event could have a material adverse effect on the price of the Common Stock. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Unaudited Selected Pro Forma Quarterly Data' and 'Business --
Strategy.'
Ability to Attract and Retain Qualified Transcriptionists. The Company's
future success depends upon its ability to attract and retain qualified
transcriptionists. Competition for transcriptionists is intense, and no
assurance can be given that the Company will be successful in attracting and
retaining the personnel necessary to conduct its business successfully. The
inability of the Company to attract, hire and retain such personnel would have a
material adverse effect upon the Company's business, financial condition and
results of operations. The Company takes the position that its transcriptionists
are independent contractors for state tax, benefits and unemployment purposes
and statutory employees for federal income tax purposes. A successful challenge
to the Company's position or a change in applicable law could result in the
incurrence of liability for withholding taxes, disability payments, unemployment
payments, interest and penalties by the Company, and could have a material
adverse effect on the Company's costs of hiring and retaining transcriptionists.
See 'Business -- Employees.'
Risks Associated With Acquisitions. The Company acquired Transcriptions,
Ltd. in May 1994, made two other acquisitions of smaller transcription companies
in 1995, and intends to seek other acquisitions which will likely require the
consent of its senior lenders. There can be no assurance that the Company will
be successful in identifying suitable acquisition candidates, financing such
acquisitions, negotiating terms favorable to the Company, consummating
acquisitions or integrating the acquired businesses into the Company's
operations. Moreover, in connection with acquisitions, the Company may be
required to incur additional indebtedness or other liabilities which could have
a material adverse effect on the Company's liquidity and capital resources, or
to issue shares of its capital stock, which could result in dilution to its
shareholders. See 'Business -- Strategy.'
Management of Changing Business. The Company has experienced significant
changes, including the acquisition and growth of its transcription business and
the divestiture of its other business. Such changes have placed and may continue
to place a significant strain on the Company's management, client service
personnel and operations. In order to manage such changes in the future, the
Company must continue to implement and improve its operational, financial and
management information systems, and hire, train and manage its employees. If the
Company is unable to implement such systems and manage such changes effectively,
the Company's business, financial condition and results of operations could be
materially and adversely affected. See 'Business -- Strategy.'
Competition. The transcription services industry is highly fragmented and
primarily consists of small regional or local companies, and a limited number of
national companies, with which the Company currently competes directly. The
Company believes that its ability to compete successfully depends upon many
factors within and outside of its control, including the timing and market
acceptance of new services and service enhancements developed by the Company and
its competitors, service quality, performance, price, reliability and client
support. In addition, the healthcare information industry includes a number of
companies with substantially greater financial, technical and marketing
resources than the Company. Such companies, if they were to enter the
transcription business, could respond more quickly than the Company to evolving
technological developments, changing client needs or emerging technical
standards, or could devote greater resources to the development, marketing and
sale of their services. Competition may increase due to consolidation of
transcription companies, and current and potential competitors may establish
cooperative relationships among themselves or with third parties to increase
their ability to address the needs of the
7
<PAGE>
Company's current and prospective clients. Increased competition may result in
price reductions for the Company's services, reduced operating margins and the
inability of the Company to increase its market share. There can be no assurance
that the Company will be able to compete successfully against current or future
competitors or that competitive pressures will not have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the market available to the Company is limited by healthcare
organizations which maintain in-house transcription departments. See 'Business
-- Competition.'
Changes in the Healthcare Industry. The healthcare industry is subject to
changing political, economic and regulatory influences that may affect the
outsourcing arrangements of healthcare providers. Federal and state legislators
have proposed programs to reform the United States healthcare system and other
proposals are in the development stage. In general, these programs and proposals
tend to emphasize managed care, seek to lower reimbursement rates and otherwise
attempt to control the environment in which healthcare providers operate.
Healthcare providers may react to these proposals and the uncertainty
surrounding such proposals by curtailing outsourcing arrangements or deferring
decisions regarding the use of outsourced services. Many healthcare providers
are consolidating to create larger healthcare delivery organizations. This
consolidation reduces the number of potential clients for the Company's services
and increases the bargaining power of these organizations which could lead to
reductions in the amounts paid for the Company's services. The impact of these
developments in the healthcare industry is difficult to predict and could have a
material adverse effect on the Company's business, financial condition and
results of operations. See 'Business -- Government Regulation.'
Dependence on Proprietary Rights; Risks of Infringement. The Company's
success depends upon its proprietary technology. The Company regards the
software underlying its services as proprietary, and relies primarily on a
combination of contract, copyright and trademark law, trade secrets,
confidentiality agreements and contractual provisions to protect its proprietary
rights. The Company has not registered its MTS, DTS or Transcriptions, Ltd.
trademarks and has no patents or patent applications pending. Existing trade
secrets and copyright laws afford the Company limited protection. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's software or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's software is difficult. There can be no assurance that the
obligations to maintain the confidentiality of the Company's trade secrets and
proprietary information will effectively prevent disclosure of the Company's
confidential information or provide meaningful protection for the Company's
confidential information, or that the Company's trade secrets or proprietary
information will not be independently developed by the Company's competitors.
There can be no assurance that copyrights owned by the Company will provide
competitive advantages or will not be challenged or circumvented by its
competitors. Litigation may be necessary for the Company to defend against
claims of infringement, to enforce copyrights or to protect trade secrets and
could result in substantial cost to, and diversion of management efforts by, the
Company. There can be no assurance that the Company would prevail in any such
litigation.
The Company is not aware that any of its software, trademarks or other
proprietary rights infringe the proprietary rights of third parties. However,
there can be no assurance that third parties will not assert infringement claims
against the Company in the future. Any such claims, with or without merit, can
be time consuming and expensive to defend and may require the Company to enter
into royalty or licensing agreements or cease the infringing activities. The
failure to obtain such royalty agreements, if required, and the Company's
involvement in such litigation could have a material adverse effect on the
Company's financial condition and results of operations. See 'Business --
Intellectual Property.'
Confidentiality Requirements. The medical information transcribed by the
Company is of an extremely sensitive nature. In providing its services, the
Company is subject to certain statutory, regulatory and common law requirements
regarding the confidentiality of medical information. Failure to comply with
such confidentiality requirements could result in material liability to the
Company. See 'Business -- Government Regulation.'
8
<PAGE>
RISKS ASSOCIATED WITH THE OFFERING OF COMMON STOCK
Potential Volatility of Stock Price. The market price of the Common Stock
has been, and may in the future be, highly volatile. Factors such as
acquisitions, technological innovations, new products or services, changes in
government regulation and healthcare legislation, fluctuations in the Company's
operating results and general market and economic conditions could cause the
market price of the Common Stock to fluctuate substantially. In addition, the
stock market in general has experienced extreme price and volume fluctuations
which has resulted in substantial volatility of the market prices of healthcare
service companies that has often been unrelated to the operating performance
of these companies. These or other factors may adversely affect the market
price of the Common Stock. See 'Price Range of Common Stock.'
Proceeds to Benefit Related Parties. The Company intends to use
approximately $18,375,000 of the net proceeds from this Offering to fund the
debt portion of the deferred purchase price payable for Transcriptions, Ltd.
This amount is payable to the Company's Chief Executive Officer, its Chief
Operating Officer and a Vice President of its Transcription, Ltd. subsidiary.
See 'Use of Proceeds' and 'Certain Transactions -- Acquisition of
Transcriptions, Ltd.'
Shares Eligible For Future Sale. Sales of substantial amounts of Common
Stock in the public market following this Offering could adversely affect the
market price of the Common Stock and the Company's ability to raise additional
equity capital. Upon completion of this Offering, and after giving effect to the
Heller Transaction and the issuance of shares of Common Stock in connection with
the payment of the deferred purchase price for Transcriptions, Ltd., the Company
will have 6,522,338 shares of Common Stock outstanding. Of these shares, the
2,200,000 shares of Common Stock offered hereby (plus up to 330,000 additional
shares if the Underwriters exercise their over-allotment option in full), the
1,650,000 shares sold in the Company's initial public offering and approximately
690,000 shares of Common Stock issued upon exercise of employee options will be
freely tradeable without restriction or further registration except by
'affiliates' of the Company, as that term is defined under the Act, subject to
the resale limitations of Rule 144 under the Securities Act of 1933, as amended
(the 'Act'). Approximately 1,975,000 shares of Common Stock may not be sold
unless they are registered under the Act or are sold pursuant to an exemption
from registration, such as the exemption provided by Rule 144 under the Act.
Certain of the Company's officers, directors and shareholders have agreed with
Robertson, Stephens & Company LLC that, until 180 days after the date of this
Prospectus, they will not sell approximately 380,000 shares of Common Stock
beneficially owned by them, and Mr. David Cohen, the Company's Chief Executive
Officer, who beneficially owns 604,373 shares of Common Stock (including 572,873
shares of Common Stock issuable on August 31, 1996 as partial payment of the
deferred purchase price for Transcriptions, Ltd.), has agreed to similar
restrictions for a period of 270 days after the date of this Prospectus.
Additionally, Heller and Chemical, who beneficially own 1,005,175 and 75,351
shares of Common Stock, respectively, have agreed to similar restrictions on the
public sale of such shares of Common Stock for 270 and 180 days, respectively,
after the date of this Prospectus. In its sole discretion and at any time
without notice, Robertson, Stephens & Company LLC may release all or any portion
of the shares subject to these lock-up agreements. If a shareholder other than
Heller obtains a release from a lock-up agreement, Heller will be entitled to a
release of the same number of shares. The Company has also agreed not to sell
any shares of Common Stock, other than shares to be issued in the Heller
Transaction, shares or options issued or to be issued under the Company's stock
option and stock purchase plans, shares of Common Stock issued upon the exercise
of presently outstanding warrants, or shares, warrants or convertible securities
issued in connection with future acquisitions, until at least 180 days after the
date of this Prospectus, except with the prior written consent of Robertson,
Stephens & Company LLC. In addition, 1,531,100 shares of Common Stock issuable
in the future in connection with employee benefit plans may be sold in the
public market from time to time pursuant to the Company's registration
statements on Form S-8. Certain holders of the Company's securities, including
Heller and Chemical, are entitled to certain registration rights. The Company
has filed a registration statement on Form S-3 under the Act to register the
resale by Heller and Chemical, subject to the foregoing lockup agreements, of
962,675 and 75,351 shares of Common Stock, respectively. If such holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, such sales could have a material
adverse effect on the market price for the Common Stock. See 'Shares Eligible
For Future Sale.'
9
<PAGE>
Certain Anti-Takeover Provisions. The New Jersey Shareholders Protection
Act prohibits the Company from entering into certain business combination
transactions with any shareholder of the Company which owns 10% or more of the
outstanding voting securities of the Company, except under certain limited
circumstances. In addition, the Company's Amended and Restated Certificate of
Incorporation gives the Board of Directors the authority without shareholder
approval to issue up to 3,950,000 shares of Preferred Stock, in one or more
series, with rights, preferences and limitations that could adversely affect the
voting power and the other rights of the holders of the Common Stock. The
Company's Amended and Restated Certificate of Incorporation also provides for
staggered terms for the members of the Board of Directors such that no more than
one-third of its members stands for reelection in any one year. The Company has
entered into certain severance arrangements which provide for payments to
certain of its officers upon a 'change in control' (as defined therein) of the
Company. Moreover, the terms of the Company's 1992 Stock Option Plan (the '1992
Option Plan') provide that outstanding options automatically vest and become
exercisable upon a 'change in control' (as defined therein) of the Company.
These provisions and arrangements may have the effect of delaying, deferring or
making more costly a change in control of the Company, including transactions in
which shareholders might otherwise receive a premium for their shares over the
then current market price, and, therefore, could adversely affect the market
price of the Common Stock. See 'Management' and 'Description of Capital Stock --
Takeover Protection.'
10
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale by the Company of the 2,200,000 shares of
Common Stock offered hereby will be approximately $40.7 million ($46.4 million
if the Underwriter's over-allotment option granted by the Company is exercised
in full), based on an assumed public offering price of $19.875 per share, less
estimated underwriting discounts and commissions, and estimated expenses payable
by the Company. The Company plans to use approximately $18,375,000 of the net
proceeds to pay the debt portion of the deferred purchase price payable to
related parties in connection with the acquisition of Transcriptions, Ltd. (of
which an aggregate of approximately $13.1 million is payable to the Company's
Chief Executive Officer and to its Chief Operating Officer) and will apply the
balance to repay a portion of the borrowings outstanding under the Company's
senior credit facility with certain lenders including Chemical (the 'Chemical
Facility'), first to reduce the outstanding balance under the revolving credit
facility (the 'Revolving Credit Facility') and, thereafter, to prepay the term
loans (the 'Term Loans'). After giving effect to the application of the net
proceeds from the Offering, the Company's borrowing availability under the
Revolving Credit Facility at March 31, 1996 would have been $8.1 million. See
'Certain Transactions.'
The Chemical Facility provides for an aggregate of $9.5 million of Term
Loans payable in 24 quarterly installments ending December 31, 2001, and up to a
$10 million Revolving Credit Facility, subject to a borrowing base limitation
based on a percentage of eligible accounts receivable, expiring December 31,
1998. The weighted average interest rate under the Term Loans and the Revolving
Credit Facility at March 31, 1996 was 8.625%. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.'
The Company will not receive any of the net proceeds from the sale of up to
22,840 shares of Common Stock by the Selling Shareholders pursuant to the
exercise of the Underwriter's over-allotment option. See 'Underwriting.'
DIVIDEND POLICY
The Company has never declared or paid any dividends on its capital stock.
The Company currently intends to retain future earnings, if any, to finance
operations and expansion, and does not expect to pay any cash dividends on its
Common Stock in the foreseeable future. Future cash dividends, if any, will be
determined by the Board of Directors, and will be based upon the Company's
earnings, capital requirements, financial condition and other factors deemed
relevant by the Board of Directors. The Chemical Facility does not permit the
payment of any dividends without the consent of the lenders.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
Since September 20, 1994, the Common Stock has been traded on the American
Stock Exchange under the symbol 'MBS.' From May 12, 1992, when the Company
completed its initial public offering, until the commencement of trading on the
American Stock Exchange, the Common Stock was quoted on the Nasdaq National
Market. The following table sets forth the high and low reported closing sale
prices for the Common Stock for the period during which the Common Stock has
been traded on the American Stock Exchange and the range of high and low bid
quotations for the period in which the Common Stock was quoted on the Nasdaq
National Market. The bid quotations for the Nasdaq National Market reflect
inter-dealer prices, do not include retail mark-ups, mark-downs or commissions
and may not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1994
First Quarter....................................................................... $ 7 1/8 $ 4 1/2
Second Quarter...................................................................... 7 1/4 6 1/4
Third Quarter....................................................................... 7 1/8 5 7/8
Fourth Quarter...................................................................... 9 6 3/8
1995
First Quarter....................................................................... 8 1/8 6 3/4
Second Quarter...................................................................... 9 1/4 6 3/8
Third Quarter....................................................................... 10 1/8 6 3/8
Fourth Quarter...................................................................... 9 3/8 6 3/4
1996
First Quarter....................................................................... 13 8 3/8
Second Quarter (through May 9)...................................................... 19 7/8 13 3/8
</TABLE>
On May 9, 1996, the closing sale price for the Common Stock, as reported on
the American Stock Exchange Composite Tape, was $19.875 per share, and there
were 88 record holders of the Common Stock.
The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol 'MEDQ.'
12
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1996; (i) the actual
capitalization of the Company; (ii) the pro forma capitalization of the Company
as adjusted to reflect the Heller Transaction; and (iii) the pro forma
capitalization of the Company as adjusted to reflect the sale of 2,200,000
shares of Common Stock offered hereby at an assumed public offering price of
$19.875 per share and the application of the estimated net proceeds therefrom.
The information set forth below should be read in conjunction with 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
the Consolidated Financial Statements of the Company (including the Notes
thereto), included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt........................................... $ 3,337 $ 3,337 $ --
--------- ----------- -----------
--------- ----------- -----------
Long-term debt, net of current portion...................................... $ 16,054 $ 9,599 $ --
--------- ----------- -----------
Subordinated payable to related parties..................................... 17,726 17,726 --
--------- ----------- -----------
Shareholders' equity:
Class A preferred stock, no par value, 650 shares authorized, none
issued................................................................. -- -- --
Class B preferred stock, no par value, 400 shares authorized, none
issued................................................................. -- -- --
Common Stock, no par value, 20,000 shares authorized, 2,455 shares issued
and outstanding (actual), 3,461 shares issued and outstanding (pro
forma) and 5,661 shares issued and outstanding (as adjusted) (1)....... 4,695 11,866 52,568
Common Stock to be issued to related parties, 861 shares (2).............. 4,550 4,550 4,550
Retained earnings......................................................... 6,327 5,611 5,611
--------- ----------- -----------
Total shareholders' equity........................................... 15,572 22,027 62,729
--------- ----------- -----------
Total capitalization.............................................. $ 49,352 $ 49,352 $ 62,729
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
------------------
(1) Excludes 764,553 shares of Common Stock which may be issued upon exercise of
options and warrants outstanding as of March 31, 1996, and an additional
320,296 shares of Common Stock which may be issuable upon exercise of
options to purchase Common Stock which may be granted in the future. As of
March 31, 1996, the weighted average exercise prices of all outstanding
options and warrants were $7.19 per share and $6.74, respectively. See
'Management -- Director Compensation,' '-- Executive Compensation,' 'Certain
Transactions,' and Notes 2, 8 and 9 of Notes to Consolidated Financial
Statements of the Company.
(2) See 'Certain Transactions -- Acquisition of Transcriptions, Ltd.' and Notes
2 and 7 of Notes to Consolidated Financial Statements of the Company.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below reflects selected
consolidated financial data of the Company as of and for the periods indicated,
after giving retroactive effect to the Company's discontinued operations. The
selected consolidated financial data as of and for each of the three years ended
December 31, 1995 have been derived from the Consolidated Financial Statements
of the Company which have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report included elsewhere in this
Prospectus. The selected consolidated financial data as of and for each of the
years ended December 31, 1991 and 1992 have been derived from Consolidated
Financial Statements of the Company not included in this Prospectus. The
selected consolidated statement of operations data for the three months ended
March 31, 1995 and 1996 and the selected consolidated balance sheet data as of
March 31, 1996 have been derived from unaudited consolidated financial
statements of the Company that, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations for these periods in accordance
with generally accepted accounting principles. The consolidated results of
operations for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for any interim period or for the
full year. Because of the discontinued operations, annual period to period
comparison of results of operations are not meaningful. This data should be read
in conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto, and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues (1)............................... $ -- $ -- $ -- $ 24,841 $ 45,127 $ 10,426 $ 13,978
--------- --------- --------- --------- --------- --------- ---------
Costs and expenses:
Cost of revenues......................... -- -- -- 18,677 33,711 7,676 10,435
Selling, general and administrative...... 1,564 1,533 1,688 2,798 4,325 1,599 888
Depreciation............................. 66 53 60 639 1,862 280 587
Amortization of intangible assets........ 19 10 12 264 496 109 278
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses.............. 1,649 1,596 1,760 22,378 40,394 9,664 12,188
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss).................... (1,649) (1,596) (1,760) 2,463 4,733 762 1,790
Interest expense........................... 296 393 1,426 2,738 3,695 959 865
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes...................... (1,945) (1,989) (3,186) (275) 1,038 (197) 925
Income tax provision (benefit)............. (804) (867) (1,290) (109) 431 (82) 379
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations... (1,141) (1,122) (1,896) (166) 607 (115) 546
Discontinued operations (2)................ 2,293 2,629 3,746 1,612 (1,729) 441 --
Extraordinary item (3)..................... -- -- -- -- (545) -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).......................... $ 1,152 $ 1,507 $ 1,850 $ 1,446 $ (1,667) $ 326 $ 546
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Income (loss) per share (4):
Continuing operations.................... $ (0.50) $ (0.41) $ (0.40) $ 0.09 $ 0.30 $ -- $ 0.14
Discontinued operations (2).............. 1.00 0.97 1.02 0.49 (0.52) 0.13 --
Extraordinary item (3)................... -- -- -- -- (0.16) -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per share........... $ 0.50 $ 0.56 $ 0.62 $ 0.58 $ (0.38) $ 0.13 $ 0.14
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in computing income (loss)
per share (4)............................ 2,290 2,697 3,656 3,316 3,335 3,130 4,363
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
TRANSCRIPTIONS, LTD. DATA:
Revenues (5)........................................... $ 20,020 $ 23,025 $ 27,103 $ 36,634 $ 45,127
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------------------- -----------
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................. $ (244) $ (373) $ 1,108 $ 776 $ 4,926 $ 6,104
Total assets................................ 8,598 27,556 25,041 51,403 58,095 59,082
Current portion of long-term debt........... 372 1,125 1,146 4,889 2,246 3,337
Long-term debt, net of current portion...... 2,849 13,663 12,395 30,415 15,956 16,054
Subordinated payable to related parties..... -- -- -- -- 17,337 17,726
Shareholders' equity........................ 4,517 11,937 9,071 10,692 14,970 15,572
</TABLE>
------------------
(1) Transcriptions, Ltd. was acquired by the Company effective May 1, 1994 and
its business is the only operating business of the Company. All of the
Company's prior businesses have been treated as discontinued operations. See
(2) below.
(2) On November 14, 1995, the Company executed a letter of intent to sell its
receivables management business. The operations and net assets of the
Company's receivables management business and previously divested businesses
have been accounted for as discontinued operations. Discontinued operations
are presented net of tax and include a gain on disposal of $1,749 in 1993
and a loss on disposal of $3,180 in 1995. See Note 3 of Notes to
Consolidated Financial Statements of the Company.
(3) Represents the loss on early extinguishment of debt, net of income taxes.
(4) The Company's total outstanding options and warrants to purchase Common
Stock exceed 20% of the total outstanding Common Stock. Therefore, the
income (loss) per share computations are modified as required under
Accounting Principle Board Opinion No. 15. Upon the completion of this
Offering and the closing of the Heller Transaction, the Company will no
longer be subject to the modified treasury stock method of Accounting
Principle Board Opinion No. 15. See Note 1 of Notes to Consolidated
Financial Statements of the Company.
(5) The revenues for Transcriptions, Ltd. prior to its acquisition by the Comany
on May 1, 1994 have been derived from its historical financial statements.
The 1994 revenues reflect Transcriptions, Ltd.'s revenues for four months
and the Company's revenues for eight months. See 'Business -- Company
History' and the Combined Financial Statements of Transcriptions, Ltd.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under 'Risk Factors' and elsewhere in
this Prospectus.
GENERAL
The Company is a leading national provider of electronic transcription and
document management services to the healthcare industry. As a result of
acquisition and divestiture activity from 1992 through 1995, the Company's
operations have changed considerably and the financial statements included in
this Prospectus relate to its continuing transcription business. See 'Business
-- Company History.' Accordingly, the historical consolidated operating results
of the Company set forth in the Consolidated Financial Statements do not reflect
the financial results of Transcriptions, Ltd. prior to its May 1994 acquisition
date. See Combined Financial Statements of Transcriptions, Ltd. included
elsewhere in this Prospectus. As a result, investors should not rely on these
statements as an indication of historical operating performance of the Company's
business or as a prediction of future operating performance.
Revenues and cost of revenues are included only from the May 1994
acquisition of Transcriptions, Ltd., although selling, general and
administrative expenses, depreciation, amortization and interest are included
for each of the periods indicated. Revenue from transcription related services
are based primarily on contracted rates, and revenue is recognized upon the
rendering of services and delivery of reports. Cost of revenues consists of all
direct costs associated with providing transcription related services, including
payroll, telecommunications, software customization, repairs and maintenance,
rent and other direct costs. Selling, general and administrative expenses
include costs associated with the Company's senior executive management and with
marketing and sales, finance, legal and other administrative functions.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data in the Company's Consolidated Statements of Operations as a
percentage of net revenues for the years ended December 31, 1994 and 1995 and
the three months ended March 31, 1995 and 1996. The Company did not have
revenues from continuing operations in 1993 and, accordingly, information as a
percentage of revenues for that year is not meaningful.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Continuing Operations:
Revenues.............................................................. 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues.................................................... 75.2 74.7 73.6 74.7
Selling, general and administrative................................. 11.3 9.6 15.4 6.3
Depreciation........................................................ 2.6 4.1 2.7 4.2
Amortization of intangibles assets.................................. 1.0 1.1 1.0 2.0
Operating income...................................................... 9.9 10.5 7.3 12.8
Interest expense...................................................... 11.0 8.2 9.2 6.2
Income (loss) from continuing operations before income taxes.......... (1.1) 2.3 (1.9) 6.6
Income tax provision (benefit)........................................ (0.4) 1.0 (0.8) 2.7
Income (loss) from continuing operations.............................. (0.7) 1.3 (1.1) 3.9
</TABLE>
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
Revenues. Revenues increased 34% to $14 million in the three months ended
March 31, 1996 from $10.4 million in the comparable 1995 period. The $3.6
million increase reflected approximately $2.3 million of
16
<PAGE>
net additional revenues generated from existing clients, $400,000 of revenues
from new clients and $900,000 of revenues from the Company's two 1995 medical
transcription acquisitions.
Cost of Revenues. Cost of revenues increased 35.1% from $7.7 million in
the three months ended March 31, 1995 to $10.4 million in the comparable 1996
period. As a percentage of revenues, cost of revenues increased from 73.6% in
the first quarter of 1995 to 74.7% for the comparable 1996 period. The
percentage increase in cost of revenues primarily resulted from increases in the
Company's telecommunications costs.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 44.5% to $888,000 in the three months ended March 31, 1996
from $1.6 million in the comparable 1995 period. As a percentage of revenues,
selling, general and administrative expenses decreased from 15.4% in the first
quarter of 1995 to 6.3% in the comparable 1996 period. Included in the 1995
selling, general and administrative costs were non-recurring retirement and
severance costs of $522,000 associated with the departure of certain executive
personnel.
Depreciation. Depreciation expense increased 109.6% from $280,000 for the
three months ended March 31, 1995 to $587,000 for the comparable 1996 period.
The increase in depreciation expense resulted primarily from $3.4 million of
capital expenditures during 1995.
Amortization. Amortization of intangible assets increased 155.0% to
$278,000 for the three months ended March 31, 1996 as compared to $109,000 for
the comparable 1995 period. The increase is directly attributable to the
additional intangible assets associated with the increased purchase price
related to the fixing of the deferred purchase price for Transcriptions, Ltd.
which began to be amortized effective December 29, 1995.
Interest. Interest expense decreased 9.8% from $959,000 for the three
months ended March 31, 1995 to $865,000 for the comparable 1996 period. The
decrease was due to the prepayment of approximately $16.7 million of the
Chemical Facility with the net proceeds from the sale of the receivables
management business in December 1995, partially offset by an increase of
$390,000 related to the non-cash interest associated with the accretion of the
discounted non-interest bearing subordinated payable to related parties in
connection with the fixing of the debt portion of the deferred purchase price
for Transcriptions, Ltd. in December 1995.
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
CONTINUING OPERATIONS
Revenues. Revenues increased 82% to $45.1 million in 1995 from $24.8
million in 1994. Revenues from continuing operations are included only from the
May 1994 acquisition of Transcriptions, Ltd. On a pro forma basis, as if the
acquisition had occurred on January 1, 1994, revenues would have been $36.6
million in 1994. The $8.5 million (23%) increase in 1995 revenues over 1994 pro
forma revenues reflected approximately $3.4 million of revenues generated from
new clients, $4.3 million of net additional revenues from existing clients and
$800,000 of revenues from the Company's two 1995 medical transcription
acquisitions.
Cost of Revenues. Cost of revenues increased from $18.7 million in 1994 to
$33.7 million in 1995, reflecting the full year of continuing operations in
1995.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $1.7 million in 1993 to $2.8 million in 1994, and
further increased to $4.3 million in 1995. As a percentage of revenues, selling,
general and administrative expenses decreased from 11.3% in 1994 to 9.6% in
1995, reflecting the full year of continuing operations in 1995. The aggregate
increase in selling, general and administrative expenses in 1995 resulted
primarily from $697,000 of non-recurring retirement and severance costs
associated with the departure of certain executive personnel, expenditures
incurred during the fourth quarter in connection with the opening of three new
locations, and the effect of a full year of continuing operations.
17
<PAGE>
Depreciation. Depreciation expense increased from $60,000 in 1993 to
$639,000 in 1994, and further increased to $1.9 million in 1995. These increases
reflect the acquisition of Transcriptions, Ltd. and an increased level of
capital expenditures during the last quarter of 1994 and during 1995.
Amortization. Amortization of intangible assets was $496,000 in 1995 as
compared to $264,000 in 1994, reflecting the full year of continuing operations
in 1995. This expense level will increase by approximately $670,000 in 1996 as
the intangible assets associated with the fixing of the deferred purchase price
for Transcriptions, Ltd. begin to be amortized. In 1993, the Company incurred
$12,000 of amortization expenses.
Interest. Interest expense increased from $1.4 million in 1993 to $2.7
million in 1994, and further increased to $3.7 million in 1995. These increases
were primarily due to the increase in the Company's borrowings which were
incurred in connection with the May 1994 acquisition of Transcriptions, Ltd. The
Company's future interest expense will be affected by a monthly non-cash
interest charge of approximately $130,000 from January 1, 1996 to August 31,
1996 associated with the fixing of the debt portion of the deferred purchase
price for Transcriptions, Ltd.
DISCONTINUED OPERATIONS
For the years ended December 31, 1993, 1994 and 1995, the discontinued
operations generated net revenue of $29.1 million, $21.4 million and $18.8
million and net income of $2.0 million, $1.6 million and $1.5 million,
respectively. The 1995 divestiture of the receivables management business
generated a net loss of $3.2 million. Included in this net loss is net income of
$113,000 related to the operation of the business from November 14, 1995 through
December 29, 1995. The 1993 divestiture generated net income of $1.7 million.
EXTRAORDINARY ITEM
During 1995, the Company recorded an extraordinary loss on the early
extinguishment of debt of $545,000. The extraordinary loss is the result of the
write off of certain deferred financing costs incurred in May 1994.
UNAUDITED SELECTED PRO FORMA QUARTERLY DATA
The following table sets forth the unaudited selected pro forma quarterly
data for the periods indicated assuming that the following transactions were
effected as of January 1, 1995; (i) the prepayment of approximately $16.7
million of the Chemical Facility with the proceeds from the sale of the
receivables management business on December 29, 1995; (ii) the fixing of the
Transcriptions, Ltd. deferred purchase price on December 29, 1995, causing
additional amortization and interest expense; (iii) the Heller Transaction; and
(iv) the repayment of the subordinated payable to related parties (the debt
portion of the deferred purchase price for Transcriptions, Ltd.) and a portion
of the Chemical Facility with the proceeds from this Offering. This data does
not reflect an estimated non-recurring deduction from net income to arrive at
net income available to common shareholders of $718 to be incurred in connection
with the issuance of 42,500 shares of common stock to Heller to induce Heller to
exercise the warrants and simultaneously convert the Preferred Stock into Common
Stock. The actual non-recurring deduction will be based on the discounted fair
value of the Common Stock at the date of issuance.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
PRO FORMA STATEMENTS OF OPERATIONS DATA: 1995 1995 1995 1995 1996
------------------------------------------------------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues............................................... $ 10,426 $ 10,806 $ 11,538 $ 12,357 $ 13,978
Income per share from continuing operations............ $ 0.04 $ 0.07 $ 0.11 $ 0.09 $ 0.14
Shares used in computing pro forma income per share.... 6,462 6,525 6,508 6,599 6,810
</TABLE>
Quarterly results of operations may fluctuate as a result of a variety of
factors, including demand for the Company's services, the opening of new
offices, the timing of introduction of new services and service enhancements by
the Company or its competitors, market acceptance of new services, the size and
timing of individual client contracts, changes in client budgets, the size and
timing of acquisitions, the integration of acquired businesses into the
Company's operations, the number and timing of new hires, competitive conditions
in the industry and general economic conditions. Further, the Company's
contracts generally involve significant client commitment and may require
time-consuming authorization procedures within the client organization. For
these and other reasons, the sales cycles for the Company's services are
typically lengthy and subject to a number of factors outside of the Company's
control. As a result, the Company's
18
<PAGE>
revenues are difficult to forecast, and the Company believes that period to
period comparisons of results of operations are not necessarily meaningful and
should not be relied upon as an indication of future results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had working capital of $4.9 million,
including $1.8 million of cash and cash equivalents. During 1995, the Company's
operating activities provided cash of $6.1 million and during 1994 these
activities provided $3.9 million. The increase in cash provided by operating
activities is primarily related to an increase in depreciation and amortization
and a loss in the disposal of discontinued operations, offset by an increase in
accounts receivable and a decrease in net income. At March 31, 1996, the Company
had working capital of $6.1 million, including $1.2 million of cash and cash
equivalents. During the first quarter of 1996, the Company's operating
activities used cash of $821,000 as compared to an increase in cash of $288,000
during the first quarter of 1995. The decrease in cash generated by operating
activities during the first quarter of 1996 was primarily related to an increase
in accounts receivable and decreases in accrued payroll and expenses, offset by
increases in net income, depreciation and amortization, and amortization of debt
discount.
During 1995, the Company purchased $3.4 million of capital equipment and
completed the acquisition of two transcription businesses for approximately
$834,000 in cash and 22,840 shares of Common Stock. These expenditures were
financed through cash flow from operations, the issuance of a subordinated note
payable (which was paid in March 1996), and the Chemical Facility. During the
three months ended March 31, 1996, the Company purchased $998,000 of capital
equipment. These expenditures were financed through cash flow from operations,
capital lease arrangements and the Chemical Facility.
The Company entered into the Chemical Facility when it acquired
Transcriptions, Ltd. in May 1994. The Chemical Facility was restructured in
December 1995 to provide for an aggregate of $9.5 million of Term Loans payable
in 24 quarterly installments ending December 31, 2001 (increasing to $475,000),
and a $10.0 million Revolving Credit Facility expiring December 31, 1998, which
is subject to a borrowing base limitation based on a percentage of eligible
accounts receivable. The Term Loans and the Revolving Credit Facility are
secured by substantially all of the assets of the Company. The Term Loans and
the Revolving Credit Facility bear interest at resetting rates selected by the
Company from various alternatives computed by adding a margin to one of the
interest rate alternatives described below. The interest rate alternatives are
either (i) 0.5% to 1.5% in excess of the greater of (x) Chemicals' base lending
rate, (y) the federal funds rate plus 1.0% or (z) the bank's certificate of
deposit rate, or (ii) LIBOR plus 2.0% to 3.0%. The applicable margins are
determined based upon the Company's compliance with its total debt coverage
ratio. In the case of LIBOR-based loans, the margin is 2%, 2.5% or 3%, if such
ratio is less than 2.75:1, between 2.76:1 and 3.5:1, or greater than 3.51:1,
respectively. In the case of other loans, the margin is .5%, 1% or 1.5%, if such
ratio is less than 2.75:1, between 2.76:1 and 3.5:1, or greater than 3.51:1,
respectively. At March 31, 1996, the weighted average interest rate on all loans
outstanding under the Chemical Facility was 8.625% per annum. As of March 31,
1996, approximately $9.3 million of the Term Loans were outstanding and $2.3
million of borrowings under the Revolving Credit Facility were outstanding. The
Revolving Credit Facility can be used for working capital and general corporate
purposes or, subject to a $7.5 million maximum, for future acquisitions.
Borrowings for acquisitions under the Revolving Credit Facility ('Acquistion
Loans') are repayable in equal quarterly installments ending December 31, 2001.
Except with respect to this Offering, the Chemical Facility generally requires
that the net proceeds of equity financings by the Company be used first to
prepay outstanding amounts under the Term Loans, then to prepay Acquisition
Loans, and thereafter to reduce the outstanding balance under Revolving Credit
Facility. In addition, 50% of defined Excess Cash Flow for each year commencing
with 1996 is required to be used first to prepay outstanding amounts under the
Term Loans, then to prepay Acquisition Loans and thereafter to reduce borrowings
under the Revolving Credit Facility. Excess Cash Flow is defined to mean, with
respect to any fiscal year, the amount by which the Company's consolidated net
cash flow exceeds its aggregate of consolidated regularly scheduled principal
payments of indebtedness and consolidated cash interest expense. To the extent
any amounts under the Revolving Credit facility are repaid, the Company may
reborrow such amounts. The Chemical Facility includes certain financial and
other covenants applicable to the Company, including limitations on capital
expenditures, maintaining a
19
<PAGE>
fixed charge coverage ratio, as well as ratios of total funded debt to adjusted
net cash flow, and total other debt to adjusted net cash flow within certain
levels, having positive net income in each fiscal quarter, and maintaining
EBITDA (earnings before income taxes, extraordinary items, interest expense,
depreciation and amortization) above certain levels.
On March 29, 1996, Heller entered into an agreement with the Company
pursuant to which, on the closing date of the Offering, Heller will exercise the
Heller Warrants by applying the $7 million of outstanding principal amount under
the Heller Facility against the exercise price (cancelling the note related
thereto having a carrying value of $6.5 million at March 31, 1996 due to
original issue discount), and converting the Class A and Class B Preferred Stock
received upon such exercise into 962,675 shares of Common Stock. Additionally,
in connection with such exercise and conversion, the Company has agreed to issue
to Heller an additional 42,500 shares of Common Stock. The cancellation of the
Heller subordinated debt will result in a reduction in the Company's interest
expense of $490,000 per year.
After the application of the net proceeds from this Offering, the Company
believes that cash flow generated from the Company's operations and its
borrowing capacity under the Chemical Facility (estimated at $8.1 million) and
certain capital leasing arrangements should be sufficient to meet its working
capital and capital expenditure requirements through December 31, 1997.
Additional funds may be required in connection with future acquisitions, if any.
In connection with the fixing on December 29, 1995 of the deferred purchase
price for the acquisition of Transcriptions, Ltd., the Company agreed to pay
$24.5 million on August 31, 1996 in the form of 861,463 shares of Common Stock
and $18,375,000 in cash. Because the deferred purchase price is not due until
August 31, 1996, the cash portion has been discounted and presented as a
subordinated payable at December 31, 1995. See Notes 2 and 7 of Notes to
Consolidated Financial Statements of the Company. The Company intends to use a
portion of the proceeds from this Offering to pay the debt portion of the
deferred purchase price. See 'Use of Proceeds.'
20
<PAGE>
BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under 'Risk Factors' and
elsewhere in this Prospectus.
GENERAL
The Company is a leading national provider of electronic transcription and
document management services to the healthcare industry. Through its proprietary
software, open architecture environment and network of more than 1,500 trained
transcriptionists, the Company converts free-form medical dictation into
electronically formatted patient records which healthcare providers use in
connection with patient care and for other administrative purposes. The
Company's customized outsourcing services enable clients to improve the accuracy
of transcribed medical reports, reduce report turnaround times, shorten billing
cycles and reduce overhead and other administrative costs. The Company believes
that the electronic capture and delivery of free-form physician dictation are
key components in the increasing implementation by healthcare providers of
electronic medical record systems.
The Company develops long term client relationships due to its
technological expertise, efficient and cost-effective services and an
experienced management team. The Company's diversified client base includes more
than 400 hospitals and other healthcare organizations such as outpatient
clinics, health maintenance organizations and physician practice groups. The
Company has a history of client satisfaction and retention and has provided
services for an average of over five years for its 25 largest clients in 1995.
The Company performed services in 1995 for 88%, 92% and 100% of those clients
which were its 25 largest customers in 1992, 1993 and 1994, respectively.
The Company continues to implement advances in technology to improve the
delivery of its services. The Company utilizes its Medical Transcription System,
an integrated transcription and document management system based upon
proprietary software, to service the transcription and document management needs
of its clients. The Company's technical staff customizes MTS to address initial
data capture, conversion of data into electronic format, editing of data and
routing of electronically formatted reports to the client's host computer
system. For electronic data interchange, MTS incorporates the HL-7 format or
other interface protocols. The Company's Dictation Tracking System enables the
Company and its clients to track the status of particular patient data and
transcribed reports at any point in time and to evaluate the Company's on-time
performance. Clients also use DTS as an integral management tool to monitor
physician timeliness in the dictation, review and sign-off process.
INDUSTRY OVERVIEW
Growth in the demand for medical transcription services is directly
impacted by the number of hospital admissions and outpatient visits. Each
hospital admission or outpatient visit generates dictated or written data which
must be entered into a patient's record. For the quarter ended September 30,
1995, the American Hospital Association estimated that the numbers of hospital
admissions and outpatient visits in the United States were 8.3 million (an
increase of approximately 3% over the corresponding period in 1992) and 112
million (an increase of approximately 22% over the corresponding period in
1992), respectively.
Medical transcription is the process by which free-form dictated patient
data is captured in a useable format, routed to the appropriate location,
reviewed and approved by the dictating healthcare provider, and inserted into a
patient's medical record. Physicians and other individual healthcare providers
use this information for direct patient care delivery purposes and
administrative personnel use the information for billing and other
administrative purposes. Historically, the majority of dictated reports and
related transcription expenditures were generated by hospital medical record
departments, where transcription services represent a significant expenditure.
Examples of these reports include patient histories, discharge summaries,
operative reports and consults. Increasingly, other hospital departments, such
as radiology, emergency, oncology, pediatrics and cardiology, are dictating
reports to improve their delivery of care and administrative functions. Health
maintenance organizations, outpatient clinics and physician practice groups
21
<PAGE>
are also expanding their use of transcribed medical reports. Accordingly, the
Company believes the market for outsourced transcription services will continue
to expand.
Outsourcing. During the 1990's, the healthcare industry has increasingly
outsourced services as a means to reduce administrative burdens and fixed costs.
Within hospitals and other healthcare organizations, medical record departments
have contracted with third parties for electronic transcription of dictated
patient records as their information needs, documentation requirements and
volume of dictated reports have expanded. As healthcare providers grow in size
and the delivery of medical care becomes decentralized, the outsourcing of
transcription services permits providers to reduce overhead and costs, ease
administrative burdens, improve quality of reports, access leading technologies
without development and investment risk and obtain the expertise to implement
and manage a system tailored to their specific requirements.
Growth in Information Systems. As healthcare organizations expand and the
delivery of care becomes increasingly decentralized, the insurance industry and,
in some cases, healthcare accreditation organizations are requiring expanded use
of transcribed reports to facilitate communication between various parts of a
healthcare network, to improve the quality and efficiency of patient care, and
to retain and provide reliable information in the event of malpractice
litigation. Moreover, the growing information needs of hospitals and other
healthcare organizations are driving the creation of electronic medical record
systems as the first step in the implementation of the computer based patient
record and the ability to perform outcomes analysis. The Company believes that
electronic medical transcription services are a core component of such systems
and records since they provide the ability to capture, access and manipulate the
patient data which forms the basis of the patient record.
Delivery of Care. As the health insurance industry continues to shift from
traditional fee-for-service reimbursement to managed care forms of reimbursement
such as 'capitation,' healthcare providers and payors are creating integrated
healthcare delivery systems consisting of hospitals, health maintenance
organizations, outpatient clinics and physician practice groups which must
coordinate the exchange of patient information and the delivery of patient care.
The accurate and efficient capture of patient data, and the distribution and
storage of and access to patient medical records are critical to such
coordination. Similar coordination is required as healthcare organizations,
often with different information systems, consolidate and increase in size
through mergers and acquisitions. Increasingly, healthcare organizations are
recognizing that centralizing patient data into an accessible system can create
economics of scale to reduce overall healthcare costs and improve the efficient
delivery of patient care.
Consolidation. The medical transcription industry is highly fragmented. An
industry trade organization estimates that there are approximately 1,500
providers of medical transcription services, most of which are small local or
regional companies. Many of these companies lack the financial resources or the
technological capabilities necessary to provide outsourced transcription
services to healthcare providers nationwide. As healthcare organizations
themselves consolidate and increase in size, and their information needs become
more complex, providers and payors increasingly require large and sophisticated
vendors.
STRATEGY
The Company's objectives are to maintain its leadership position as a
provider of electronic transcription and document management services to the
healthcare industry and to enhance that position as the information needs of
healthcare providers continue to expand and evolve. The key elements of the
Company's strategy include the following:
Expand Existing Client Relationships. A majority of the Company's
transcription services are provided to hospital medical record departments.
Through its close and continuing client relationships, the Company seeks to
increase its services as these departments outsource more of their transcription
requirements and as the volume of patient records continues to grow. In
addition, the Company is seeking to penetrate direct care departments at
hospitals such as radiology, emergency, oncology, pathology, pediatrics and
cardiology, within its existing client base. Historically, these departments
have not dictated their patient data or outsourced the transcription of their
patient data to the same extent as medical record departments.
Extend Current Client Base. The Company is seeking to extend its base of
traditional hospital clients
22
<PAGE>
and to pursue new clients such as health maintenance organizations, outpatient
clinics and physician practice groups which the Company believes will represent
a growing percentage of the available market. Based upon input from new clients,
the Company believes that references from its existing client base represent a
key component of its sales and marketing efforts. In addition, the Company has
begun to hire dedicated sales people to enhance its marketing efforts.
Leverage Technology Leadership. The Company's proprietary software, which
operates within an open architecture environment, and the Company's
technological expertise enable it to create customized systems tailored to
specific client requirements and changing industry standards. In order to
provide greater value added services to its clients, the Company intends to
continue to incorporate advances in technology to expand the breadth and
functionality of its services (such as outcome analysis capabilities) and
enhance its competitive position.
Capitalize on Emerging Technologies. The Company is initiating
relationships with developers and end-users of emerging technologies, such as
voice-recognition, physician clinical work stations and Internet based
communications, to create new value added services for its clients and to
participate in the development of the computer based patient record. In light of
preliminary discussions with such developers and end-users, the Company believes
that such relationships can accelerate the development and commercialization of
emerging technologies in the medical transcription and document management
field, including opportunities in telecommunications technology to improve the
efficiency of its operations and to reduce costs.
Pursue Strategic Acquisitions. The Company intends to pursue acquisitions
of other transcription companies which expand its client base, network of
qualified transcriptionists or geographic presence, as well as acquisitions,
joint ventures and other relationships which expand its technological expertise.
As the only publicly traded company engaged primarily in the provision of
medical transcription services, the Company believes that it can capitalize on
consolidation opportunities within the fragmented medical transcription
industry.
THE MEDQUIST INTEGRATED SYSTEM
The Company integrates proprietary software with sophisticated digital
dictation equipment, a network of more than 1,500 transcriptionists and an
experienced management team to provide customized solutions for hospitals and
other healthcare providers. Through its outsourced transcription and document
management services, the Company captures and stores free-form medical
dictation, professionally transcribes such dictation into accurate reports, and
electronically receives, reviews and distributes final reports to a client by
up-loading them into the client's computer system for placement into a patient's
medical record. Authorized individuals at multiple locations can access this
electronic information when needed for administrative, billing and patient care
purposes. The Company believes that the electronic transcription and management
of free-form dictation are key components in the increasing implementation of
electronic medical record systems.
23
<PAGE>
The following chart illustrates the full capabilities of the Company's
electronic transcription and document management system:
[GRAPHIC]
In the printed document there is a flow chart graphically describing how
medical reports are electronically transmitted.
1. MTS is accessed by healthcare professionals over standard telephone lines.
2. Free-form dictation is received by the Company and routed to a
fault-tolerant dictation system at one of its branch offices.
3. Transcriptionists access the free-form data stored at any of the Company's
locations through a special telephone transcribing station permitting the
shifting of work to reduce backlog.
4. Once transcribed, reports are reviewed and proofread for accuracy.
5. Reports are compiled at the Company's offices for distribution to the
client.
6. Reports are electronically forwarded to the client and uploaded to its host
computer.
7. Physicians and other healthcare professionals can access the reports at
remote locations.
8. DTS enables both the client and the Company to track the status of reports
as they move through the system and to monitor physician timeliness in
their dictation, review and sign-off process.
24
<PAGE>
The following are the key characteristics of the Company's electronic
transcription and document management system:
Customization/Open-Architecture. MTS operates in an open architecture
environment providing flexibility to address individual client needs. The
Company is capable of modifying MTS to interface with existing or legacy
systems. The Company's technical staff works closely with its clients, both
before and after installation, to develop system modifications and refinements.
For example, MTS allows database abstracting and can generate reports which
clients can use for administrative, management or direct delivery of patient
care purposes (i.e. outcomes analysis studies).
Fast, Accurate and Reliable Reports. The Company believes that due to its
large number (more than 1,500) of trained transcriptionists and its ability to
allocate work among them efficiently, it is able to reduce the production
turnaround times for transcribed medical reports. MTS allows a match of client
turnaround requirements and transcriptionist availability that an in-house staff
or smaller organization generally cannot provide. MTS also provides editing and
electronic review capabilities, such as specific reference to pages or clauses
to alert clients to potential deficiencies, that increase accuracy and
reliability. The quality of its transcriptionists and the capabilities of MTS
enable the Company to deliver its services on a cost-effective basis.
Distribution/Routing System. MTS speeds the distribution of transcribed
reports within the client's healthcare organization. MTS enables the Company to
exchange patient data with the client, using either the HL-7 format or another
interface protocol selected by the client. As a result, completed reports are
uploaded directly into the client's computer system. Once received at the client
host computer, authorized healthcare professionals throughout the client's
organization can access the report.
Tracking System. DTS enables a client and individual healthcare providers
to review the status of particular patient data and transcribed reports at any
point in time and to advise the Company whether the production of a particular
report requires acceleration. Through DTS, the client and the Company are able
to monitor the Company's on-time performance, especially with respect to
critical reports requiring turnaround times of less than 24 hours. Healthcare
providers also use DTS as an integral management tool to monitor physician
timeliness in their dictation, review and sign-off process.
TECHNOLOGY DEVELOPMENT
To assist its clients in meeting their transcription and document
management needs, the Company modifies MTS to interface with existing or legacy
systems. The Company works directly with its clients, both before and after
implementation of its systems, to create customized solutions. The Company
continually evaluates emerging technologies and applies them as appropriate to
make its services more reliable, efficient and cost-effective. For example, the
Company partners with its clients to customize MTS to enable electronic data
exchange in accordance with the HL-7 format, or other interface protocols, to
link the various components of the client's healthcare network.
The Company has also made technological enhancements to MTS to increase the
speed and accuracy of its transcriptionists. Completed projects include the
development of keys and keystroke combinations which translate into commonly
used, often misspelled, medical and technical terms. Additional improvements in
the MTS online spellcheck and editing systems are currently under development,
as are enhancements to the Company's electronic signature capability, the
Company's use of facsimile servers to facilitate the distribution of transcribed
reports to multiple locations, and the conversion of ASCII text into HTML
documents for transmission over computer networks.
The Company is currently working to develop an Internet/MTS access route
which is reliable and secure, provides an acceptable response time and reduces
telephone charges, a major component of the Company's cost structure.
Additionally, the Company is in discussions with a developer of voice
recognition technology to refine that technology for application in the medical
transcription environment. The successful application of voice recognition
technology to the medical transcription process would enable the Company to
concentrate on more value added data access and manipulation services, such as
data exchange and data analysis services, as compared to initial data capture.
There can be no assurance that the Company will be successful in responding to
technological developments, emerging technical standards or evolving customer
needs, on a timely basis or at all, or that any service enhancements or new
services, if developed and introduced, will achieve market acceptance.
25
<PAGE>
CLIENTS
The Company's diversified client base includes more than 400 hospitals and
other healthcare organizations such as outpatient clinics, health maintenance
organizations and physician practice groups. A majority of the Company's largest
clients are hospitals, including large metropolitan hospitals and major teaching
hospitals. Additional clients include health maintenance organizations and
out-patient clinics. The Company's clients are located in 38 states and the
District of Columbia. The following table sets forth certain information
relating to the Company's client profile and their contribution to the Company's
revenue in 1995:
<TABLE>
<CAPTION>
PERCENTAGE
TYPE OF CLIENT OF REVENUES
---------------------------------------------------------------------------------- ---------------
<S> <C>
Hospital Medical Record Departments............................................... 78.3%
Other Hospital Departments........................................................ 13.3
HMOs, Out-Patient Clinics and Other Healthcare Providers.......................... 7.8
Physician Practice Groups......................................................... 0.6
------
100.0%
------
------
</TABLE>
Due to its technological expertise and experience, and efficient and
cost-effective services, the Company has developed long-term client
relationships. The Company has a history of customer satisfaction and retention
and has provided services for an average of over five years for its 25 largest
clients in 1995. The Company performed services in 1995 for 88%, 92% and 100% of
those clients which were its 25 largest clients in 1992, 1993 and 1994,
respectively. During 1993, 1994 and 1995, annual revenue from each of the
Company's 25 largest clients ranged from $287,000 to $993,000, $351,000 to
$2,000,000 and $487,000 to $2,100,000, respectively. The Company's largest
client accounted for less than 5% of the Company's revenue during 1995. The
following table sets forth the average revenue per client for each of the years
indicated:
<TABLE>
<CAPTION>
AVERAGE REVENUE
YEAR PER CLIENT
--------------------------------------------------------------------- -----------------
<S> <C>
1993................................................................. $ 105,000
1994................................................................. $ 136,000
1995................................................................. $ 142,000
</TABLE>
The Company emphasizes client support and partnering with its clients. The
partnership begins when the Company's implementation team works with a new
client to develop a customized transcription services plan. The team then
executes the plan, provides ongoing support and develops service improvements
and enhancements as the relationship evolves. The Company's support team
includes 40 systems administrators. As part of its support efforts, the Company
also actively solicits input from clients and other sources (such as trade
groups) on how to improve existing services and develop new services. For
example, in January 1996, the Company held a user group meeting that was
attended by the health information directors of many of its largest clients.
SALES AND MARKETING
All office managers and operational vice presidents, as well as the
Company's senior management including the Chief Executive Officer, have sales
responsibilities. The Company recently hired its first regional director of
sales and another dedicated salesperson, and intends to develop and implement a
formal marketing plan to assist marketing efforts with traditional hospital
clients and to help penetrate emerging markets. Based on input from new clients,
the Company believes that, historically, new clients have utilized its services
in large part due to recommendations and references by its existing national
client base, and that references from the existing client base will continue to
be a key component of the Company's marketing and sales strategy. In addition to
its traditional transcription services to hospital medical record departments,
the Company's target markets include patient care departments, such as
radiology, emergency rooms, oncology, pathology, pediatrics and cardiology,
health maintenance organizations, physician practice groups and outpatient
clinics.
When performing sales and marketing responsibilities, the Company's
employees utilize a consultative sales and marketing approach by establishing a
working relationship with its clients through a series of direct meetings with
the chief financial officer, health information manager, chief information
officer and other key
26
<PAGE>
individuals at the client's organization. In this manner, the Company obtains
information concerning the particular needs of a client, and educates the client
as to how the Company's services can be customized to meet those needs. As part
of its marketing efforts, the Company also advertises in national healthcare
trade publications (including those sponsored by the American Health Information
Management Association), and participates in industry conventions.
COMPETITION
The Company currently competes in a highly fragmented industry which is
predominately populated by small regional or local companies, with a limited
number of national companies. According to American Association for Medical
Transcriptionists, there are approximately 1,500 companies providing medical
transcription services in the United States. The Company believes that it
competes for clients on the basis of price, ability to customize services, the
reliability, accuracy and turnaround time of transcribed reports. In addition to
competition, the market available to the Company is limited by healthcare
organizations which maintain in-house transcription departments.
EMPLOYEES
As of March 26, 1996, the Company employed 483 persons, of whom 23 are
administrative, 22 are branch office managers, 40 are technical and systems
support, two are sales and marketing, 210 are clerical and other support
personnel, and 186 are transcriptionists. In addition, 1,354 persons provide
transcription services to the Company from their homes. The Company compensates
its transcriptionists under an incentive-based compensation structure based upon
their performance (including accuracy, speed and output). The Company believes
that its ability to engage at-home transcriptionists enables it to compete
effectively for the limited number of skilled transcriptionists. By being able
to work out of their homes, qualified transcriptionists can make their own
hours, eliminate commuting costs and time and have the benefits of flexible work
hours. Additionally, many of the Company's transcriptionists are working parents
with children and the ability to work at home permits them to reduce child care
costs. The Company takes the position that its transcriptionists are independent
contractors for state tax, benefits and unemployment purposes and statutory
employees for federal income tax purposes. A successful challenge to the
Company's position or a change in applicable law could result in the incurrence
of liability for withholding taxes, disability payments, unemployment payments,
interest and penalties by the Company. See 'Risk Factors -- Ability to Attract
and Retain Qualified Transcriptionists.'
The Company utilizes a quality control program for training its
transcriptionists to permit greater accuracy of transcribed reports. The Company
has hired a national recruiter for screening and testing applicants for
positions as transcriptionists and maintains relationships with transcriptionist
schools to develop applicant pools. Screening procedures include testing
applicants' skills to determine whether they meet the Company's standards.
None of the Company's employees is represented by a labor union. The
Company considers its relations with its employees to be good.
GOVERNMENT REGULATION
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the outsourcing arrangements of healthcare
providers. Federal and state legislators have proposed programs to reform the
United States healthcare system and other proposals are in the development
stage. In general, these programs and proposals tend to emphasize managed care,
seek to lower reimbursement rates and otherwise attempt to control the
environment in which providers operate.
In providing its services, the Company is subject to certain statutory,
regulatory and common law requirements regarding the confidentiality of such
medical information. The Company requires its personnel to agree to keep all
medical information confidential and monitors compliance with applicable
confidentiality requirements.
Federal and state regulators are making increasing efforts to investigate
claims of false billing for government reimbursement and have secured
substantial payments from healthcare providers to resolve these claims. Because
these claims often result from a lack of appropriate documentation to support
billing, these government investigational efforts may stimulate a need for more
comprehensive transcription services.
27
<PAGE>
Additionally, healthcare accreditation organizations and governmental
authorities have begun to require more efficient transcription of patient
medical records as part of the requirements for a hospital or other healthcare
organization to receive and maintain its accreditation.
It presently cannot be determined if any additional healthcare legislation
or self-regulatory proposals (whether relating to reimbursement, accreditation,
billing practices, confidentiality, the healthcare industry in general or
otherwise) will be introduced, the form that any such legislation or proposals
would take, whether such legislation or proposals would be enacted or adopted
and, if enacted or adopted, what effect, if any, such legislation or proposals
would have on the healthcare industry in general and the Company in particular.
INTELLECTUAL PROPERTY
The Company considers its MTS and DTS trademarks and its corporate names
MedQuist and Transcriptions, Ltd. to be important to the operation of its
business and the marketing of its services. The Company has been issued a
registered trademark for the corporate name 'MedQuist.' No registered trademark
has been issued for MTS, DTS or the corporate name Transcriptions, Ltd. The
Company regards the software underlying its services as proprietary, and relies
primarily on a combination of contract, copyright and trademark law, trade
secrets, confidentiality agreements and contractual provisions to protect its
proprietary rights. The Company has no patents or patent applications pending,
and relies on existing trade secrets and copyright laws to afford it protection
against unauthorized use. The Company is not aware that any of its software,
trademarks or other proprietary rights infringe the proprietary rights of third
parties. See 'Risk Factors -- Dependence on Proprietary Rights; Risks of
Infringement.'
FACILITIES
The Company does not own any real property. The Company leases office and
other space for 24 service centers in 21 states. The Company's typical service
center ranges in size from 1,000 to 7,000 square feet and is leased for a term
ranging from three to five years. The Company moved its executive offices in May
1995 to its current 14,000-square foot location and has four years remaining on
its lease. The Company believes that there is adequate office space available to
it should it need to move or expand and that minimal leasehold improvements are
required in order to open a new location.
LEGAL PROCEEDINGS
Although the Company from time to time in the course of the operation of
its business is subject to various legal proceedings, the Company is not
currently a party to any material pending legal proceeding nor, to the knowledge
of the Company, is any material legal proceeding currently threatened.
COMPANY HISTORY
The Company was incorporated in New Jersey in 1987 as a group of outpatient
healthcare businesses affiliated with a non-profit healthcare provider. During
the last several years, the Company sold its outpatient businesses, acquired
Transcriptions, Ltd. in May 1994 and two other small transcription businesses in
1995, and sold its receivables management division in December 1995. The Company
received $17.3 million in cash for its receivables management division and
applied the net proceeds of $16.7 million to reduce its bank debt.
As a result of the foregoing acquisitions and divestitures, the Company now
focuses on providing electronic transcription and document management services
to hospitals and other healthcare providers. Transcriptions, Ltd. commenced its
medical transcription business in 1970. Prior to 1991, Transcriptions, Ltd.
supplemented internal growth by granting franchises in certain areas. The
Company does not intend to grant any future franchises and, to date, the Company
has acquired all of the franchises other than in Georgia, Florida and the New
York City metropolitan area. The Company's revenue derived from its franchises
in 1995 was $317,000. Each of the Company's three remaining franchisees has the
exclusive right to provide medical transcription services to clients in its
territory utilizing the Company's proprietary systems and software, except that
if the franchisee is unable or unwilling to service a new client in its
territory in a timely and commercially reasonable manner, the Company may
provide the services to that client directly.
28
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------------ --- ------------------------------------------------------------
<S> <C> <C>
James R. Emshoff.......................... 53 Chairman of the Board and Director
David A. Cohen............................ 55 President, Chief Executive Officer and Director
John A. Donohoe, Jr....................... 41 Executive Vice President and Chief Operating Officer
Robert F. Graham.......................... 33 Vice President, Treasurer and Chief Financial Officer
Ronald F. Scarpone........................ 51 Vice President and Chief Information Officer
John M. Suender........................... 35 Vice President, General Counsel and Secretary
William T. Carson, Jr. (1)(2)(3).......... 63 Director
Richard J. Censits........................ 58 Director
James F. Conway (2)....................... 68 Director
Frederick S. Fox, III (1)(2)(3)........... 59 Director
A. Fred Ruttenberg (2)(3)................. 53 Director
John H. Underwood (1)(2)(3)............... 37 Director
Terrence J. Mulligan...................... 50 Director Nominee
</TABLE>
------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Nominating Committee
James R. Emshoff has been a director of the Company since December 1992 and
Chairman of the Board since November 1995. Mr. Emshoff also served as acting
President and Chief Executive Officer from April 1995 through November 1995.
Since August 1992, Mr. Emshoff has been the Chairman and Chief Executive Officer
of IndeCap Enterprises, Inc., a firm providing consulting services on corporate
restructuring issues and venture participation in the outsourcing of management
service functions. From February 1991 to August 1992, Mr. Emshoff was Chairman
and Chief Executive Officer of Wellesley Medical Management Inc., an owner and
operator of primary healthcare centers. From January 1985 to February 1991, Mr.
Emshoff was President and Chief Executive Officer of Citicorp Diners Club.
David A. Cohen joined the Company in May 1994 as President of the
Transcriptions, Ltd. subsidiary and has been an executive officer and director
of the Company since July 1994 and the Company's President and Chief Executive
Officer since November 1995. Mr. Cohen joined Transcriptions, Ltd. in 1973 and
served as its Chief Executive Officer for more than 15 years.
John A. Donohoe, Jr. joined the Company in May 1994 as Executive Vice
President of the Company's Transcriptions, Ltd. subsidiary. Mr. Donohoe became
Chief Operating Officer of the Company in November 1995. Mr. Donohoe was
employed by Transcriptions, Ltd. since 1974, serving in numerous management
capacities. Mr. Donohoe is a member of the board of directors of the Medical
Transcription Industry Alliance.
Robert F. Graham, a certified public accountant, has been Vice President,
Treasurer and Chief Financial Officer of the Company since December 1993. Prior
to his promotion to that position, Mr. Graham served as Corporate Controller and
Chief Accounting Officer of the Company starting in December 1992 and as an
Assistant Controller starting in July 1992. Prior to joining the Company, Mr.
Graham was with Deloitte & Touche, Philadelphia, Pennsylvania since 1985.
Ronald F. Scarpone has been Vice President and Chief Information Officer of
the Company since
29
<PAGE>
January 1996. Mr. Scarpone joined the Company in May 1994 as Vice President -
Information Services. Mr. Scarpone was employed by Transcriptions, Ltd. since
1989 and served as its Vice President of Information Services since September
1993.
John M. Suender has been General Counsel of the Company since September
1992 and a Vice President and the Secretary of the Company since October 1992.
From September 1988 until joining the Company, Mr. Suender was with the law firm
of Pepper, Hamilton & Scheetz, Philadelphia, Pennsylvania.
William T. Carson, Jr., a director of the Company since January 1991, was
President of Sullivan-Carson, Inc., a textile manufacturing firm in Haddonfield,
New Jersey, for 25 years until 1988. In 1988, he became Vice President and a
director of Covenant Bank, Haddonfield, New Jersey, positions he currently
holds.
Richard J. Censits has been a director of the Company since January 1987.
Mr. Censits was Chief Executive Officer from January 1, 1987 until his
resignation in March 1995, and was President of the Company until September
1994. Mr. Censits served as the Vice President and Chief Financial Officer of
Campbell Soup Company from 1974 to 1986. Mr. Censits currently serves as a
director of Checkpoint Systems, Inc., DiMark, Inc. and Energy North, Inc.
James F. Conway, a director of the Company since January 1987, has been the
General Manager and principal shareholder of Mister Softee, Inc., an ice cream
franchise company located in Runnemede, New Jersey, since 1956.
Frederick S. Fox, III has been a director of the Company since January 1987
and served as its Chairman of the Board until August 1993. Mr. Fox is President
of TFAM, Inc. ('TFAM'), a provider of commercial real estate brokerage and asset
management services, which he founded in 1991. Prior to founding TFAM, Mr. Fox
served as Executive Vice President of Fox & Lazo, Incorporated, a real estate
brokerage company with which he has been associated since 1960.
A. Fred Ruttenberg has been a director of the Company since December 1991.
Mr. Ruttenberg has, since September 1986, been a partner in the law firm of
Blank, Rome, Comisky & McCauley, Cherry Hill, New Jersey, which acts as special
counsel to the Company for certain matters.
John H. Underwood has been a director of the Company since July 1994. Since
1989, Mr. Underwood has been a Vice President with Heller, a wholly-owned
subsidiary of Heller Financial, Inc., a Delaware corporation which is an
indirect wholly-owned subsidiary of the Fuji Bank, Limited, a Japanese banking
corporation. Heller is engaged in the business of making equity and debt
investments in small concerns. Mr. Underwood was nominated to the Board of
Directors in 1994 to serve as Heller's representative pursuant to the terms of
certain credit arrangements between the Company and Heller. From 1986 to 1989,
Mr. Underwood served as a Vice President of Citicorp North America, Inc. as a
member of its leveraged capital group.
Terrence J. Mulligan has been nominated to serve as a member of the Board
of Directors. Mr. Mulligan has held several senior executive positions with
Baxter International, Inc. since 1986, including his current position as Group
Vice President, Health Systems, since 1994, Group Vice President, Multi-Hospital
Systems from 1993 to 1994, and Senior Vice President, Corporate Sales and
Marketing from 1988 to 1993. Mr. Mulligan also serves on the Senior Management
Committee and the Operating Management Committee at Baxter International, Inc.
Baxter International, Inc., through its subsidiaries, is a leading manufacturer
and marketer of healthcare products and services worldwide, concentrating its
research and development programs in biotechnology, cardiovascular medicine,
renal therapy and related medical fields. Mr. Mulligan currently serves as a
member of the Board of Visitors of the University of Iowa College of Business
Administration, a member of the Board of Directors of the Baxter Foundation, a
private philanthropic organization, and a member of the Board of Directors and a
past President of the University of Iowa Alumni Association. If elected by the
Company's shareholders, it is anticipated that Mr. Mulligan will commence
serving on the Company's Board of Directors promptly after completion of this
Offering.
CLASSIFIED BOARD OF DIRECTORS
Pursuant to the Company's Amended and Restated Certificate of
Incorporation, the Company's Board of
30
<PAGE>
Directors is divided into three classes of directors each containing, as nearly
as possible, an equal number of directors. Directors within each class are
elected to serve three-year terms and approximately one-third of the directors
sit for election at each annual meeting of the Company's shareholders. The terms
of Messrs. Cohen and Underwood expire in 1996; the terms of Messrs. Emshoff, Fox
and Ruttenberg expire in 1997; and the terms of Messrs. Carson, Censits and
Conway expire in 1998. If elected at the 1996 shareholders' meeting, Mr.
Mulligan's term will expire in 1999. A classified board of directors may have
the effect of deterring or delaying any attempt by any group to obtain control
of the Company by a proxy contest since such third party would be required to
have its nominees elected at two separate annual meetings of the Board of
Directors in order to elect a majority of the members of the Board of Directors.
Directors who are elected to fill a vacancy (including vacancies created by an
increase in the number of directors) must be confirmed by the shareholders at
the next annual meeting of shareholders whether or not such director's term
expires at such annual meeting.
DIRECTOR COMPENSATION
In 1995, each director who was not an executive officer of the Company was
paid an annual retainer of $4,000, an additional $1,000 for each meeting of the
Board of Directors attended (or $500 if attended by teleconference) and an
additional $500 for each committee meeting attended. In addition, Mr. Underwood
does not accept any cash or non-cash compensation as a director. In 1995, the
average cash compensation paid to a director (excluding those who received no
compensation) was $17,000.
Subject to the approval of the Company's shareholders, commencing in 1996,
each director who is not an executive officer of the Company, in lieu of the
foregoing retainer and meeting fees, will be entitled to deferred compensation
in the form of Common Stock having a fair market value of $18,000 on the date of
grant. The Board approved this change in the form of compensation in order to be
consistent with its philosophy of aligning interests of Board members more
closely with shareholder interests. Under the deferred compensation plan, Common
Stock will not be issued until the date a director leaves the Board. Fair market
value of a particular grant equals the closing price of the Common Stock on the
date of grant. For tax purposes, a director may choose not to defer receipt of
Common Stock under a particular grant, but will nevertheless be prohibited from
selling the Common Stock prior to leaving the Board.
Pursuant to the terms of the Company's Nonstatutory Stock Option Plan for
Non-employee Directors, during each calendar year in which a non-employee
director serves, and so long as such director serves in such capacity on June 1
of such calendar year, such director is granted an option to purchase 3,000
shares of Common Stock at an exercise price equal to the Common Stock's fair
market value on the date of the grant of the option, which options are
exercisable for a 10-year period commencing on the one-year anniversary of the
grant date. Such options, to the extent not exercised, terminate 30 days after
the individual ceases to be a director of the Company. Up to 100,000 shares of
Common Stock are available for issuance to directors under this plan. The
Company intends to register under the Act the shares of Common Stock issuable
pursuant to this plan. See 'Shares Eligible for Future Sale.'
COMMITTEES OF THE BOARD
The Company's Board of Directors has appointed an Audit Committee, a
Nominating Committee and a Compensation Committee.
Audit Committee. The Audit Committee, which currently consists of Messrs.
Fox (Chairman), Underwood and Carson, has the authority and responsibility: to
hire one or more independent public accountants to audit MedQuist's books,
records and financial statements and to review the Company's systems of
accounting (including its systems of internal control); to discuss with such
independent public accountants the results of such audit and review; to conduct
periodically independent reviews of the systems of accounting (including systems
of internal control); and to make reports periodically to the Board of Directors
with respect to its findings.
31
<PAGE>
Compensation Committee. The Compensation Committee, which currently
consists of Messrs. Conway (Chairman), Carson, Fox, Ruttenberg and Underwood, is
responsible for fixing the compensation of the Chief Executive Officer, and
making recommendations to the Board of Directors with respect to the
compensation of other executive officers and other compensation matters such as
with respect to stock option plans and approving the targets under any bonus
plans. The Compensation Committee administers the 1992 Option Plan.
Nominating Committee. The Nominating Committee, which currently consists
of Messrs. Carson (Chairman), Fox, Ruttenberg and Underwood makes
recommendations to the Board of Directors with respect to management and other
nominees to the Board, reviews shareholder nominees to the Board of Directors
and periodically reports its findings to the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee (Messrs. Conway, Carson,
Fox, Ruttenberg or Underwood) has any interlocking or other relationship with
the Company that would call into question their independence with respect to his
duties. Mr. Underwood is a Vice President of Heller, which has engaged in
certain financing transactions with the Company. See 'Certain Transactions.'
LIMITATION OF DIRECTORS' LIABILITY; INDEMNIFICATION MATTERS
The Company's Amended and Restated Certificate of Incorporation provides
that no director shall be personally liable to the Company or its shareholders
for monetary damages for breach of any duty in his or her capacity as a director
owed to the Company or to the shareholders of the Company, except for liability
for breach of the director's duty of loyalty to the Company or its shareholders,
for acts or omissions not in good faith or which involve a knowing violation of
law, or for any act or omission which results in receipt by the director of an
improper personal benefit.
Section 14A:3-5 of the Corporation Law of the State of New Jersey ('NJCL')
permits each New Jersey business corporation to indemnify its directors,
officers, employees and agents against expenses and liability for each such
person's acts taken in his or her capacity as a director, officer, employee or
agent of the corporation if such actions were taken in good faith and in a
manner which he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal proceeding, if he
or she had no reasonable cause to believe his or her conduct was unlawful.
Article 10 of the Company's Bylaws provides that the Company, to the full extent
permitted by Section 14A:3-5 of the NJCL, shall indemnify all past and present
directors or officers of the Company and may indemnify all past or present
employees or other agents of the Company. To the extent that a director,
officer, employee or agent of the Company has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in such
Article 10, or in defense of any claim, issue, or matter therein, he or she
shall be indemnified by the Company against expenses in connection therewith.
Such expenses shall be paid by the Company in advance of the final disposition
of the action, suit or proceeding as authorized by the Board of Directors upon
receipt of an undertaking to repay the advance if it is ultimately determined
that such person is not entitled to indemnification.
32
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company for
services rendered in all capacities during the calendar years 1993, 1994 and
1995 to those persons who served as its chief executive officer during 1995, and
to the four most highly-compensated executive officers and key employees (other
than the chief executive officer) whose annual salary and bonus exceeded
$100,000 and who were serving at December 31, 1995 (collectively, the 'Named
Officers').
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------
AWARDS
ANNUAL COMPENSATION --------------
-------------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME YEAR SALARY ($) BONUS ($) COMPENSATION ($)(1) OPTIONS (#) COMPENSATION ($)
-------------------------- --------- ----------- ----------- ------------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
David A. Cohen (2)........ 1995 $ 173,077 $ 45,000 $ 0 50,000 $ 1,635(3)
1994 100,000 26,250 0 25,000 1,250(3)
1993 -- -- -- -- --
John A. Donohoe, Jr. (4).. 1995 159,134 22,333 0 52,464(5) 0
1994 90,000 11,800 0 10,000 0
1993 -- -- -- -- --
Ronald F. Scarpone (6).... 1995 110,000 17,333 0 5,000(5) 735(3)
1994 73,333 14,667 0 5,000 0
1993 -- -- -- -- --
John M. Suender (7)....... 1995 105,000 16,000 0 19,174(5) 200(3)
1994 100,000 5,000 0 3,000 200(3)
1993 93,900 18,780 11,193 0 0
Robert F. Graham (8)...... 1995 93,000 18,600 0 15,000 200(3)
1994 85,000 4,250 0 5,000 200(3)
1993 75,000 15,000 8,940 0 0
James R. Emshoff (9)...... 1995 76,346 28,500 0 110,435(5) 0
1994 -- -- -- -- --
1993 -- -- -- -- --
Richard J. Censits (10)... 1995 250,000 0 0 10,000 335,000(11)
1994 240,000 30,000 0 75,000 0
1993 240,000 120,000 85,824 0 545,000(11)
Paul E. Weitzel, Jr.
(12).................... 1995 58,333 0 0 3,000 116,667(13)
1994 164,600 13,500 0 55,000 0
1993 125,000 37,500 29,800 0 0
</TABLE>
------------------
(1) Reflects a bonus based on the Company's financial performance in 1993 but
not payable until 1996 and then only if the executive is still a Company
employee. In the case of Mr. Censits, such amount was paid on January 1,
1995.
(2) Mr. Cohen joined the Company in May 1994 as President of its
Transcriptions, Ltd. subsidiary with an annual base salary of $150,000. In
November 1995, he became the Company's President and Chief Executive
Officer with an annual base salary of $250,000.
33
<PAGE>
(3) Represents employer matching contributions under the Company's 401(k) plan
and premiums paid by the Company on term life insurance.
(4) Mr. Donohoe joined the Company in May 1994 as Executive Vice President of
its Transcriptions, Ltd. subsidiary with an annual base salary of $135,000.
In November 1995, he became the Company's Chief Operating Officer with an
annual base salary of $165,000.
(5) Includes bonus foregone at the election of the Named Officer pursuant to a
deferred compensation program in which the officer elected to receive
options to purchase Common Stock in lieu of bonus. Under the program, in
February 1996, Mr. Donohoe received 2,464 options, Mr. Suender received
2,174 options, Mr. Emshoff received 10,435 options and Mr. Scarpone
received 2,029 options.
(6) Mr. Scarpone joined the Company in May 1994 as Vice President--Information
Services of the Company's Transcriptions, Ltd. subsidiary with an annual
base salary of $110,000. In January 1996, he became the Company's Vice
President and Chief Information Officer with an annual base salary of
$120,000.
(7) Mr. Suender serves as Vice President, General Counsel and Secretary.
(8) Mr. Graham serves as Vice President, Treasurer and Chief Financial Officer.
(9) Mr. Emshoff serves as Chairman of the Board, and served as acting President
and Chief Executive Officer from April 1995 until Mr. Cohen permanently
filled the position in November 1995.
(10) Mr. Censits served as Chief Executive Officer until his resignation in
March 1995. Mr. Censits continues to serve as a member of the Board of
Directors.
(11) The amount represents accrued amounts associated with Mr. Censits'
retirement benefits. The 1993 accrual represents a charge based on the
Company's estimate of the balance of all future costs associated with
retirement benefits under Mr. Censits' employment contract. Because of the
change in Mr. Censits' employment contract in March 1995, additional
accruals were made in 1995 to reflect the present value of the retirement
payments of $75,000 per annum commencing January 1, 1996, health coverage
and other benefits as provided in his employment contract.
(12) Mr. Weitzel served as the Company's Chief Executive Officer during March
and April 1995.
(13) Represents amounts paid to Mr. Weitzel during 1995 pursuant to a severance
agreement.
34
<PAGE>
STOCK OPTIONS
The following table presents information with respect to grants of stock
options pursuant to the Company's option plans during 1995, to the Named
Officers. No stock appreciation rights were granted to any officer of the
Company during 1995.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------------------ ANNUAL RATES OF
% OF TOTAL STOCK PRICE
NUMBER OF OPTIONS APPRECIATION
SECURITIES GRANTED EXERCISE OR FOR OPTION TERMS(1)
UNDERLYING OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION --------------------
NAME GRANTED(2)(3) IN 1995 ($/SHARE) DATE 5% 10%
---------------------------- --------------------- ------------------- --------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
David A. Cohen.............. 50,000(4) 17.1% $ 9.50 09/18/05 $ 299,250 $ 755,250
John A. Donohoe, Jr......... 5,000(5) 1.7 7.25 01/01/05 22,838 57,638
45,000(4) 15.4 9.50 09/18/05 269,325 679,725
Ronald F. Scarpone.......... 5,000(5) 1.7 7.25 01/01/05 22,838 57,638
John M. Suender............. 2,000(5) .7 7.25 01/01/05 9,135 23,055
15,000(4) 5.1 9.50 09/18/05 89,775 226,575
Robert F. Graham............ 15,000(4) 5.1 9.50 09/18/05 89,775 226,575
James R. Emshoff............ 15,000(5) 5.1 8.13 05/15/05 76,781 193,781
60,000(6) 20.5 8.13 08/25/00 136,500 307,125
25,000(4) 8.5 9.50 09/18/05 149,625 377,625
Richard J. Censits.......... 10,000(5) 3.4 7.25 01/01/05 45,675 115,275
Paul E. Weitzel, Jr......... 3,000(5) 1.0 7.25 01/01/05 13,703 34,583
</TABLE>
------------------
(1) Amounts reported in the column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration of
their term, assuming the specified compounded rates of appreciation of the
Common Stock over the term of the options. These numbers are calculated
based on rules promulgated by the Commission and do not represent the
Company's estimate of future Common Stock price. Actual gains, if any, on
stock option exercises and Common Stock holdings are dependent on the timing
of such exercise and the future market price of the Common Stock. There can
be no assurance that the rates of appreciation assumed in this table can be
achieved or that the amounts reflected will be received by the individuals.
This table does not take into account any appreciation in the price of the
Common Stock from the date of grant to the present date. The values shown
are net of the exercise price, but do not include deductions for taxes or
other expenses associated with the exercise.
(2) Granted pursuant to the 1992 Option Plan.
(3) Excludes options granted to Messrs. Donohoe (2,464 options), Suender (2,174
options), Emshoff (10,435 options) and Scarpone (2,029 options) on February
8, 1996, which were granted under a deferred compensation program in which
such officers elected to receive such options in lieu of bonus based upon
1995 performance.
(4) Vest in 20% increments on each anniversary of the grant date for five years.
(5) Vest in 50% increments on the first and second anniversary of the grant
date.
(6) Vest 100% on August 25, 1996.
35
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table summarizes the aggregate option exercises in the last
fiscal year and fiscal year-end value of unexercised options on an aggregate
basis.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
OF COMMON STOCK UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SHARES AT DECEMBER 31, 1995 DECEMBER 31, 1995(1)
ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------------------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Cohen............... 0 $ 0 12,500 62,500 $ 20,313 $ 20,313
John A. Donohoe.............. 0 0 5,000 55,000 8,125 12,500
Ronald F. Scarpone........... 0 0 2,500 7,500 4,063 8,138
John M. Suender.............. 0 0 3,000 17,000 10,305 1,750
Robert F. Graham............. 0 0 5,000 15,000 17,175 0
James R. Emshoff............. 0 0 6,000 100,000 12,750 0
Richard J. Censits........... 0 0 116,000 10,000 462,960 8,750
Paul E. Weitzel, Jr.......... 63,000 170,590 0 0 0 0
</TABLE>
------------------
(1) Based on the closing price on the American Stock Exchange of $8.125 per
share of Common Stock on December 29, 1995.
EMPLOYEE STOCK PURCHASE PLAN
The Stock Purchase Plan permits substantially all full-time employees of
the Company to purchase shares of Common Stock through payroll deduction. An
aggregate of up to 250,000 shares of Common Stock may be purchased under this
plan. Any employee who is regularly scheduled to work at least 20 hours per week
may participate in the Stock Purchase Plan (including the Named Officers), other
than any employee who owns Company stock possessing five percent or more of the
total combined voting power or value of all classes of Company stock. The Stock
Purchase Plan permits the Company to set a purchase price for shares of Common
Stock that is between 85% and 100% of fair market value (as defined in the Stock
Purchase Plan), and employees currently may purchase shares of Common Stock at
90% of fair market value. The Stock Purchase Plan, which is subject to
shareholder approval (currently scheduled for a vote at the Company's next
annual shareholders' meeting), is designed and intended to meet the requirements
of Section423 of the Internal Revenue Code and, accordingly, defers any gain
attributable to shares of Common Stock so purchased until the time that such
shares are sold and treats any gain or loss relating to such shares as capital
gain or loss. The Company intends to register under the Act the shares of Common
Stock issuable pursuant to this plan. See 'Shares Eligible for Future Sale.'
401(K) PLAN
Employees of the Company (including the Named Officers) are eligible to
participate in a 401(k) Plan. Under the plan, employees contribute monies
through salary reduction and the Company matches a specific percentage of the
employees' contributions. Commencing in 1996, Company matching contributions
will be made in shares of Common Stock. Up to 250,000 shares of Common Stock are
available to employees under this plan. The number of shares of Common Stock to
be contributed for each participant is determined by dividing the dollar value
of the matching contribution for such participant by the fair market value (as
defined therein) of a share of Common Stock. Employees will retain the right to
direct the investment of their own contributions and Company matching
contributions made before 1996 among several alternative investments, but
matching contributions for 1996 and later years must be invested in shares of
Common Stock. An employee who is entitled to a distribution from the 401(k) Plan
will receive the cash value of his or her accounts, including the Common Stock
account. The Company intends to register under the Act the shares of Common
Stock issuable pursuant to this plan. See 'Shares Eligible for Future Sale.'
36
<PAGE>
EMPLOYMENT CONTRACTS
David A. Cohen. In connection with the acquisition of Transcriptions,
Ltd., the Company entered into an employment agreement with Mr. Cohen, which was
amended effective January 1, 1996. The agreement, which expires on December 31,
1998, provides that Mr. Cohen is currently entitled to receive a $250,000 base
salary, plus discretionary bonus compensation in an amount up to 50% of his base
salary. Upon accepting employment, Mr. Cohen also received options to purchase
25,000 shares of Common Stock pursuant to the 1992 Option Plan. He is also
entitled to other benefits normally provided to the Company's other senior
executive officers. The agreement terminates upon Mr. Cohen's death or
disability. Additionally, Mr. Cohen may resign by giving the Company at least
three months' prior notice or the Company may terminate Mr. Cohen at any time
with or without cause. If Mr. Cohen's employment is terminated without cause,
the Company is required to continue to pay Mr. Cohen's base salary through the
end of the term. Upon any termination, Mr. Cohen has agreed to retain in
confidence and not otherwise to use any confidential or proprietary information
of the Company. Additionally, for a three-year period following any termination
of the agreement, Mr. Cohen is prohibited from competing with the Company or
from soliciting clients, customers or employees of the Company.
John A. Donohoe. In connection with the acquisition of Transcriptions,
Ltd., the Company entered into an employment agreement with Mr. Donohoe, which
was amended effective January 1, 1996. The agreement, which expires on December
31, 1998, provides that Mr. Donohoe is currently entitled to receive a $165,000
base salary, plus discretionary bonus compensation in an amount up to 35% of his
base salary. Upon accepting employment, Mr. Donohoe also received options to
purchase 10,000 shares of Common Stock pursuant to the 1992 Option Plan. He is
also entitled to other benefits normally provided to the Company's other senior
executive officers. The agreement contains the same provisions regarding
termination, confidentiality, competition and solicitation as does Mr. Cohen's
agreement.
James R. Emshoff. Effective August 25, 1995, the Company entered into an
employment agreement with Mr. Emshoff. The agreement provides that Mr. Emshoff
is currently entitled to receive a $20,000 base salary, plus Mr. Emshoff is
entitled to participate in any bonus programs adopted by the Board of Directors.
The agreement terminates on August 31, 1996. During the period of Mr. Emshoff's
employment and for a period of two years thereafter, Mr. Emshoff has agreed to
retain in confidence and not otherwise use any confidential or proprietary
information of the Company and not to compete with the Company. Additionally,
for a three year period following any termination of Mr. Emshoff's employment,
Mr. Emshoff is prohibited from divulging any accounts of the Company, competing
with the Company, soliciting clients, customers or employees of the Company, or
disclosing or using proprietary of confidential information of the Company.
Ronald F. Scarpone. In connection with the acquisition of Transcriptions,
Ltd., the Company entered into an employment agreement with Mr. Scarpone, which
was amended effective January 1, 1996. The agreement provides that Mr. Scarpone
is currently entitled to receive a $120,000 base salary, plus bonus compensation
in an amount up to 25% of his base salary. Upon accepting employment, Mr.
Scarpone also received options to purchase 5,000 shares of Common Stock pursuant
to the 1992 Option Plan. He is also entitled to other benefits normally provided
to the Company's other senior executive officers. The term of the agreement
expires December 31, 1997. The agreement contains other provisions comparable to
those in Mr. Cohen's agreement, except that the post-termination prohibition on
competition and solicitation is two years.
Richard J. Censits. Effective January 1, 1993, the Company entered into an
employment agreement with Mr. Censits, which was amended and restated effective
January 1, 1996. As restated, the agreement recognizes that Mr. Censits is no
longer an employee of the Company and is entitled during his lifetime to life
insurance, medical, dental and long-term care coverage for himself and his wife
and a retirement benefit of $75,000 annually. If Mr. Censits dies, his wife is
entitled to continue her medical, dental and long-term care coverage during her
lifetime, and the Company has agreed to loan Mr. Censits' estate the funds
necessary to exercise any options to purchase shares of the Common Stock owned
by Mr. Censits at the time of his death, with the stock held by the Company as
collateral. The loan must be repaid three years after grant or earlier if the
stock is sold. The agreement restricts Mr. Censits from competing with the
Company, hiring employees of the Company or disclosing or using confidential
information of the Company so long as he serves as a member of the Board of
Directors and during any period in which he is receiving benefits under the
agreement.
37
<PAGE>
SEVERANCE ARRANGEMENTS
The Company adopted a severance plan for certain executive officers. The
plan provides that if a covered executive is terminated for any reason other
than 'cause' (which includes the failure to perform day-to-day duties as
assigned by the Board of Directors) within 12 months after a 'change in
control,' such covered executive is to receive, within 10 days of the
termination, a one time payment equal to all compensation awarded to him or her
in the fiscal year immediately prior to such termination or, if such executive's
compensation was higher or would be higher on an annualized basis, in the fiscal
year in which such termination takes place, plus payment from the Company of any
amount earned (whether vested or not) by such executive pursuant to the
Company's long-term incentive compensation plan. As of the date of this
Prospectus, the Company has not made any payments pursuant to this plan and no
liabilities are currently required to be recorded with respect to this plan. The
term 'change in control' means (a) any liquidation of the Company, (b) the sale
of all or substantially all of the assets of the Company, (c) the acquisition by
any person or group of beneficial ownership of securities representing more than
50% of the combined voting power in the election of directors of the Company
(after giving effect to the exercise of any options, warrants or other
convertible securities held by such person or group), (d) the election of a
majority of the members of the Board of Directors as a result of one or more
proxy contests within any period of three years, (e) approval of a merger,
consolidation or other business combination by the Company's shareholders or (f)
commencement of a tender offer to purchase securities representing more than 50%
of the combined voting power in the election of directors of the Company (after
giving effect to the exercise of any options, warrants or other convertible
securities held by such person or group).
In connection with Mr. Weitzel's April 27, 1995 resignation as President
and Chief Executive Officer, the Company and Mr. Weitzel entered into a
severance agreement. Under the terms of the agreement, Mr. Weitzel was entitled
to (i) continued payment of his base salary and health benefits for an initial
six month period and (ii) the immediate vesting of all options granted to Mr.
Weitzel and the right to exercise same over a six month period. Additionally,
the Company agreed to continue payment of Mr. Weitzel's base salary and health
benefits beyond six months until he obtains other employment, but not beyond
April 28, 1996. Mr. Weitzel received $175,000 in severance payments under this
Agreement, and the Company's obligation to make such payment was recorded as an
expense in 1995. Mr. Weitzel has exercised all of his options. Commencing April
28, 1995, Mr. Weitzel is restricted for a period of two years from disclosing or
using any confidential information of the Company or directly or indirectly
competing with the Company and, for a period of three years, from divulging or
using his knowledge of customer accounts or soliciting Company employees.
38
<PAGE>
CERTAIN TRANSACTIONS
Acquisition of Transcriptions, Ltd. The Company acquired Transcriptions,
Ltd. in May 1994 and paid $16.6 million in cash and agreed to pay additional
purchase price on a deferred basis in an amount equal to 5.2 times the average
annual pre-tax income (as more particularly described in the acquisition
agreement) of Transcriptions, Ltd. during the 24 months following the closing of
the acquisition, less $19.2 million. The Company also discharged $5.8 million of
interest-bearing debt of Transcriptions, Ltd. On December 29, 1995, the parties
agreed to fix the amount of the deferred purchase price at $24.5 million,
payable on August 31, 1996 as follows: (i) $18,375,000 in cash and (ii)
$6,125,000 in the form of Common Stock valued at $7.11 per share, or 861,463
shares. The Company has granted certain registration rights with respect to such
shares of Common Stock. The Company is obligated to pay the cash portion of the
deferred purchase price from the proceeds of this Offering. Mr. David Cohen, a
director, the President and Chief Executive Officer of the Company, received
approximately 66 1/2% of the purchase price paid at closing and is entitled to
receive approximately 66 1/2% of the deferred purchase price when paid. John A.
Donohoe, the Chief Operating Officer of the Company, received 5% of the purchase
price paid at closing and is entitled to receive approximately 5% of the
deferred purchase price when paid. See 'Description of Capital Stock --
Registration Rights' and 'Use of Proceeds.'
Loan to Mr. Censits. MedQuist loaned Mr. Censits $300,000 at no interest
in connection with his exercise of options in 1993 to purchase Common Stock. The
loan was repaid in full on March 1, 1996, its due date.
Heller Arrangements. In December 1992, the Company entered into a $7
million senior subordinated credit facility with Heller (the 'Heller Facility')
and issued to Heller warrants to purchase an aggregate of 962,675 shares of
Class A and Class B Preferred Stock, which are convertible into shares of Common
Stock on a share-for-share basis. The Heller Warrants currently have an exercise
price of $7.27 per share. In March 1996, prior to the filing of the Registration
Statement of which this Prospectus is a part, the Company and Heller agreed
that, on the closing date of this Offering, Heller would exercise the Heller
Warrants by applying the $7 million principal amount under the Heller Facility
against the exercise price, and simultaneously convert the shares of Preferred
Stock received upon such exercise into 962,675 of shares of Common Stock. As an
inducement for Heller to exercise the Heller Warrants and convert the Preferred
Stock, the Company has agreed to issue Heller 42,500 additional shares of Common
Stock on the closing date of this Offering. See 'Shares Eligible for Future
Sale.' The Company has filed a registration statement to register under the Act
the 962,675 shares for resale by Heller. Heller has agreed not to sell publicly
such shares, or the additional 42,500 shares, without the consent of Robertson,
Stephens & Company LLC, for a period of 270 days after the date of this
Prospectus. The Company has also granted Heller certain registration rights. See
'Description of Capital Stock -- Registration Rights.' Heller is entitled to
designate one nominee to the Board of Directors. In 1994 Heller first exercised
this right and designated Mr. Underwood, a Principal at Heller, as its nominee.
Mr. Underwood was elected as a director in July 1994, when the Board of
Directors was expanded by its current membership to consist of eight directors,
and he will stand for election to a three-year term at the 1996 annual meeting
of shareholders.
39
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of May 1, 1996 and as adjusted to
reflect the sale of the Common Stock offered hereby (i) by each person or group
known to the Company to be the beneficial owner of more than 5% of Common Stock,
(ii) by each of the Company's Named Officers and directors and (iii) by all
executive officers and directors of the Company as a group. Except as otherwise
noted and subject to community property laws, where applicable, each beneficial
owner of the Common Stock listed below has sole investment and voting power with
respect to their shares of Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
----------------------------------------
PERCENT OF CLASS
----------------------------
NUMBER BEFORE AFTER
NAME AND ADDRESS (2) OF SHARES OFFERING(3) OFFERING(4)
------------------------------------------------------------------------ ---------- ------------- -------------
<S> <C> <C> <C>
Heller Equity Capital Corporation....................................... 1,005,175(5) 29.0% 17.8%
500 West Monroe Street
Suite 1100
Chicago, IL 60661
Piedmont Capital Management Corporation................................. 613,300(6) 17.7 10.8
1 James Center, Suite 1400
Richmond, VA 23219
Richard J. Censits...................................................... 277,600(7) 7.8 4.8
688 Annemore Lane
Naples, FL
David A. Cohen.......................................................... 31,500(8) * *
James R. Emshoff........................................................ 26,000(9) * *
William T. Carson, Jr................................................... 37,400(10) 1.1 *
James F. Conway......................................................... 24,025(11) * *
Frederick S. Fox, III................................................... 30,400(12) * *
A. Fred Ruttenberg...................................................... 24,066(13) * *
John H. Underwood....................................................... 1,005,175(14) 29.0 17.8
John A. Donohoe, Jr..................................................... 12,500(15) * *
Robert F. Graham........................................................ 5,428(16) * *
Ronald F. Scarpone...................................................... 7,500(17) * *
John M. Suender......................................................... 6,828(18) * *
Paul E. Weitzel, Jr..................................................... 0 * *
All executive officers and directors as a group (12 persons)............ 1,488,422(19) 39.8% 25.1%
</TABLE>
------------------
* Less than 1%
<TABLE>
<S> <C>
(1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission
(the 'Commission'), and includes voting or investment power with respect to the shares beneficially owned.
Shares of Common Stock subject to options or warrants currently exercisable or exercisable within 60 days
after May 1, 1996 are deemed outstanding for computing the percentage ownership of the person holding such
options or warrants, but are not deemed outstanding for computing the percentage ownership of any other
person.
(2) Except where otherwise noted, the address of all persons listed is c/o MedQuist Inc., Five Greentree Centre,
Suite 311, Marlton, New Jersey 08053.
</TABLE>
40
<PAGE>
<TABLE>
<S> <C>
(3) Applicable percentage of ownership as of March 31, 1996 is based upon 3,460,875 shares of Common Stock
outstanding, which gives effect to the Heller Transaction. Excludes 861,463 shares of Common Stock to be
issued on August 31, 1996 in connection with the payment of the deferred purchase price for Transcriptions,
Ltd.
(4) Applicable percentage ownership after this Offering is based upon 5,660,875 shares of Common Stock
outstanding which gives effect to the Heller Transaction and the issuance of 2,200,000 shares of Common Stock
offered hereby. Excludes 861,463 shares of Common Stock to be issued on August 31, 1996 in connection with
the payment of the deferred purchase price for Transcriptions, Ltd.
(5) Heller is a wholly-owned subsidiary of Heller Financial, Inc., a Delaware corporation which is an indirect
wholly-owned subsidiary of The Fuji Bank, Limited, a Japanese banking corporation. See Note 14 below.
(6) Reflects information set forth in a Schedule 13G filed by the holder with the Commission.
(7) Includes 121,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Censits and
exercisable within 60 days after May 1, 1996 and 57,100 shares of Common Stock owned by Mr. Censits' spouse.
(8) Includes 25,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Cohen and
exercisable within 60 days after May 1, 1996. Excludes 572,873 shares of Common Stock to be issued on August
31, 1996 in connection with the payment of the deferred purchase price for Transcriptions, Ltd. After such
issuance, Mr. Cohen would beneficially own 13.8% of the outstanding shares of Common Stock prior to
completion of this Offering and 9.2% of the outstanding shares of Common Stock after completion of this
Offering.
(9) Includes 13,500 shares of Common Stock issuable upon the exercise of options granted to Mr. Emshoff and
exercisable within 60 days after May 1, 1996.
(10) Includes 22,400 shares of Common Stock issuable upon the exercise of options granted to Mr. Carson and
exercisable within 60 days after May 1, 1996, and 12,100 shares of Common Stock held for Mr. Carson's benefit
in individual retirement accounts.
(11) Includes 22,400 shares of Common Stock issuable upon the exercise of options granted to Mr. Conway and
exercisable within 60 days after May 1, 1996, and 125 shares of Common Stock owned by Mr. Conway's spouse.
(12) Includes 22,400 shares of Common Stock issuable upon the exercise of options granted to Mr. Fox and
exercisable within 60 days after May 1, 1996, and 500 shares of Common Stock owned by Mr. Fox' son, who has
sole investment and voting power.
(13) Includes 22,400 shares of Common Stock issuable upon the exercise of options granted to Mr. Ruttenberg and
exercisable within 60 days after May 1, 1996.
(14) Represents shares of Common Stock beneficially owned by Heller and referred to in Note 5 above. Mr. Underwood
is a Vice President of Heller and a director of the Company, and may be deemed to be the beneficial owner of
such shares. Mr. Underwood disclaims beneficial ownership of such shares of Common Stock.
(15) Includes 12,500 shares of Common Stock issuable upon the exercise of options granted to Mr. Donohoe and
exercisable within 60 days after May 1, 1996. Excludes 43,073 shares of Common Stock to be issued on August
31, 1996 in connection with the payment of the deferred purchase price for Transcriptions, Ltd. After such
issuance, Mr. Donohoe would beneficially own 1.3% of the outstanding shares of Common Stock prior to the
completion of this Offering and less than 1% of the outstanding shares of Common Stock after completion of
this Offering.
(16) Includes 5,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Graham and
exercisable within 60 days after May 1, 1996.
(17) Includes 7,500 shares of Common Stock issuable upon the exercise of options granted to Mr. Scarpone and
exercisable within 60 days after May 1, 1996.
(18) Includes 4,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Suender and
exercisable within 60 days after May 1, 1996.
(19) Includes 278,100 options granted to directors and executive officers and exercisable within 60 days after May
1, 1996. Excludes 611,639 shares of Common Stock to be issued on August 31, 1996 in connection with the
payment of the deferred purchase price for Transcriptions, Ltd.
</TABLE>
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue up to 20,000,000 shares of Common Stock,
no par value. As of
March 31, 1996, after giving effect to the Heller Transaction, the Company had
3,460,875 outstanding shares of Common Stock and 1,107,451 shares of Common
Stock reserved for issuance upon exercise of options granted pursuant to the
Company's option plans and outstanding warrants. Holders of shares of Common
Stock are entitled to one vote per share on all matters to be voted upon by the
shareholders. Subject to such preferential rights as the Company's Board of
Directors may grant in connection with future issuances of Preferred Stock,
holders of shares of Common Stock are entitled to receive such dividends as the
Board of Directors may declare in its discretion out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, after payment of liabilities and any liquidation preference on any
shares of Preferred Stock then outstanding, the holders of shares of Common
Stock are entitled to a distribution of any remaining assets of the Company.
Holders of shares of Common Stock have no cumulative voting or preemptive
rights. All outstanding shares of Common Stock are, and the shares of Common
Stock offered hereby, when issued and paid for will be, fully paid and
nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 3,950,000 shares of Preferred
Stock, no par value. The Company does not currently contemplate the issuance of
any shares of Preferred Stock. The Company's Board of Directors, without any
further action by the shareholders, may issue from time to time the authorized
and unissued shares of Preferred Stock in one or more series, and may determine
as to each series the designation and number of shares to be issued and the
relative rights, preferences and limitations of the shares of each series,
including provisions with respect to voting powers, redemption, conversion,
dividend rights and liquidation preferences. The issuance of Preferred Stock
could adversely affect the voting power of the holders of Common Stock or could
have the effect of deterring or delaying any attempt by a person or group to
obtain control of the Company.
WARRANTS
The Company has issued to Chemical warrants to purchase 75,351 shares of
Common Stock which are exercisable, in whole or in part, at any time and from
time to time through May 27, 2001 at an exercise price of $6.74 per share. The
exercise price is subject to adjustment under certain circumstances, including
in the event of a stock split, stock dividend, recapitalization or similar
event, or if the Company issues additional shares of equity securities, or other
securities of the Company convertible into, exchangeable for or exercisable for
equity securities of the Company, and the issuance, conversion or exercise price
is less than the greater of the current exercise price of the warrants issued to
Chemical or the fair value of the equity securities (as more fully defined
therein). These warrants are subject to certain restrictions on transfer. The
Company has granted certain registration rights to register the shares of Common
Stock to be issued upon exercise of these warrants. See '-- Registration
Rights.'
REGISTRATION RIGHTS
Heller. The Company has filed a registration statement to register under
the Act 962,675 shares of Common Stock beneficially owned by Heller for resale
by Heller; provided that Heller has agreed not to sell publicly such shares, or
the additional 42,500 shares being issued to it in the Heller Transaction
(together with the 962,675 shares, the 'Heller Common Stock'), without the
consent of Robertson, Stephens & Company LLC, for a period of 270 days after the
date of this Prospectus. Additionally, under the terms of a registration
agreement (the 'Heller Agreement'), Heller is entitled to request one
registration on Form S-1 of shares of Heller Common Stock in which the Company
will pay all registration expenses other than underwriting discounts and
commissions, and an unlimited number of requests for registration on Form S-1
covering at least 300,000 shares of the Heller Common Stock in which Heller will
pay its share of the registration expenses (including all underwriting discounts
and commissions applicable to the Heller Common Stock sold in such offering).
Under the Heller Agreement, Heller also has the right, with certain limited
exceptions and at its own expense, to request up to three registrations under
Form S-2 or S-3 each covering at least 100,000 shares of the Heller Common Stock
and, in the event the Company proposes to register any of its securities under
the Act for its own account or otherwise, Heller may include in such
registration all or a portion of the
42
<PAGE>
Heller Common Stock, subject to certain limitations and exclusions. The Company
is obligated to pay the registration expenses in any piggyback registration
(other than underwriting discounts and commissions). The underwriter in any
requested registration may exclude for market reasons a pro rata portion of the
Heller Common Stock sought to be registered by Heller. The underwriter in any
piggyback registration may exclude all or a portion of the Heller Common Stock
sought to be registered by Heller for marketing reasons, subject to certain
priorities set forth in the Heller Agreement. Heller has waived its right to
include, in the registration statement of which this Prospectus forms a part,
any of the shares of Heller Common Stock.
Sellers of Transcriptions, Ltd. and Affiliates. Under the terms of a
registration rights agreement (the 'TL Registration Rights Agreement') between
the Company and the sellers (the 'Sellers') of Transcriptions, Ltd., the Sellers
(which include David A. Cohen, the Company's Chief Executive Officer, and John
A. Donohue, the Company's Chief Operating Officer) are entitled after August 31,
1997 and before September 1, 2003 to request on two occasions (more than 12
months apart) that the Company effect the registration under the Act of 500,000
or more shares of the 861,463 shares of Common Stock to be received by the
Sellers in partial payment of the deferred purchase price for such transaction
(the 'Seller Common Stock'). The Sellers will pay their pro rata share of the
registration expenses (including all underwriting discounts and commissions on
the sale of the Seller Common Stock) in any such registration. If after August
31, 1997, the Company shall propose to file a registration statement under the
Act, whether or not for its own account, Sellers may include in such
registration all or a portion of the Seller Common Stock, subject to certain
limitations and exclusions. The Company is obligated to pay the registration
expenses in any such registration (other than underwriting discounts and
commissions on the sale of the Seller Common Stock), except that if such
registration is initiated by another shareholder, then the Sellers will pay
their pro rata portion of any such registration expenses (including all
underwriting discounts and commissions on the sale of the Seller Common Stock).
Chemical Bank. The Company has filed a registration statement to register
under the Act the 75,351 shares of Common Stock issuable upon exercise of
certain warrants (the 'Chemical Common Stock') for resale by Chemical, subject
to its 180-day lockup agreement. Additionally, under the terms of a registration
agreement (the 'Chemical Registration Agreement'), Chemical is entitled to
request one registration under the Act of the Chemical Common Stock. The Company
will pay all registration expenses of such registrations other than underwriting
discounts and commissions. The Chemical Registration Agreement provides that the
Company is prohibited from including any securities other than the Chemical
Common Stock and any Heller Common Stock. The Chemical Registration Agreement
also provides that, in the event the Company proposes to register any of its
securities under the Act for its own account or otherwise, Chemical may include
in no more than two such registrations all or a portion of the Chemical Common
Stock, subject to certain limitations and exclusions. The Company will pay the
registration expenses in such a piggyback registration (other than underwriting
discounts and commissions). The underwriter of any requested offering may
exclude all or a portion of the Chemical Common Stock for marketing reasons,
subject to certain priorities set forth in the Chemical Registration Agreement.
Chemical has waived its right to include the Chemical Common Stock in the
registration statement covering this Offering.
Brawm Shareholders. Under the terms of a registration rights agreement
among the Company, Elizabeth Kostick and Susan Stuart, the two former
shareholders of Brawm Transcriptions, Inc. ('Brawm'), if the Company shall
propose to file a registration statement under the Act, whether or not for its
own account, these shareholders may include in such registration all or a
portion of the 22,840 shares of Common Stock received by them in connection with
the Company's acquisition of Brawm in 1995 (the 'Brawm Shares'), subject to
certain limitations and exclusions. The Company is obligated to pay all of the
registration expenses in any such registration (excluding underwriting discounts
and commissions on the sale of the Brawm Shares). The Brawm Shares are subject
to the Underwriters' over-allotment option.
TAKEOVER PROTECTION
The New Jersey Shareholders Protection Act (the 'New Jersey Act') prohibits
certain New Jersey corporations, such as the Company, from entering into certain
'business combinations' with an 'interested shareholder' (defined as any person
who is the beneficial owner of 10% or more of such corporation's outstanding
voting securities) for five years after such person became an interested
shareholder, unless the business combination or the interested shareholder's
acquisition of stock was approved by the corporation's board of directors prior
to such interested shareholder's stock acquisition date. After the five-year
waiting
43
<PAGE>
period has elapsed, a business combination between such corporation and an
interested shareholder will be prohibited unless the business combination is
approved by the holders of at least two-thirds of the voting stock not
beneficially owned by the interested shareholder, or unless the business
combination satisfies the New Jersey Act's fair price provision intended to
provide that all shareholders (other than the interested shareholders) receive a
fair price for their shares.
The New Jersey Act defines 'business combination' to include, among other
things: (1) a merger or consolidation between certain corporations and an
interested shareholder or such interested shareholder's affiliates; (2) any
sale, lease, exchange, mortgage, pledge, transfer or other disposition to or
with the interested shareholder, which has an aggregate market value equal to
10% or more of the aggregate market value of all of the assets, outstanding
stock or income of the corporation or its subsidiaries; (3) the issuance or
transfer by a corporation to the interested shareholder of any stock of the
corporation or of its subsidiaries having an aggregate market value equal to or
greater than 5% of the corporation's outstanding stock; (4) the adoption of a
plan or proposal for the liquidation or dissolution of the corporation proposed
by the interested shareholder; (5) any reclassification of securities proposed
by the interested shareholder that has the effect, directly or indirectly, of
increasing any class or series of stock that is owned by the interested
shareholder; and (6) the receipt by the interested shareholder of any loans or
other financial assistance from the corporation.
The New Jersey Act does not apply to certain business combinations,
including those with persons who acquired 10% or more of the voting power of the
corporation prior to the time the corporation was required to file periodic
reports pursuant to the Securities Exchange Act of 1934 or prior to the time the
corporation's securities began to trade on a national securities exchange.
The Company's Amended and Restated Certificate of Incorporation does not
provide for any additional anti-takeover protections other than the ability of
the Board of Directors to issue, from time to time, up to 3,950,000 shares of
Preferred Stock in one or more series without shareholder approval, and the
separation of the Board of Directors into three classes. See 'Management.'
The 1992 Option Plan provides that all outstanding options automatically
vest upon a 'change-in-control' of the Company. For purposes of this vesting
provision, the term 'change-in-control' means (a) any liquidation of the
Company, (b) the sale of all or substantially all of the assets of the Company,
(c) the acquisition by any person or group of beneficial ownership of securities
representing more than 50% of the combined voting power in the election of
directors of the Company (after giving effect to the exercise of any options,
warrants or other convertible securities held by such person or group), (d) the
election of a majority of the members of the Board of Directors as a result of
one or more proxy contests within any period of three years, (e) approval of a
merger, consolidation or other business combination by the Company's
shareholders or (f) commencement of a tender offer to purchase securities
representing more than 50% of the combined voting power in the election of
directors of the Company (after giving effect to the exercise of any options,
warrants or other convertible securities held by such person or group). The
acceleration of unvested options could have an adverse effect upon the ability
of a potential acquirer to gain control of the Company since it will necessarily
increase the cost of any such acquisition.
The Company adopted a severance plan for certain executive officers. The
plan provides that if a covered executive is terminated for any reason other
than 'cause' (which includes the failure to perform day-to-day duties as
assigned by the Board of Directors), within 12 months after a 'change in
control', such covered executive is to receive, within 10 days of the
termination, a one time payment equal to all compensation awarded to him or her
in the fiscal year immediately prior to such termination or, if such executive's
compensation was higher or would be higher on an annualized basis, in the fiscal
year in which such termination takes place, plus payment from the Company of any
amount earned (whether vested or not) by such executive pursuant to the
Company's long-term incentive compensation plan. See 'Management -- Severance
Arrangements' for a definition of the term 'change in control.'
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, after giving effect to the Heller
Transaction and the issuance of shares of Common Stock in connection with the
payment of the deferred purchase price for Transcriptions, Ltd., the Company
will have 6,522,338 shares of Common Stock outstanding. Of these shares, the
2,200,000 shares of Common Stock offered hereby (plus up to 330,000 additional
shares if the Underwriters exercise in full their over-allotment option), the
1,650,000 sold in the Company's initial public offering and approximately
690,000 shares of Common Stock issued upon exercise of employee options will be
freely tradeable without restriction or further registration, except by
'affiliates' of the Company, as that term is defined under the Act, subject to
the resale limitations of Rule 144 under the Act. Accordingly, approximately
1,975,000 shares of Common Stock may not be sold unless they are registered
under the Act or are sold pursuant to an exemption from registration, such as
the exemption provided by Rule 144 under the Act.
In general, Rule 144 allows a person who has beneficially owned Restricted
Shares for at least two years, including persons who may be deemed affiliates of
the Company, to sell, within any three-month period, up to the number of
Restricted Shares that does not exceed the greater of (i) one percent of the
then outstanding shares of Common Stock, and (ii) the average weekly trading
volume during the four calendar weeks preceding the date on which notice of the
sale is filed with the Commission. A person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale and who
has beneficially owned his or her Restricted Shares for at least three years
would be entitled to sell such Restricted Shares without regard to the volume
limitations described above and certain other conditions of Rule 144. The
Commission has proposed certain amendments to Rule 144 that would reduce by one
year the holding periods required for shares subject to Rule 144 and 144(k) to
become eligible for resale in the public market. This proposal, if adopted,
would increase the number of shares of Common Stock eligible for immediate
resale following the expiration of the lock-up agreements described below. No
assurance can be given concerning whether or when the proposal will be adopted
by the Commission.
Notwithstanding the foregoing, certain of the Company's officers, directors
and shareholders have agreed with Robertson, Stephens & Company LLC that, until
180 days after the date of this Prospectus, they will not offer to sell,
contract to sell or otherwise sell, dispose of or grant any rights with respect
to approximately 380,000 shares of Common Stock beneficially owned by them, or
any options or warrants to purchase shares of Common Stock or any securities
convertible into or exchangeable for shares of Common Stock (collectively, the
'Securities') now owned or hereinafter acquired directly by such holder or with
respect to which such holder has power of disposition, other than with the prior
written consent of Robertson, Stephens & Company LLC. Mr. David Cohen, the
Company's Chief Executive Officer, who owns 604,373 shares of Common Stock, has
agreed to similar restrictions for a period of 270 days after the date of this
Prospectus. Heller and Chemical, who own 1,005,175 and 75,351 shares of Common
Stock, respectively, have agreed to similar restrictions on the public sale of
their shares for 270 and 180 days, respectively, after the date of this
Prospectus. In its sole discretion and at any time without notice, Robertson,
Stephens & Company LLC may release all or any portion of the Securities subject
to lock-up agreements. If a shareholder other than Heller obtains a release from
a lock-up agreement, Heller will be entitled to a release of the same number of
shares. The Company has also agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for any shares of Common Stock, or any
options or warrants to purchase Common Stock, other than shares issued pursuant
to the Heller Transaction, shares or options issued or to be issued under the
Company's stock option and stock purchase plans, shares of Common Stock issued
upon the exercise of presently outstanding warrants, or shares, warrants or
convertible securities issued in connection with future acquisitions, until at
least 180 days after the date of this Prospectus except with the prior written
consent of Robertson, Stephens & Company LLC. See 'Underwriting.'
Certain persons and entities are the holders of registration rights with
respect to 1,922,329 shares of Common Stock. The Company has filed a
registration statement under the Act to register the resale by Heller and
Chemical, subject to the foregoing lock-up restrictions, of 962,675 and 75,351
shares of Common Stock, respectively. See 'Description of Capital Stock --
Registration Rights.' The Company also has an effective registration statement
on Form S-8 registering the 735,100 shares issuable upon the exercise of options
granted or available for grant thereunder. The Company also intends to file a
registration statement on Form S-8 to register up to 800,000 additional shares
of Common Stock for issuance pursuant to certain Company benefit plans. Market
sales of a substantial number of shares of Common Stock, or the availability of
such shares for sale in the public market, could adversely affect prevailing
market prices of the Common Stock.
45
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Volpe, Welty & Company, and Pennsylvania
Merchant Group Ltd (the 'Representatives'), have severally agreed with the
Company and the Selling Shareholders, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company the number of shares of
Common Stock set forth opposite their respective names below. The Underwriters
are committed to purchase and pay for all of such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------------------ -----------
<S> <C> <C>
Robertson, Stephens & Company LLC.............................................
Volpe, Welty & Company........................................................
Pennsylvania Merchant Group Ltd...............................................
Total.................................................................. 2,200,000
-----------
-----------
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price, less a concession of not in excess of $__ per share, of which $__
may be reallowed to other dealers. After the public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction shall change the amount the amount of
proceeds to be received by the Company as set forth on the cover page of this
Prospectus.
The Company, and Elizabeth Kostick and Susan Stuart (the 'Selling
Shareholders'), have granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 307,160,
11,420 and 11,420 additional shares of Common Stock, respectively, at the same
price per share as the Company will receive for the 2,200,000 shares that the
Underwriters have agreed to purchase. The Underwriters have agreed to exercise
in full the option granted by the Selling Shareholders, pro rata between the
Selling Shareholders, prior to exercising any portion of the option granted by
the Company, and the Company and the Selling Shareholders will be obligated to
sell shares to the extent the option is exercised. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage of such additional
shares that the number of shares of Common Stock to be purchased by it shown in
the above table represents as a percentage of the 2,200,000 shares to be offered
hereby. If purchased, the additional shares will be sold by the Underwriters on
the same terms as those on which the 2,200,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Shareholders against certain civil
liabilities, including liabilities under the Securities Act.
Pursuant to the terms of lock-up agreements, certain officers, directors,
shareholders and warrantholders of the Company have agreed with Robertson,
Stephens & Company LLC that, for periods ranging from 180 to 270 days after the
date of this Prospectus, they will not, with certain exceptions, sell any shares
of Common Stock now owned or hereinafter acquired by such holder, other than
with the prior written consent of Robertson, Stephens & Company LLC, which may,
in its sole discretion and at any time without notice, release all or any
portion of the Securities subject to lock-up agreements. See 'Shares Eligible
for Future Sale.' The Company has also agreed not to offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for any shares of Common Stock,
or any options or warrants to purchase Common Stock, other than shares or
options issued or to be issued under the Company's stock option and stock
purchase plans, shares of Common Stock issued upon the exercise of presently
outstanding options or warrants, or shares, warrants or convertible securities
issued in connection with future acquisitions, until at least 180 days after the
effective date of this registration statement except with the prior written
consent of Robertson, Stephens & Company LLC.
The Underwriters will not make sales to accounts over which they exercise
discretionary authority (i) in excess of 5% of the number of shares of Common
Stock offered hereby and (ii) unless they obtain specific written consent from
the customer.
46
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Pepper, Hamilton & Scheetz, Philadelphia, Pennsylvania.
Certain legal matters will be passed upon for the Underwriters by Brobeck,
Phleger & Harrison LLP, New York, New York.
EXPERTS
The Consolidated Financial Statements and Schedule of the Company as of
December 31, 1994 and 1995 and for each of the three years in the period ended
December 31, 1995 included in this Prospectus and elsewhere in the Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The Combined Financial Statements of Transcriptions, Ltd., as of December
31, 1991, 1992 and 1993, and for the years then ended, included in this
Prospectus and in the Registration Statement have been audited by Amper,
Politziner & Mattia, independent certified public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act'), and in accordance
therewith files annual and quarterly reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices located at Seven
World Trade Center, Suite 1300, New York, New York 10048, and at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611.
Copies of such material also may also be obtained from the Public Reference
Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the prescribed fees.
The Common Stock is listed on the American Stock Exchange. Reports, proxy
statements and other information concerning the Company may be inspected at the
offices of the American Stock Exchange located at 86 Trinity Place, New York,
New York 10006.
The Company has filed with the Commission a Registration Statement on Form
S-1, including all amendments and exhibits thereto (the 'Registration
Statement'), under the Act, with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus omits
certain information, exhibits, schedules and undertakings set forth in the
Registration Statement. For further information pertaining to the Company and
the Common Stock, reference is made to the Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete, and, with respect to any contract or other document filed as an
exhibit to the Registration Statement, each such statement is qualified in all
respects by reference to such exhibit. Copies of the Registration Statement and
exhibits may be inspected without charge at the public reference facilities of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the
Registration Statement and the exhibits may be obtained from the Commission upon
payment of the prescribed fees by writing to the Public Reference Section of the
Commission at such address.
47
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
MEDQUIST INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................................................... F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Operations...................................................................... F-4
Consolidated Statements of Shareholders' Equity............................................................ F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
TRANSCRIPTIONS, LTD., AND AFFILIATES
Independent Auditors' Report............................................................................... F-18
Combined Balance Sheets.................................................................................... F-19
Combined Statements of Operations.......................................................................... F-20
Combined Statements of Retained Earnings................................................................... F-21
Combined Statements of Cash Flows.......................................................................... F-22
Notes to Combined Financial Statements..................................................................... F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MedQuist Inc.:
We have audited the accompanying consolidated balance sheets of MedQuist
Inc. (a New Jersey corporation) and subsidiaries as of December 31, 1994 and
1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for the three years in the period ended December 31, 1995.
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 MedQuist Inc. and
subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 23, 1996
F-2
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 807 $ 1,812 $ 1,181
Accounts receivable, net of allowance of $145 and $257 and $257 in 1994, 1995,
and at March 31, 1996...................................................... 6,956 9,769 11,636
Deferred income taxes......................................................... 645 966 966
Prepaid expenses and other.................................................... 1,301 754 751
--------- --------- -----------
Total current assets..................................................... 9,709 13,301 14,534
Property and equipment, net..................................................... 4,752 6,725 7,136
Intangible assets, net.......................................................... 15,887 37,426 37,162
Net assets of discontinued operations........................................... 20,743 180 --
Other........................................................................... 312 463 250
--------- --------- -----------
$ 51,403 $ 58,095 $ 59,082
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................. $ 4,889 $ 2,246 $ 3,337
Accounts payable.............................................................. 624 2,164 2,575
Accrued payroll............................................................... 1,320 1,092 666
Accrued expenses.............................................................. 2,100 2,873 1,852
--------- --------- -----------
Total current liabilities................................................ 8,933 8,375 8,430
--------- --------- -----------
Long-term debt.................................................................. 30,415 15,956 16,054
--------- --------- -----------
Subordinated payable to related parties......................................... -- 17,337 17,726
--------- --------- -----------
Other long-term liabilities..................................................... 866 848 691
--------- --------- -----------
Deferred income taxes........................................................... 497 609 609
--------- --------- -----------
Commitments and contingencies (Note 11)
Shareholders' equity:
Class A preferred stock, no par value, 650 shares authorized, none issued..... -- -- --
Class B preferred stock, no par value, 400 shares authorized, none issued..... -- -- --
Common stock, no par value, 20,000 shares authorized, 2,250, 2,446 and 2,455
shares issued and outstanding at December 31, 1994 and 1995 and March 31,
1996, respectively......................................................... 3,244 4,639 4,695
Common stock to be issued to related parties, 861 shares...................... -- 4,550 4,550
Retained earnings............................................................. 7,448 5,781 6,327
--------- --------- -----------
Total shareholders' equity............................................... 10,692 14,970 15,572
--------- --------- -----------
$ 51,403 $ 58,095 $ 59,082
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................................................... $ -- $ 24,841 $ 45,127 $ 10,426 $ 13,978
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of revenues.......................................... -- 18,677 33,711 7,676 10,435
Selling, general and administrative....................... 1,688 2,798 4,325 1,599 888
Depreciation.............................................. 60 639 1,862 280 587
Amortization of intangible assets......................... 12 264 496 109 278
--------- --------- --------- --------- ---------
Total operating expenses............................... 1,760 22,378 40,394 9,664 12,188
--------- --------- --------- --------- ---------
Operating income (loss)..................................... (1,760) 2,463 4,733 762 1,790
Interest expense............................................ 1,426 2,738 3,695 959 865
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before income
taxes..................................................... (3,186) (275) 1,038 (197) 925
Income tax provision (benefit).............................. (1,290) (109) 431 (82) 379
--------- --------- --------- --------- ---------
Income (loss) from continuing operations.................... (1,896) (166) 607 (115) 546
Discontinued operations, net of income taxes:
Income from operations.................................... 1,997 1,612 1,451 441 --
Estimated gain (loss) on disposal......................... 1,749 -- (3,180) -- --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item..................... 1,850 1,446 (1,122) 326 546
Loss on early extinguishment of debt, net of income tax
benefit................................................... -- -- 545 -- --
--------- --------- --------- --------- ---------
Net income (loss)........................................... $ 1,850 $ 1,446 $ (1,667) $ 326 $ 546
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per share:
Income (loss) from continuing operations.................. $ (0.40) $ 0.09 $ 0.30 $ -- $ 0.14
Discontinued operations................................... 1.02 0.49 (0.52) 0.13 --
Extraordinary item........................................ -- -- (0.16) -- --
--------- --------- --------- --------- ---------
Net income (loss) per share............................ $ 0.62 $ 0.58 $ (0.38) $ 0.13 $ 0.14
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in computing income (loss) per share (Note 1)... 3,656 3,316 3,335 3,130 4,363
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------
SHARES OUTSTANDING SHARES TO BE ISSUED RECEIVABLE
---------------------- ---------------------- RETAINED FROM
NUMBER AMOUNT NUMBER AMOUNT EARNINGS SHAREHOLDER
----------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992......................... 2,896 $ 8,222 -- $ -- $ 4,152 $ (437)
Net income....................................... -- -- -- -- 1,850 --
Exercise of common stock options, including tax
benefit....................................... 326 1,080 -- -- -- --
Redemption of common stock in connection with
sale of business.............................. (999) (6,233) -- -- -- --
Repayment of receivable.......................... -- -- -- -- -- 437
----------- --------- ----- --------- --------- -----------
Balance, December 31, 1993......................... 2,223 3,069 -- -- 6,002 --
Net income....................................... -- -- -- -- 1,446 --
Exercise of common stock options, including tax
benefit....................................... 27 175 -- -- -- --
----------- --------- ----- --------- --------- -----------
Balance, December 31, 1994......................... 2,250 3,244 -- -- 7,448 --
Net loss......................................... -- -- -- -- (1,667) --
Exercise of common stock options, including tax
benefit....................................... 173 1,210 -- -- -- --
Issuance of common stock in connection with
business acquisition.......................... 23 185 -- -- -- --
Common stock to be issued in connection with
Transcriptions Ltd. acquisition............... -- -- 861 4,550 -- --
----------- --------- ----- --------- --------- -----------
Balance, December 31, 1995......................... 2,446 4,639 861 4,550 5,781 $ --
Net income (unaudited)........................... -- -- -- -- 546 --
Exercise of common stock options, including tax
benefit (unaudited)........................... 9 56 -- -- -- --
----------- --------- ----- --------- --------- -----------
Balance, March 31, 1996 (unaudited)................ 2,455 $ 4,695 861 $ 4,550 $ 6,327 $ --
----------- --------- ----- --------- --------- -----------
----------- --------- ----- --------- --------- -----------
<CAPTION>
TOTAL
---------
Balance, December 31, 1992......................... $ 11,937
Net income....................................... 1,850
Exercise of common stock options, including tax
benefit....................................... 1,080
Redemption of common stock in connection with
sale of business.............................. (6,233)
Repayment of receivable.......................... 437
---------
Balance, December 31, 1993......................... 9,071
Net income....................................... 1,446
Exercise of common stock options, including tax
benefit....................................... 175
---------
Balance, December 31, 1994......................... 10,692
Net loss......................................... (1,667)
Exercise of common stock options, including tax
benefit....................................... 1,210
Issuance of common stock in connection with
business acquisition.......................... 185
Common stock to be issued in connection with
Transcriptions Ltd. acquisition............... 4,550
---------
Balance, December 31, 1995......................... 14,970
Net income (unaudited)........................... 546
Exercise of common stock options, including tax
benefit (unaudited)........................... 56
---------
Balance, March 31, 1996 (unaudited)................ $ 15,572
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)............................................... $ 1,850 $ 1,446 $ (1,667) $ 326 $ 546
Adjustments to reconcile net income (loss) to net cash provided
by operating activities-
Depreciation and amortization............................... 1,641 2,115 4,005 743 875
Amortization of debt discount............................... 220 161 131 33 422
Estimated (gain) loss on disposal of discontinued
operations............................................... (3,942) -- 4,286 -- --
Provision for restructuring of discontinued segment......... 2,148 -- -- -- --
Loss on early extinguishment of debt........................ -- -- 545 -- --
Gain on debt retirement..................................... (124) -- -- -- --
Deferred income tax provision (benefit)..................... (377) 865 (355) 61 --
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures --
Accounts receivable.................................... 2,137 561 (2,377) (792) (1,867)
Prepaid expenses and other............................. (220) (508) 706 (36) 3
Other assets........................................... (93) (81) (128) (12) 393
Accounts payable....................................... (639) 805 1127 (247) 411
Accrued payroll........................................ 186 (587) (326) 10 (426)
Accrued expenses....................................... (2,511) (989) 282 (137) (1,021)
Other long-term liabilities............................ (132) 143 (91) 339 (157)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities......................................... 144 3,931 6,138 288 (821)
--------- --------- --------- --------- ---------
Investing activities:
Purchases of property and equipment, net........................ (704) (982) (3,448) (424) (817)
Acquisitions, net of cash acquired.............................. (3,514) (21,738) (7) -- --
Net cash proceeds from divestitures............................. 5,291 -- 16,723 -- --
Other........................................................... (120) 692 -- (108) (24)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities......................................... 953 (22,028) 13,268 (532) (841)
--------- --------- --------- --------- ---------
Financing activities:
Proceeds from issuance of long-term debt........................ -- 22,525 -- -- --
Deferred financing costs........................................ -- (1,530) (178) -- --
Net borrowings on revolving line of credit...................... 450 250 -- 150 2,308
Repayments of long-term debt.................................... (2,056) (3,555) (18,806) (519) (1,259)
Repayments of obligations under capital leases.................. (737) (241) (213) (61) (74)
Net proceeds from issuance of common stock...................... 672 154 796 72 56
Repayment of shareholder receivable............................. 437 -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities.... (1,234) 17,603 (18,401) (358) 1,031
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............. (137) (494) 1,005 (602) (631)
Cash and cash equivalents, beginning of year...................... 1,438 1,301 807 807 1,812
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of year............................ $ 1,301 $ 807 $ 1,812 $ 205 $ 1,181
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of March 31, 1996 and for
three months ended March 31, 1995 and 1996 is unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Background
MedQuist Inc. is a leading national provider of electronic transcription
and document management services to the healthcare industry. MedQuist Inc. was
incorporated in New Jersey in 1987 as a group of outpatient healthcare
businesses affiliated with a non-profit healthcare provider. In 1992 and 1993,
the outpatient businesses were sold (see Note 3) and, in 1994, Transcriptions,
Ltd. was acquired (see Note 2). In November 1995, MedQuist Inc. discontinued its
receivables management business. The operations and net assets of the
receivables management business and the outpatient businesses, which together
formed one business segment, have been accounted for as discontinued operations
(see Note 3).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
MedQuist Inc. and its subsidiaries (the 'Company'). All material intercompany
balances and transactions have been eliminated.
Interim Financial Statements
The financial statements as of March 31, 1996 and for the three months
ended March 31, 1995 and 1996 are unaudited and, in the opinion of management,
include all adjustments (consisting only of normal and recurring adjustments)
necessary for a fair presentation of results for these interim periods. The
results for the three months ended March 31, 1996 are not necessarily indicative
of the results to be expected for the entire year.
Use of Estimates
The preparation of financial statements, in accordance with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported assets and liabilities and contingency
disclosures at the date of the financial statements and the reported operations
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Fees for transcription-related services are based primarily on contracted
rates, and revenue is recognized upon the rendering of services and delivery of
records. Included in revenues are franchise fees of $216 and $317 for the years
ended December 31, 1994 and 1995 and $77 and $69 for the three months ended
March 31, 1995 and 1996, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Prepaid Expenses and Other
Prepaid expenses and other consists primarily of recoverable income taxes,
prepaid insurance and prepaid rent.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
have been provided using the straight-line method over the estimated useful
lives of the assets, which range from three to five years for furniture,
equipment and software, and the lease term for leasehold improvements. Repairs
and maintenance costs are expensed as incurred. Additions and betterments are
capitalized. Gains or losses on the disposition of property and equipment are
charged to operations.
F-7
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- CONTINUED
Intangible Assets
Intangible assets include the excess of cost over net asset value of
acquired businesses, customer lists and deferred financing costs and are being
amortized over 20 to 40 years, 20 years and 5 to 6 years, respectively.
Subsequent to its acquisitions, the Company continually evaluates whether later
events and circumstances have occurred that indicate the remaining estimated
useful life of intangible assets may warrant revision or that the remaining
balance may not be recoverable. When factors indicate that intangible assets
should be evaluated for possible impairment, the Company uses an estimate of the
related undiscounted operating income over the remaining life of the intangible
asset in measuring whether the intangible asset is recoverable. As of December
31, 1995, management believes that no revision to the remaining useful lives or
write-down of intangible assets is required.
Accrued Expenses
Accrued expenses consists primarily of deferred revenue, accrued interest,
deferred telephone credits, and accrued professional fees. At December 31, 1994
and 1995 and March 31, 1996, deferred revenue was $475, $466 and $261,
respectively.
Severance Costs
In fiscal 1995, two of the Company's then Chief Executive Officers
resigned. In connection with such resignations, the Company incurred severance
and retirement costs of $697 and $522 for the year ended December 31, 1995, and
the three months ended March 31, 1995, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
$0, $96, $162, $41 and $24, for the years ended December 31, 1993, 1994 and 1995
and for the three months ended March 31, 1995 and 1996, respectively.
Statements of Cash Flow Information
For the years ended December 31, 1993, 1994 and 1995, and the three months
ended March 31, 1995 and 1996 the Company paid interest of $1,145, $2,108,
$3,155, $839 and $409, respectively, and income taxes of $2,492, $257, $478, $30
and $800, respectively. Capital lease obligations of $593, $531, $329 and $181
were incurred on equipment leases entered into in 1994 and 1995 and the three
months ended March 31, 1995 and 1996, respectively. In 1994, the Company
refinanced $5,265 of long-term debt and $820 under its line of credit. In 1993,
the Company sold a business to a shareholder for consideration that included 999
shares of the Company's common stock.
F-8
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- CONTINUED
The following table displays the net non cash assets and liabilities that
were consolidated as a result of business acquisitions, including the impact of
fixing the Transcriptions deferred purchase price in 1995 (see Note 2):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Non cash assets (liabilities):
Accounts receivable............................................................. $ 6,720 $ 169
Prepaid expenses and other...................................................... 550 19
Property and equipment.......................................................... 4,034 213
Intangible assets............................................................... 14,516 23,183
Accounts payable and accrued expenses........................................... (2,670) (299)
Long-term debt.................................................................. (404) (379)
--------- ---------
Net non cash assets acquired................................................. 22,746 22,906
Less -- Seller notes and payables............................................ (1,008) (18,164)
Common Stock to be issued........................................... -- (4,550)
Common Stock issued................................................. -- (185)
--------- ---------
Net cash paid for business acquisitions......................................... $ 21,738 $ 7
--------- ---------
--------- ---------
</TABLE>
Income Taxes
Income taxes are calculated using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, 'Accounting for Income
Taxes' (SFAS No. 109). Accordingly, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Effective January 1, 1993, the Company adopted SFAS No. 109. The cumulative
effect of the change in accounting for income taxes was not material and is,
therefore, not presented separately in the consolidated statement of operations.
Income (Loss) Per Share
The Company's total outstanding common stock options and warrants exceed
20% of the total outstanding common stock. Therefore, the income per share
computations are modified, as required under Accounting Principles Board Opinion
No. 15, to assume all outstanding common stock options and warrants were
exercised and the related proceeds were used to repurchase up to 20% of the
total outstanding common stock. Any remaining proceeds are assumed to be used to
reduce borrowings, thereby reducing interest expense, net of tax. Because
interest expense has not been allocated to discontinued operations (see Note 3),
the reduction of interest expense only impacts income per share from continuing
operations.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 'Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ' (SFAS No. 121).
SFAS No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill. The Company is required
to adopt SFAS No. 121 effective January 1, 1996. The adoption of SFAS No. 121
did not have any effect on the Company's financial condition or results of
operations.
F-9
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- CONTINUED
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, 'Accounting for Stock-Based
Compensation' (SFAS No. 123). SFAS No. 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans. This statement
also applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. The Company is required to adopt
SFAS No. 123 effective January 1, 1996. The Company has elected to adopt the
disclosure requirement of this statement.
Reclassifications
Certain reclassifications have been made to prior year financial statements
to conform with the current year presentation.
(2) ACQUISITIONS:
Effective May 1, 1994, the Company purchased substantially all of the
assets of Transcriptions, Ltd. and affiliates ('Transcriptions') as well as
assuming certain liabilities, as defined, for $16,930 in cash, including
acquisition costs of $322, plus the payment of Transcriptions interest bearing
debt of $5,816, plus a deferred purchase price based on future operating
results. The deferred purchase price consideration was to equal 5.2 times the
average annual pre-tax income, as defined, during the 24 month period ended May
31, 1996, less $19,200 and was payable on or before August 31, 1996.
Effective December 29, 1995, and in connection with the sale of the
receivables management division (see Note 3), the Company fixed the deferred
purchase price by agreeing to pay the former owners of Transcriptions $18,375 in
cash and 861 shares of Common Stock (valued at $4,550 for financial reporting
purposes) on August 31, 1996. Accordingly, the $18,375 of cash consideration has
been discounted and presented as a subordinated payable of $17,337 at December
31, 1995 (see Note 7) and the shares to be issued have been presented as such in
shareholders' equity at December 31, 1995.
Upon fixing the deferred purchase price, the total purchase price for the
Transcriptions acquisition was $44,633. The acquisition has been accounted for
using the purchase method with the purchase price allocated to the fair value of
the acquired assets and liabilities. The results of operations of Transcriptions
are included in the accompanying consolidated statements of operations from May
1, 1994.
The following unaudited pro forma summary presents the results of
operations of the Company as if the Transcriptions acquisition, including the
payment of the deferred purchase price which causes additional amortization and
interest expense, had occurred on January 1, 1994. The pro forma information
does not purport to be indicative of the results that would have been attained
if the operations had actually been combined during the periods presented and is
not necessarily indicative of operating results to be expected in the future.
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Net revenues...................................................................... $ 36,634 $ 45,127
Loss from continuing operations................................................... (940) (701)
Loss per share from continuing operations......................................... (.42) (.30)
Shares used in computing loss per share........................................... 2,250 2,323
</TABLE>
In August 1995, the Company entered into a merger agreement with Brawm
Transcriptions, Inc. The agreement provided for net cash consideration of $7 and
23 shares of the Company's Common Stock valued at $185. In November 1995, the
Company entered into an agreement to purchase substantially all of the assets
and certain liabilities of Transcriptions, Ltd. of Michigan, a former
franchisee, for a $827, 9% Subordinated Promissory Note which is due in March
1996. The results of operations of these two acquisitions are included in the
accompanying consolidated statement of operations since the dates of
acquisition. The purchase price allocation for these acquisitions has not been
finalized as of December 31, 1995. Pro forma information is not presented as
these acquisitions are not material to the Company.
F-10
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(3) DISCONTINUED OPERATIONS:
Since December 1992, the Company has sold or eliminated all of the
businesses within its discontinued segment as follows:
<TABLE>
<CAPTION>
CONSIDERATION DIVESTITURE
BUSINESS RECEIVED DATE
-------- ------------- ------------------
<S> <C> <C>
Occupational health and rehabilitation.............................. $ 475 December 1992
Retail pharmacy..................................................... -- December 1992
Home medical........................................................ 1,955 July 1993
Medical transport................................................... 3,535 August 1993
Ambulatory surgery.................................................. 6,833 September 1993
InForMED software................................................... -- September 1993
Receivables management.............................................. 17,330 December 1995
</TABLE>
On November 14, 1995, the Company signed a letter of intent to sell its
receivables management business, the last remaining businesses in the segment.
Accordingly, the operations and net assets of all divested businesses in this
segment have been accounted for as discontinued operations and the operating
results and net assets are reported in such manner for all periods presented in
the accompanying consolidated financial statements.
The ambulatory surgery business was sold in September 1993 to the Company's
then largest shareholder. Under the terms of the sale agreement, the Company
received $600 in cash and redeemed 999 shares of its common stock held by this
shareholder.
For the years ended December 31, 1993, 1994 and 1995, the discontinued
operations generated revenue of $29,079, $21,438 and $18,767 and net income of
$1,997, $1,612 and $1,451, respectively. The 1995 divestiture of receivables
management generated an estimated net loss of $3,180, which includes net income
of $113 related to the operations of the business from the November 14, 1995
measurement date through the December 29, 1995 disposal date. The 1993
divestitures generated net income of $1,749. At December 31, 1995, the
accompanying balance sheet includes $180 of net accounts receivable, related to
discontinued operations, that were retained by the Company.
(4) PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Furniture, equipment and software.................................... $ 5,626 $ 9,509 $ 10,507
Leasehold improvements............................................... 126 78 78
--------- --------- -----------
5,752 9,587 10,585
Less -- Accumulated depreciation and amortization.................... (1,000) (2,862) (3,449)
--------- --------- -----------
$ 4,752 $ 6,725 $ 7,136
--------- --------- -----------
--------- --------- -----------
</TABLE>
(5) INTANGIBLE ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Excess of cost over net asset value of acquired businesses.......... $ 14,553 $ 33,899 $ 33,899
Customer lists...................................................... -- 3,800 3,800
Deferred financing costs............................................ 1,935 608 632
Other............................................................... 15 -- --
--------- --------- -----------
16,503 38,307 38,331
Less -- Accumulated amortization.................................... (616) (881) (1,169)
--------- --------- -----------
$ 15,887 $ 37,426 $ 37,162
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-11
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(6) LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Senior term loans payable to banks, escalating quarterly principal
installments (see below).......................................... $ 21,000 $ 9,500 $ 9,263
Revolving credit facility (see below)............................... 5,809 -- 2,308
Senior subordinated note payable to financial institution, quarterly
payments of interest at 7.0%, balloon principal payment in May
2000, net of original issue discount of $709, $578, and $545
respectively (see Note 8)......................................... 6,291 6,422 6,455
Subordinated 9.0% promissory note, due in March 1996 (see Note 2)... -- 827 --
Subordinated 9.5% promissory notes, due June 1997 through April
1999.............................................................. 467 439 432
Convertible subordinated notes, due in January 1996................. 641 175 --
Subordinated promissory notes repaid in 1995........................ 561 -- --
Capital lease obligations........................................... 459 826 933
Other notes payable................................................. 76 13 --
--------- --------- -----------
35,304 18,202 19,391
Less -- Current portion............................................. (4,889) (2,246) (3,337)
--------- --------- -----------
$ 30,415 $ 15,956 $ 16,054
--------- --------- -----------
--------- --------- -----------
</TABLE>
In connection with the Transcriptions acquisition in May 1994 (see Note 2),
the Company entered into a credit agreement (the 'Credit Agreement') with
certain banks that included $22,000 of term loans and an $8,000 revolving credit
facility. In connection with the sale of the receivables management division
(see Note 3), the Company restructured its credit facility to include $9,500 of
term loans and a $10,000 revolver. The new credit facility bears interest at
resetting rates, as selected by the Company, based on various rate alternatives
and the Company's level of compliance with certain financial covenants, as
defined. The interest rate alternatives are LIBOR plus 2% to 3% or 0.5% to 1.5%
in excess of either the bank's prime rate, federal funds plus 1.0% or the bank's
certificate of deposit rate, subject to certain restrictions, as defined. The
weighted average interest rate at December 31, 1995 and March 31, 1996, was 10%
and 8.625%, respectively.
The term loans are payable in 24 quarterly escalating installments ranging
from $275 to $475 through December 2001 and the revolving credit facility
expires in December 1998. The term loans and the revolving credit facility are
cross-collateralized and cross-defaulted. The Credit Agreement requires that any
prepayments, as defined, first be applied to the term loans. Additionally, the
Company is required to comply with various financial and nonfinancial covenants,
the most restrictive of which are specified income and debt related financial
ratios and restrictions on the payment of dividends, acquisitions and the sale
of property and equipment, among other items, as defined.
In 1995, the Company incurred interest expense of $498 on the revolving
credit facility, at a weighted average interest rate of 8.96%. The highest
outstanding borrowing during 1995 was $7,332. The revolving credit facility is
subject to a borrowing base of 85% of eligible receivables, as defined, and at
December 31, 1995, there was $7,000 available under the revolver.
In 1994, the Company incurred interest expense of $326 on the revolving
credit facility, at a weighted average interest rate of 7.72% and the highest
outstanding borrowing was $6,509.
In connection with the restructuring of the credit facility, the Company
expensed, as an extraordinary item, the related deferred financing costs of
$826, increasing the 1995 net loss by $545, or $.16 per share.
F-12
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(6) LONG-TERM DEBT: -- CONTINUED
Long-term debt maturities as of December 31, 1995, are as follows:
<TABLE>
<S> <C>
1996............................................................................... $ 2,327
1997............................................................................... 1,505
1998............................................................................... 2,168
1999............................................................................... 2,122
2000............................................................................... 1,904
2001 and thereafter................................................................ 8,900
---------
18,926
Less -- Unamortized discount and interest on capital lease obligations............. (724)
---------
$ 18,202
---------
---------
</TABLE>
(7) SUBORDINATED PAYABLE TO RELATED PARTIES:
Effective December 29, 1995, the Company and the former owners of
Transcriptions who include the Company's current Chief Executive Officer and
Chief Operating Officer, amended the Transcriptions purchase agreement to fix
the amount of the deferred purchase price (see Note 2). The amendment provides
for the Company to pay $18,375 in cash and issue 861 shares of common stock
(valued at $4,550 for financial reporting purposes) on August 31, 1996. The cash
portion of the deferred purchase price was discounted using an 8.75% rate and is
presented as a $17,337 long-term subordinated payable at December 31, 1995.
The amendment requires the company to use commercially reasonable efforts
to raise $18,375 by means of a public offering or through borrowings from the
Company's senior lenders. If the Company is unsuccessful raising sufficient
funds by August 31, 1996, the Company is required to deliver by December 31,
1996, any cash it is able to raise by the methods described above, and a
subordinated promissory note for the balance plus any accrued interest. Any such
subordinated promissory note will bear interest at the alternative base rate, as
defined in the Credit Agreement (see Note 6), plus 2.5% and as long as the
Company is not in default under the Credit Agreement, the Company may pay
regular quarterly interest payments on any such subordinated note. As of the
issue date of these financial statements the Company was able to show the
ability to refinance the subordinated payable to related parties by means of the
subordinated promissory note. Accordingly the subordinated payable to related
parties has been presented as a long-term liability.
If the subordinated promissory note is issued for a portion of the $18,375,
the Company is then required to use its best efforts to repay such note through
the sale of equity or subordinated debt, at terms that are satisfactory to the
Company's senior lenders. If repayment still does not occur, the entire balance
and any accrued interest thereon is due 30 days after all obligations under the
Credit Agreement are paid in full.
(8) SHAREHOLDERS' EQUITY:
In connection with the 1992 issuance of the senior subordinated note (see
Note 6), the Company sold to the holder for $1,100 warrants to purchase 577
shares of Class A and 356 shares of Class B Preferred Stock at an exercise price
of $7.50 per share. Each share of Class A and Class B Preferred Stock is
convertible into one share of Common Stock. During 1994, the holder was issued
additional warrants and all warrant exercise prices were reset at $7.28, in
accordance with the antidilution provisions of the original warrant agreement.
At December 31, 1995, warrants to purchase 595 shares of Class A Preferred Stock
and 367 shares of Class B Preferred Stock were outstanding and exercisable
through May 2002.
On September 30, 1993, in connection with the sale of its ambulatory
surgery business, the Company redeemed all 999 shares of Common Stock owned by
HCSF, Inc. and received $600 in cash. The value of the Common Stock at the time
of redemption was $6,233. In connection with this sale, the $437 receivable from
HCSF, Inc. was repaid.
In connection with the May 1994 Credit Agreement (see Note 6), the Company
issued the agent bank warrants to purchase 75 shares of Common Stock at an
exercise price of $6.74 per share. These warrants expire May 2001.
F-13
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(9) STOCK OPTION PLANS:
The Company has three stock option plans which provide the granting of
options to purchase an aggregate of 1,353 shares of Common Stock to eligible
employees (including officers) and nonemployee directors of the Company. Options
granted may be at fair market value of the Common Stock or at a price determined
by a committee of the Board. The stock options vest and are exercisable over a
period determined by the committee, but not longer than ten years. Information
with respect to the options under the plans and certain prior options follows:
<TABLE>
<CAPTION>
OPTION PRICE AGGREGATE
SHARES PER SHARE PROCEEDS
----------- ---------------- -----------
<S> <C> <C> <C>
Outstanding, December 31, 1992.................................. 572 $2.00 - $ 6.70 $ 2,041
Granted....................................................... 18 5.25 95
Exercised..................................................... (326) 2.00 - 5.80 (972)
Canceled...................................................... -- --
----- -----------
Outstanding, December 31, 1993.................................. 264 2.00 - 6.70 1,164
Granted....................................................... 300 4.69 - 6.75 1,663
Exercised..................................................... (27) 3.40 - 6.00 (154)
Canceled...................................................... (37) 4.65 - 6.75 (163)
----- -----------
Outstanding, December 31, 1994.................................. 500 2.00 - 6.75 2,510
Granted....................................................... 305 7.25 - 9.50 2,594
Exercised..................................................... (173) 2.00 - 7.25 (796)
Canceled...................................................... (45) 2.00 - 7.50 (259)
----- -----------
Outstanding, December 31, 1995.................................. 587 3.40 - 9.50 4,049
Granted....................................................... 111 8.13 - 11.50 961
Exercised..................................................... (9) 6.50 - 6.63 (56)
Canceled...................................................... -- -- --
----- -----------
Outstanding, March 31, 1996..................................... 689 $3.40 - $11.50 $ 4,954
----- -----------
----- -----------
</TABLE>
At December 31, 1995, there were 256 exercisable options at an aggregate
exercise price of $1,277 and 72 additional options to purchase Common Stock were
available for grant under the plans.
(10) INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
State......................................................... $ 437 $ -- $ 181
Federal....................................................... 2,077 85 161
--------- --------- ---------
2,514 85 342
Deferred........................................................ (377) 865 (355)
--------- --------- ---------
Total......................................................... $ 2,137 $ 950 $ (13)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income tax provision (benefit) is included in the accompanying consolidated
financial statements as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Continuing operations............................................. $ (1,290) $ (109) $ 431
Discontinued operations:
Income from operations.......................................... 1,234 1,059 796
Gain (loss) on disposal......................................... 2,193 -- (959)
Extraordinary item................................................ -- -- (281)
--------- --------- ---------
Total........................................................ $ 2,137 $ 950 $ (13)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-14
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(10) INCOME TAXES: -- CONTINUED
A reconciliation of the statutory federal income tax rate to the effective
continuing operations income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate................................. 34.0% 34.0% 34.0%
State income taxes, net of federal benefit........................ 6.5 5.6 6.5
Other............................................................. -- -- 1.0
----- ----- -----
40.5% 39.6% 41.5%
----- ----- -----
----- ----- -----
</TABLE>
The tax effect of temporary differences that give rise to deferred income
taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax asset:
Allowance for doubtful accounts...................................................... $ 443 $ 210
Self-insurance reserves.............................................................. 77 64
Vacation accrual..................................................................... 68 15
Other................................................................................ 57 677
--------- ---------
$ 645 $ 966
--------- ---------
--------- ---------
Deferred tax liability:
Depreciation......................................................................... (510) (545)
Amortization......................................................................... (161) (402)
Deferred compensation................................................................ 174 338
--------- ---------
$ (497) $ (609)
--------- ---------
--------- ---------
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES:
Rent expense for operating leases was $144, $459 and $732 for the years
ended December 31, 1993, 1994 and 1995, respectively. Minimum annual rental
commitments for noncancelable operating leases having terms in excess of one
year as of December 31, 1995, are as follows:
<TABLE>
<S> <C>
1996................................................................................. $ 3,373
1997................................................................................. 1,080
1998................................................................................. 891
1999................................................................................. 485
2000................................................................................. 158
---------
$ 5,987
---------
---------
</TABLE>
The Company has employment agreements with four key executives with terms
ranging from 2 to 3 years. The agreements provide for, among other things,
compensation, benefits, termination and non-competition.
The Company has an employment agreement, as amended on January 1, 1996,
with a former Chief Executive Officer, who is currently a Director of the
Company. The agreement entitles this individual to receive retirement benefits
of $75 per year for life plus certain other benefits, as defined. Included in
other long-term liabilities is $436 and $847 at December 31, 1994 and 1995,
respectively, related to these retirement benefits. In accordance with terms of
the employment agreement, during 1993, the Company loaned this individual $300
to exercise 150 common stock options. The loan, as amended, is
noninterest-bearing and is due on March 1, 1996, and is included in other assets
in the accompanying consolidated balance sheets. The employment agreement also
requires the Company to loan the former CEO's estate the necessary funds to
exercise any options owned by the individual at the time of his death.
F-15
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(11) COMMITMENTS AND CONTINGENCIES: -- CONTINUED
The Company has adopted a severance plan for certain executive officers
that provides for one-time payments in the event of a change in control, as
defined. No liabilities are currently required to be recorded with respect to
this plan.
The Company has entered into an agreement with its long distance carrier through
October 1998 that provides for, among other things, annual minimum purchases of
$1,800 and termination penalties. In addition as an inducement to enter into the
agreement the long distance carrier provided the Company with credits that the
Company is amortizing on a straight line basis over the term of the agreement.
The amortization of the deferred telephone credits was $65,000, $87,000, $22,000
and $18,000 for the years ended December 31, 1994 and 1995 and the three months
ended March 31, 1995 and 1996.
In the normal course of business, the Company is a party to various claims
and legal proceedings. Although the ultimate outcome of these matters is
presently not determinable, management of the Company, after consultation with
legal counsel, does not believe that the resolution of these matters will have a
material effect upon the Company's financial position or results of operations.
(12) UNAUDITED SUPPLEMENTAL PRO FORMA DATA:
Certain events occurred immediately prior to year-end or are expected to
occur immediately prior to or upon the closing of the offering contemplated by
this Prospectus. The unaudited supplemental pro forma data presented below
assumes that the following transactions were effected as of January 1, 1995:
(i) The prepayment of approximately $16,723 of the Credit Agreement
with the proceeds from the sale of the receivables management
business on December 29, 1995 reducing interest expense (see Note
3);
(ii) The fixing of the Transcriptions deferred purchase price on
December 29, 1995, causing additional amortization and interest
expense (see Note 2);
(iii) The issuance of 963 shares of Common Stock to the senior
subordinated note holder ('Note Holder') pursuant to the
exercise of certain warrants to purchase Preferred Stock by
cancelling $7,000 principal amount of a senior subordinated note
and the simultaneous conversion of such Preferred Stock into
Common Stock, and the issuance of 43 shares of Common Stock to
induce the Note Holder to so exercise and convert (collectively,
the 'Note Holder Transaction') resulting in decreased interest
expense and additional shares outstanding; and
(iv) The repayment of the subordinated payable to related parties and
all borrowings under the Credit Agreement with proceeds from the
offering contemplated by this Prospectus resulting in reduced
interest expense.
F-16
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(12) UNAUDITED SUPPLEMENTAL PRO FORMA DATA: -- CONTINUED
INCOME STATEMENT:
<TABLE>
<S> <C> <C> <C>
Income (loss) from continuing operations, as reported..................... $ 607 $ (115) $ 546
Impact of transaction (i)................................................. 1,738 462 --
Impact of transaction (ii):
Amortization expense.................................................... (735) (199) --
Interest expense........................................................ (1,500) (375) --
Impact of transaction (iii)............................................... 620 155 155
Impact of transaction (iv)................................................ 2,398 617 601
Tax effect of transactions................................................ (1,046) (275) (318)
--------- ----------- -----------
Impact of pro forma adjustments......................................... 1,473 385 438
--------- ----------- -----------
Income from continuing operations, as adjusted............................ $ 2,080 $ 270 $ 984
--------- ----------- -----------
--------- ----------- -----------
Income from continuing operations per share............................... $ 0.32 $ 0.04 $ 0.14
--------- ----------- -----------
--------- ----------- -----------
Shares used in computing income per share................................. 6,542 6,462 6,810
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
BALANCE SHEET AS OF MARCH 31, 1996:
<TABLE>
<CAPTION>
TOTAL LONG-TERM TOTAL TOTAL
ASSETS DEBT LIABILITIES EQUITY
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Amounts, as reported......................................... $ 59,082 $ 16,054 $ 43,510 $ 15,572
Impact of transaction (i).................................... -- -- -- --
Impact of transaction (ii)................................... -- -- -- --
Impact of transaction (iii).................................. -- (6,455) (6,455) 6,455
Impact of transaction (iv)................................... 10,040 (9,599) (30,662) 40,702
--------- ----------- ----------- ---------
Amounts, as adjusted......................................... $ 69,122 $ -- $ 6,393 $ 62,729
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
The supplemental pro forma net income from continuing operations per share
does not reflect the estimated non-recurring deduction of approximately $718
from net income available to common shareholders to be incurred in connection
with the issuance of 43 shares of Common Stock to the Note Holder to induce the
exercise of the warrant and the conversion of the Preferred Stock into Common
Stock. The actual non-recurring deduction will be based on the discounted fair
value of the Common Stock at the time of issuance.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Transcriptions, Ltd. and Affiliates
We have audited the accompanying combined balance sheets of Transcriptions,
Ltd. and Affiliates as of December 31, 1993, 1992, and 1991 and the related
combined statements of operations, retained earnings 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 combined financial position of Transcriptions,
Ltd. and Affiliates as of December 31, 1993, 1992, and 1991, and the combined
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in Note 1, the Company has changed its method of accounting
for income taxes during the year ended December 31, 1993.
AMPER, POLITZINER & MATTIA
Edison, New Jersey
July 15, 1994, except Note 9 which is dated March 31, 1995
F-18
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1991 1992 1993
---------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 158,534 $ 108,956 $ 39,483
U.S. Treasury Note....................................................... 49,940 49,940 49,940
Accounts receivable, less allowance for doubtful accounts of $173,000,
$303,000, and $424,000................................................. 4,494,658 4,755,671 5,501,501
Other receivables........................................................ 91,894 80,303 300,134
Due from franchisees..................................................... 113,826 116,040 90,498
Prepaid expenses and other current assets................................ 405,056 387,937 327,669
Prepaid income taxes..................................................... 17,692 3,220 3,375
---------- ----------- -----------
5,331,600 5,502,067 6,312,600
---------- ----------- -----------
Property and equipment
Furniture and equipment.................................................. 4,962,069 6,641,389 7,221,307
Automotive equipment..................................................... 446,159 437,496 419,090
Leasehold improvements................................................... 92,142 92,142 96,934
Equipment under capital lease............................................ 1,047,493 1,047,493 1,267,481
---------- ----------- -----------
6,547,863 8,218,520 9,004,812
Less accumulated depreciation............................................ 4,597,324 5,624,654 5,289,297
---------- ----------- -----------
1,950,539 2,593,866 3,715,515
---------- ----------- -----------
Other assets
Note receivable.......................................................... 129,742 122,361 114,416
Covenant not-to-compete, net of accumulated amortization of $148,150,
$248,150 and $348,150.................................................. 351,850 251,850 151,850
Loan acquisition costs, net of accumulated amortization of $24,179,
$40,299 and $56,420.................................................... 56,420 40,299 24,178
Prepaid consulting agreement............................................. 280,000 200,000 120,000
Franchise fees, net of accumulated amortization
of $11,692, $14,799 and $17,905........................................ 67,855 64,748 61,642
Deposits................................................................. 38,822 41,742 81,705
Cash surrender value of officers' life insurance, net of policy loans of
$278,005, $420,943 and $422,562........................................ 190,403 195,161 324,429
Due from stockholders.................................................... 968,877 1,083,543 1,118,330
---------- ----------- -----------
2,083,969 1,999,704 1,996,550
---------- ----------- -----------
$9,366,108 $10,095,637 $12,024,665
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Demand notes and short-term loans........................................ $ 511,250 $ 511,250 $ 61,250
Current maturities of long-term debt..................................... 965,771 1,120,146 1,067,189
Current maturities of capital lease obligations.......................... 202,372 228,195 270,354
Accounts payable and accrued expenses.................................... 935,699 964,756 971,003
Deferred revenue......................................................... -- -- 450,405
Deferred telephone credits............................................... -- -- 246,462
Income taxes payable..................................................... 21,602 -- 37,099
Payroll taxes payable.................................................... 47,429 411,121 559,532
Deferred tax liability................................................... 111,603 101,103 157,500
---------- ----------- -----------
2,795,726 3,336,571 3,820,794
Other liabilities
Long-term debt, net of current maturities................................ 3,865,149 4,077,455 4,864,147
Capital lease obligations, net of current maturities..................... 512,866 284,680 234,316
Due to stockholders...................................................... 1,636,278 1,432,278 1,687,278
---------- ----------- -----------
8,810,019 9,130,984 10,606,535
---------- ----------- -----------
Stockholders' equity
Common stock............................................................. 44,055 44,070 47,570
Retained earnings........................................................ 2,358,439 2,766,988 3,216,965
---------- ----------- -----------
2,402,494 2,811,058 3,264,535
Less treasury stock, at cost............................................. (1,846,405) (1,846,405) (1,846,405)
---------- ----------- -----------
Total stockholders' equity............................................. 556,089 964,653 1,418,130
---------- ----------- -----------
$9,366,108 $10,095,637 $12,024,665
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1991 1992 1993
------------- ------------- -------------
<S> <C> <C> <C> <C>
Transcribing and leasing revenue.................................... $ 20,020,863 $ 23,025,200 $ 27,103,153
Direct transcribing and leasing costs............................... 12,260,306 15,183,588 17,654,821
------------- ------------- -------------
Gross profit........................................................ 7,760,557 7,841,612 9,448,332
Selling, general and administrative expenses........................ 6,975,579 6,781,143 8,217,960
------------- ------------- -------------
Earnings from operations............................................ 784,978 1,060,469 1,230,372
------------- ------------- -------------
Other income (expense)
Interest income................................................... 58,589 38,156 14,209
Interest expense.................................................. (811,908) (477,552) (458,085)
Litigation settlement............................................. -- (310,000) --
Miscellaneous income.............................................. 130,361 102,476 122,825
------------- ------------- -------------
(622,958) (646,920) (321,051)
------------- ------------- -------------
Earnings before (provision for) benefit from state income taxes,
extraordinary item and cumulative effect of change in accounting
principle......................................................... 162,020 413,549 909,321
(Provision for) benefit from state income taxes..................... 114,796 (26,200) (64,400)
------------- ------------- -------------
Earnings before extraordinary item and cumulative effect of change
in accounting principle........................................... 276,816 387,349 844,921
Extraordinary item -- utilization of net operating loss
carryforward...................................................... 39,000 21,200 --
Cumulative effect on prior years of change in accounting
principle......................................................... -- -- (43,897)
------------- ------------- -------------
Net income........................................................ $ 315,816 $ 408,549 $ 801,024
------------- ------------- -------------
------------- ------------- -------------
Pro forma results using SFAS 109 as a C-corporation:
Earnings before provision for income taxes, extraordinary item and
cumulative effect of change in accounting principle as
reported....................................................... $ 162,020 $ 413,549 $ 909,321
Pro forma provision for income taxes.............................. (87,000) (165,000) (352,000)
------------- ------------- -------------
Pro forma net income before extraordinary item and cumulative
effect of change in accounting principle....................... $ 75,020 $ 248,549 $ 557,321
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
COMBINED STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
Retained earnings -- beginning, as originally reported.................. $ 2,103,781 $ 2,578,488 $ 3,293,475
Accumulated deficit from Transcriptions, Ltd. of Texas, Transcriptions,
Ltd. of Northwest and EDM, Ltd., not previously combined.............. (61,158) (220,049) (526,487)
------------ ------------ ------------
Retained earnings -- beginning, as restated............................. 2,042,623 2,358,439 2,766,988
Net income.............................................................. 315,816 408,549 801,024
Less: distributions to stockholders..................................... -- -- (351,047)
------------ ------------ ------------
Retained earnings -- ending............................................. $ 2,358,439 $ 2,766,988 $ 3,216,965
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1991 1992 1993
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................................. $ 315,816 $ 408,549 $ 801,024
---------- ----------- -----------
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation......................................................... 921,752 1,084,692 1,518,126
Amortization......................................................... 119,229 119,228 119,227
Bad debt expense..................................................... 133,831 198,633 358,361
Deferred tax expense (benefit)....................................... 4,000 10,700 12,500
Cumulative effect on prior years of change in income tax accounting
principle.......................................................... -- -- 43,897
Net gain on sale of property and equipment........................... (33,151) (7,014) --
(Increase) decrease in
Accounts receivable................................................ (82,085) (459,646) (1,104,192)
Investment in direct financing leases.............................. 42,070 -- --
Other receivables.................................................. 330,666 11,606 (216,331)
Prepaid expenses and other current assets.......................... (28,375) 17,119 60,269
Prepaid income taxes............................................... 10,508 14,472 (155)
Prepaid consulting agreement....................................... 80,000 80,000 80,000
Deposits........................................................... 1,628 (2,920) (39,963)
Increase (decrease) in
Accounts payable and accrued expenses.............................. (82,901) 29,057 6,247
Deferred revenue................................................... -- -- 450,405
Deferred telephone credits......................................... -- -- 246,462
Income taxes payable............................................... 10,000 (21,602) 37,099
Payroll taxes payable.............................................. (6,102) 363,692 148,411
Due to bank........................................................ (102,601) -- --
Deferred tax liability............................................. (171,796) (21,200) --
---------- ----------- -----------
Total adjustments............................................... 1,146,673 1,416,817 1,720,363
---------- ----------- -----------
Net cash provided by operating activities..................... 1,462,489 1,825,366 2,521,387
---------- ----------- -----------
Cash flows from investing activities:
Principal payments on note receivable................................... 5,972 7,381 7,945
Payment for U.S. Treasury Note.......................................... (49,940) -- --
Decrease (increase) in due from franchisees............................. (3,399) (2,214) 25,542
Acquisition of property and equipment................................... (703,329) (1,755,050) (2,499,851)
Proceeds from sale of property and equipment............................ 100,630 34,045 80,064
(Increase) decrease in cash surrender value of officers' life
insurance............................................................ 134,786 (4,758) (129,268)
(Increase) decrease in due from stockholders............................ 8,333 (114,666) (34,787)
---------- ----------- -----------
Net cash used by investing activities......................... (506,947) (1,835,262) (2,550,355)
---------- ----------- -----------
Cash flows from financing activities:
Principal payments on demand notes and short-term loans................. (251,750) (500,000) (500,000)
Proceeds from demand notes and short-term loans......................... 500,000 500,000 50,000
Principal payments on long-term debt.................................... (874,835) (933,319) (1,266,265)
Proceeds from long-term debt............................................ -- 1,300,000 2,000,000
Principal payments on capital lease obligations......................... (173,150) (202,363) (228,193)
Distribution of retained earnings....................................... -- -- (351,047)
Increase (decrease) in due to stockholders.............................. (29,999) (204,000) 255,000
---------- ----------- -----------
Net cash used by financing activities......................... (829,734) (39,682) (40,505)
---------- ----------- -----------
Net (decrease) increase in cash and cash equivalents...................... 125,808 (49,578) (69,473)
Cash and cash equivalents -- beginning.................................... 32,726 158,534 108,956
---------- ----------- -----------
Cash and cash equivalents -- ending....................................... $ 158,534 $ 108,956 $ 39,483
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Transcriptions, Ltd. and Affiliates, (the 'Company'), provides medical
transcribing services to various hospitals and also leases transcribing
equipment under capital leases. The Company grants credit to substantially all
customers.
Affiliated Entities
Transcriptions, Ltd. has several affiliates, under common ownership, as
noted below, all of which are included in the combined financial statements.
Affiliates Included in Combined Financial Statements
Transcriptions, Ltd. (an S-Corporation), franchisee providing medical
transcribing services to various hospitals in the New Jersey and Delaware
Valley, Pennsylvania area, and leasing transcribing equipment to franchisees of
an affiliated company.
Transcriptions, Ltd. of Louisiana (an S-Corporation), franchisee providing
medical transcribing services to various hospitals in the New Orleans
metropolitan area.
Transcriptions, Ltd. of Utah (an S-Corporation), franchisee providing
medical transcribing services to various hospitals in the Salt Lake City
metropolitan area.
CA EDM (an S-Corporation), franchisee providing medical transcribing
services to various hospitals in the Los Angeles and San Francisco metropolitan
areas.
Transcriptions, Ltd. of Illinois (a Partnership), franchisee providing
medical transcribing services to various hospitals in the Chicago metropolitan
area.
EDM, Ltd. (a C-Corporation), franchisor of medical transcribing services
(not previously combined). EDM, Ltd. has an August 31 year-end for tax purposes.
Transcriptions, Ltd. of Texas (an S-Corporation), an inactive corporation
(not previously combined).
The following combined affiliates were incorporated during the years ended
December 31, 1991, 1992, and 1993 and were not included in the prior year's
combined financial statements:
1991
Transcriptions, Ltd. of Northwest, Inc. (an S-Corporation), franchisee
providing medical transcribing services to various hospitals in the Seattle
metropolitan area (not previously included in the combined financial statement
for the year ended December 31, 1991).
1992
Transcriptions, Ltd. of Colorado (an S-Corporation), franchisee providing
medical transcribing services to various hospitals in the Denver metropolitan
area.
1993
Transcriptions, Ltd. of North Carolina (an S-Corporation), franchisee
providing medical transcribing services to various hospitals in the North
Carolina area.
Transcriptions, Ltd. of Arizona (an S-Corporation), franchisee providing
medical transcribing services to various hospitals in the Arizona area.
F-23
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided on the
straight-line and declining balance methods over the estimated useful lives of
the assets.
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
--------------
<S> <C>
Furniture and equipment................................................................. 3 - 7 years
Automotive equipment.................................................................... 3 - 5 years
Leasehold improvements.................................................................. 3 - 31.5 years
Equipment under capital lease........................................................... 3 years
</TABLE>
Covenant Not-to-Compete
The covenant not-to-compete is amortized on a straight-line basis over the
five year term of the agreement.
Loan Acquisition Costs
Loan acquisition costs are amortized over five years on a straight-line
basis.
Franchise Fees
Franchise fees are amortized over twenty-five years on a straight-line
basis.
Deferred Revenue
Deferred revenue represents an amount paid in advance by two customers.
Revenue is recognized upon rendering transcribing services for these two
customers.
Deferred Telephone Credits
The Company received several credits as a result of signing three and four
year contracts with a telephone company. These credits are being amortized
ratably over the term of the contracts.
Profit Sharing Plan
The Company has a defined contribution plan (the 'Plan') covering
substantially all employees. The Plan contains a profit-sharing portion, funded
by the Company, as well as a salary deferral portion 401(k), with an employer
matching contribution. The Company funds the profit sharing plan in such amounts
as determined by the discretion of management.
Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), 'Accounting for Income Taxes,' which
requires the use of the liability method of accounting for income taxes. The
liability method measures deferred income taxes by applying enacted statutory
rates in effect at the balance sheet date to the differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. The resulting deferred tax asset or liability is adjusted to reflect
changes in tax laws as they occur.
F-24
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
There was no effect of adopting SFAS 109 on earnings before provision for
income taxes for the year ended December 31, 1993.
For the years ended December 31, 1991 and 1992, the Company utilized
Accounting Principles Board Opinion No. 11, 'Accounting for Income Taxes,' to
record income taxes.
The Company reports revenue and expenses for income tax purposes on the
cash basis, and on the accrual method for financial reporting purposes. Also,
the Company records depreciation and amortization on an accelerated basis for
tax purposes and on the straight-line and declining balance basis for financial
reporting purposes. These create temporary differences which give rise to
deferred income taxes.
The Companies, (except for EDM, Ltd.), have elected to be taxed as small
business S-Corporations under the Internal Revenue Code. Under this election,
the profits, losses, credits and deductions of the Companies are passed through
to the individual stockholders. The profits and losses of the Companies remain
taxable at the state level, except for Transcriptions, Ltd. of Illinois which is
a partnership, and Transcriptions, Ltd. of Colorado and Transcriptions, Ltd.
(Pennsylvania division) where the Companies are taxed as state S-Corporations.
(2) CONCENTRATION OF CASH BALANCES
At December 31, 1993, the Company maintained cash balances in one financial
institution of approximately $1,443,000.
(3) DUE FROM FRANCHISEES
Due from franchisees represents trade receivables which are to be paid in
the ordinary course of business, without interest.
(4) PROPERTY AND EQUIPMENT
Depreciation expense, which includes amortization of assets under capital
leases, for the years ended December 31, 1991, 1992 and 1993 amounted to
$921,752, $1,084,692 and $1,518,126, respectively.
Accumulated amortization of equipment under capital leases was $231,299,
$807,528, and $944,455, for the years ended December 31, 1991, 1992, and 1993,
respectively.
(5) NOTE RECEIVABLE
Note receivable from a former stockholder, due currently in monthly
installments of $1,132 including interest at prime, based on a 12-year
amortization with a balloon payment, maturing July 2000.
F-25
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(6) DEMAND NOTES AND SHORT-TERM LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1991 1992 1993
----------- ---------- ----------
<S> <C> <C> <C>
Demand note payable to a bank, under a $500,000 line of credit due June 1994,
bearing interest at the Company's option of the LIBOR (London Interbank
Offering Rate) plus 200 basis points or prime rate minus .25%,
collateralized by substantially all assets of the Company.................. $ 500,000 $ 500,000 $ 500,000
Less: amount refinanced as a long-term debt obligation during January 1994
(see Note 7)............................................................... -- -- (450,000)
----------- ---------- ----------
Balance of demand note. This note was paid during January 1994............... 500,000 500,000 50,000
Unsecured demand note bearing interest at 15% to Anne Cohen, a relative of a
current stockholder........................................................ 8,250 8,250 8,250
Unsecured demand note bearing interest at 15% to Morris Forstein, a relative
of a current stockholder................................................... 3,000 3,000 3,000
----------- ---------- ----------
$ 511,250 $ 511,250 $ 61,250
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The prime rate as of December 31, 1991, 1992 and 1993 was 6.5%, 6% and 6%,
respectively.
The LIBOR rate as of December 31, 1991, 1992, and 1993 was 4%, 3.25%, and
3%, respectively. 200 basis points are the equivalent of 2%.
(7) LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
Installment note payable to a bank at $33,333 monthly starting July
1994, plus interest at the Company's option of the LIBOR plus 200
basis points or prime rate minus .25%, maturing June 1999,
collateralized by substantially all assets of the Company............. $ -- $ -- $ 1,550,000
Plus: Demand note refinanced during January 1994 (see Note 6)........... -- -- 450,000
------------ ------------ ------------
Balance of installment note payable..................................... -- -- 2,000,000
Installment note payable to a bank in monthly installments of $61,333
through April 1994, $15,333 during May 1994 through November 1995 and
$8,333 during December 1995 through September 1997, plus interest at
the Company's option of the LIBOR plus 200 basis points or prime rate
minus .25%, maturing September 1997, collateralized by substantially
all assets of the Company............................................. 1,623,500 1,462,500 726,500
Installment note payable to a bank at $16,667 monthly plus interest at
the Company's option of the LIBOR plus 200 basis points or prime rate
minus .25% maturing July 1998, collateralized by substantially all
assets of the Company................................................. -- 1,000,000 916,667
Installment note payable to a former stockholder, relative of a current
stockholder, currently at $17,988 monthly including interest at prime,
based on a 12 year amortization with a balloon payment due July 2000,
subordinated to the bank debt......................................... 1,651,723 1,537,052 1,413,613
</TABLE>
F-26
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(7) LONG-TERM DEBT -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
Installment note payable to a former stockholder, relative of a current
stockholder, currently at $7,117 monthly including interest at prime,
based on a 12 year amortization with a balloon payment due July 2000,
subordinated to the bank debt......................................... 654,135 608,303 558,965
Demand note payable to the stockholders of the Company at $5,833
monthly, plus interest at the Company's option of the LIBOR plus 200
basis points or prime rate minus .25%, subordinated to the bank
debt.................................................................. 700,000 490,000 280,000
Installment note payable to a former stockholder, relative of a current
stockholder, at $5,555 monthly, plus interest at prime, maturing April
1993, subordinated to the bank........................................ 88,888 22,222 --
Installment note, payable $466 monthly including interest at 9.9%,
maturing March 1995, collateralized by automotive equipment. The note
was paid in June 1993................................................. 15,401 11,145 --
Installment note, payable $771 monthly including interest at 9.5%,
maturing August 1994, collateralized by automotive equipment.......... 21,708 14,202 5,227
Installment note, payable $698 monthly including interest at 11.25%,
maturing June 1993, collateralized by automotive equipment............ 10,922 3,394 --
Installment note, payable $410 monthly including interest at 9.5%,
maturing January 1995, collateralized by automotive equipment......... 13,091 9,256 4,670
Installment note, payable $587 monthly including interest at 11.2%,
maturing September 1995, collateralized by automotive equipment....... 21,469 16,598 10,659
Installment note, payable $819 monthly including interest at 10%,
maturing August 1995, collateralized by automotive equipment.......... 30,083 22,929 15,035
------------ ------------ ------------
4,830,920 5,197,601 5,931,336
Less current maturities................................................. 965,771 1,120,146 1,067,189
------------ ------------ ------------
Long-term debt, net of current maturities............................... $ 3,865,149 $ 4,077,455 $ 4,864,147
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The approximate amount of long-term debt maturing in each of the next five
years ending December 31, is as follows:
<TABLE>
<S> <C>
1994........................................................ $ 1,067,000
1995........................................................ 1,198,000
1996........................................................ 911,000
1997........................................................ 906,000
1998........................................................ 754,000
Thereafter.................................................. 1,096,000
</TABLE>
(8) CAPITAL LEASE OBLIGATIONS
The Company has entered into various capital leases for certain
transportation and other equipment expiring through 1998.
F-27
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(8) CAPITAL LEASE OBLIGATIONS -- CONTINUED
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of net minimum lease payments as
of December 31, 1993:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING
DECEMBER 31,
--------------------
<S> <C>
1994................................................................... $ 308,000
1995................................................................... 92,000
1996................................................................... 73,000
1997................................................................... 54,000
1998................................................................... 54,700
-----------
Total minimum lease payments........................................... 581,700
Less interest component................................................ 77,030
-----------
Present value of net minimum lease payments............................ $ 504,670
-----------
-----------
Current maturities..................................................... $ 270,354
Long-term maturities................................................... 234,316
-----------
Total.................................................................. $ 504,670
-----------
-----------
</TABLE>
The present values of minimum future obligations shown above are calculated
on interest rates ranging from 9.18% to 13.84%.
(9) DEFERRED TELEPHONE CREDITS
During 1993 the Company received several credits as a result of signing
three and four year contracts with a telephone company. These credits are
reflected as liabilities and are being amortized ratably over the term of the
contracts.
(10) COMMON STOCK
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------------
LESS
PAR TREASURY OUT-
VALUE AUTHORIZED ISSUED STOCK STANDING AMOUNT
----------- ----------- ----------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Transcriptions, Ltd................................ 1,000 452 192 260 $ 37,040
Transcriptions, Ltd. of Louisiana.................. $ 1 1,000 100 40 60 1,000
Transcriptions, Ltd. of Northwest.................. 1,000 15 -- 15 15
Transcriptions, Ltd. of Utah....................... 1,000 100 40 60 1,000
CA EDM............................................. $ 1 1,000 60 24 36 1,000
EDM, Ltd........................................... $ 1 1,000 -- -- -- 3,000
Transcriptions, Ltd. of Texas...................... $ 1 1,000 100 40 60 1,000
----------- ----------- --- --- ---------
Balance at December 31, 1991....................... 7,000 827 336 491 44,055
Transcriptions, Ltd. of Colorado................... 1,000 15 -- 15 15
----------- ----------- --- --- ---------
Balance at December 31, 1992....................... 8,000 842 336 506 44,070
Transcriptions, Ltd. of North Carolina............. $ 1 2,500 100 -- 100 2,500
Transcriptions, Ltd. of Arizona.................... $ 1 1,000 100 -- 100 1,000
----------- ----------- --- --- ---------
Balance at December 31, 1993....................... 11,500 1,042 336 706 $ 47,570
----------- ----------- --- --- ---------
----------- ----------- --- --- ---------
</TABLE>
(11) PROFIT SHARING PLAN
Profit sharing expense was approximately $113,000, $123,000 and $133,000,
and the 401(k) matching expense was approximately $23,000, $37,000 and $38,000,
for the years ended December 31, 1991, 1992 and 1993, respectively.
F-28
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(12) RELATED PARTY TRANSACTIONS
Other receivables represent various interest-bearing loans due from
employees of the Company.
Due from stockholders represents non-interest bearing loans payable to the
stockholders of the Company of approximately $969,000, $1,084,000 and
$1,118,000, as of December 31, 1991, 1992, and 1993, respectively, with no terms
for repayment.
Due to stockholders represents non-interest bearing loans payable to the
stockholders of the Company of approximately $1,636,000, $1,432,000, and
$1,687,000 as of December 31, 1991, 1992, and 1993, respectively, which are
subordinated to the bank debt.
Interest paid to related parties other than stockholders was approximately
$21,000, $132,000, and $107,000, for the years ended December 31, 1991, 1992,
and 1993, respectively (see Notes 6 and 7).
Interest paid to stockholders for debt included in long-term debt and for
stockholder loans was approximately $131,000, $94,000, and $94,000, for the
years ended December 31, 1991, 1992 and 1993, respectively (see Note 7).
The Company leases facilities from certain stockholders of the Company.
Related rent expense was $5,280 for each of the years ended December 31, 1991,
1992 and 1993.
(13) SUPPLEMENTAL DISCLOSURES OF CASH PAID
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
1991 1992 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest................................................. $ 724,277 $ 495,970 $ 457,013
Income taxes............................................. -- 24,264 14,956
</TABLE>
(14) INCOME TAXES
The components of the deferred tax liability as of December 31, 1993 are as
follows:
<TABLE>
<CAPTION>
CURRENT NONCURRENT
----------- -----------
<S> <C> <C>
Total deferred tax asset............................................ $ 59,200 --
Total deferred tax liability........................................ (216,700) --
Valuation allowance................................................. -- --
----------- -----------
Net deferred tax liability.......................................... $ (157,500) $ --
----------- -----------
----------- -----------
</TABLE>
The (provision for) benefit from income taxes for the years ended December
31, consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1991 1992 1993
----------- --------- ---------
<S> <C> <C> <C>
Current tax expense...................................... $ (38,000) $ (15,500) $ (59,700)
Deferred tax expense..................................... (4,000) (10,700) (12,500)
Benefit of net operating loss carryforward............... -- -- 7,800
Effect of change in tax status........................... 156,796 -- --
----------- --------- ---------
$ 114,796 $ (26,200) $ (64,400)
----------- --------- ---------
----------- --------- ---------
</TABLE>
The provision for income taxes differs from the amount that would result
from applying statutory rates because of certain non-deductible expenses.
F-29
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(14) INCOME TAXES -- CONTINUED
As of December 31, 1993, the Company had available the following net
operating loss carryforwards for tax purposes:
Expiration Date:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING
DECEMBER 31, FEDERAL STATE
------------------- ---------- ----------
<S> <C> <C>
1997.................................................................. $ -- $ 43,500
1998.................................................................. -- 213,800
1999.................................................................. -- 215,500
2005.................................................................. 45,100 --
2006.................................................................. 213,800 --
2007.................................................................. 215,600 --
---------- ----------
$ 474,500 $ 472,800
---------- ----------
---------- ----------
</TABLE>
(15) COMMITMENTS AND CONTINGENCIES
Contingencies
New Jersey Department of Labor filed an action in 1985 against
Transcriptions, Ltd. seeking to declare that the Company's treatment of
independent contractors is improper. The state is seeking to treat these
individuals as employees and is charging the Company for payroll taxes,
penalties and interest.
The Company is contesting this claim and contends that the treatment of
these individuals as independent contractors is proper. If this matter results
in an unfavorable outcome the Company could be assessed taxes, penalties and
interest, up to $320,000. Management anticipates a favorable outcome.
The State of Colorado Unemployment Bureau has conducted an audit and a
hearing stating the Company's treatment of independent contractors is improper.
Management is contesting this matter and believes that any unfavorable outcome
would not have a material impact upon the Company.
A former customer has asserted a claim against the Company. Management is
contesting this claim and believes it will not have a material effect upon the
Company.
During the year ended December 31, 1992, the Company resolved a billing
dispute with a former customer and recorded a $310,000 expense in settlement of
the litigation.
Operating Leases
The Company leases various office facilities with leases expiring through
May 1998.
The following is a schedule by years of approximate future minimum rental
payments required under operating leases that have initial of remaining
noncancelable lease terms in excess of one year as of December 31, 1993:
<TABLE>
<S> <C>
1994.............................................................................. $ 428,300
1995.............................................................................. 413,500
1996.............................................................................. 216,800
1997.............................................................................. 125,800
1998.............................................................................. 70,300
Thereafter........................................................................ --
</TABLE>
Rent expense for the years ended December 31, 1991, 1992 and 1993 was
$445,522, $514,412, and $541,152, respectively.
F-30
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(16) NONCASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1993, the Company acquired new equipment
with a cost of $219,988. In conjunction with the acquisition, liabilities were
assumed for the same amount.
During the year ended December 31, 1993, common stock of the two new
companies (Transcriptions, Ltd. of North Carolina and Transcriptions, Ltd. of
Arizona) was issued for $3,500 in exchange for stock subscriptions receivable.
During the year ended December 31, 1991, capital lease obligations of
$105,343 were incurred when the Company entered into leases for new equipment.
During the year ended December 31, 1991, the Company purchased additional
automotive equipment and assumed liabilities for $90,986.
(17) SALE OF OPERATIONS
Effective April 30, 1994, the Company sold substantially all of its assets
at their fair market value which exceeded their net book value. In addition,
liabilities were also assumed. The operations of the Company have been continued
by the acquiring entity. Therefore, the financial statements have been prepared
on a going concern basis.
F-31
<PAGE>
[GRAPHIC]
The graph is a map of the United States with stars in each state where MedQuist
Inc. provides service.
<PAGE>
[MEDQUIST LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses,
all of which will be paid by the Company, in connection with the issuance and
distribution of the securities being registered:
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
----------------- ----------
<S> <C>
SEC Registration Fee........................................................................ $ 10,312
NASD Fee.................................................................................... 3,490
American Stock Exchange Listing Fee......................................................... 17,500
Printing and engraving fees................................................................. 90,000
Registrant's counsel fees and expenses...................................................... 110,000
Accounting fees and expenses................................................................ 125,000
Blue Sky expenses and counsel fees.......................................................... 20,000
Transfer agent and registrar fees........................................................... 2,000
Miscellaneous............................................................................... 21,698
----------
TOTAL................................................................................ $ 400,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 14A:3-5 of the Corporation Law of the State of New Jersey ('NJCL')
permits each New Jersey business corporation to indemnify its directors,
officers, employees and agents against expenses and liability for each such
person's acts taken in his or her capacity as a director, officer, employee or
agent of the corporation if such actions were taken in good faith and in a
manner which he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal proceeding, if he
or she had no reasonable cause to believe his or her conduct was unlawful.
Article 10 of the Company's Bylaws provides that the Company, to the full extent
permitted by Section 14A:3-5 of the NJCL, shall indemnify all past and present
directors or officers of the Company and may indemnify all past or present
employees or other agents of the Company. To the extent that a director,
officer, employee or agent of the Company has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in such
Article 10, or in defense of any claim, issue, or matter therein, he or she
shall be indemnified by the Company against expenses in connection therewith.
Such expenses shall be paid by the Company in advance of the final disposition
of the action, suit or proceeding as authorized by the Board of Directors upon
receipt of an undertaking to repay the advance if it is ultimately determined
that such person is not entitled to indemnification.
As permitted by Section 14A:3-5(8) of the NJCL, Article Ninth of the
Company's Amended and Restated Certificate of Incorporation provides that no
director of the Company shall be personally liable to the Company or its
shareholders for monetary damages for breach of any duty in his or her capacity
as a director owed to the Company or to the Shareholders of the Company, except
for liability (i) for any breach of the director's duty of loyalty to the
Company or its shareholders as defined in Section 14A:2-7(3) of the NJCL, (ii)
for acts or omissions not in good faith or which involve a knowing violation of
law, or (iii) for any act or omission which resulted in receipt by the director
of an improper personal benefit.
The Company also has a policy insuring it and its directors and officers
against certain liabilities, including liabilities under the Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the acquisition of Stanford Financial Services, Inc.
('SFS') in June 1993, the Company issued an aggregate of $641,000 in principal
amount of convertible subordinated notes to the three owners of SFS in payment
of a portion of the purchase price. These notes were convertible into Common
Stock at a conversion price of $7.50 per share. No underwriter, placement agent
or broker dealer participated in the placement of these subordinated notes.
These notes were repaid in full, without conversion, in July 1995.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. -- CONTINUED
In connection with the acquisition of Transcriptions, Ltd. in May 1994, the
Company entered into a $30,000,000 credit facility with Chemical and, as part of
that transaction, issued to Chemical warrants to purchase 75,351 shares of
Common Stock at an exercise price of $6.74 per share. No additional
consideration was paid by Chemical in connection with the issuance of these
warrants. No underwriter, placement agent or broker dealer participated in the
placement of the warrants to Chemical other than Bowles Hollowell Conner & Co.,
which was retained by the Company to arrange for the placement of the senior
debt to enable the Company to complete the acquisition.
As part of the Company's desire to assist its directors and executive
officers with their estate planning requirements, the Company amended the 1992
Nonstatutory Option Plan to permit the transfer of options to family members of
the grantees. Thereafter, on January 3, 1995, the Company issued to three of Mr.
Censits' children an aggregate of 9,000 shares of Common Stock pursuant to their
exercise of outstanding options at an exercise price of $4.69 per share. The
options were originally issued to Mr. Censits who made a gift of them to his
children in connection with his personal estate planning. No underwriter,
placement agent or broker dealer participated in the placement of the original
options awarded to Mr. Censits, the gift by Mr. Censits to his children, or the
exercise of the options by Mr. Censits' children.
In connection with the acquisition of Brawm in August 1995, the Company
issued 22,840 shares of Common Stock to the former owners of Brawm. No
underwriter, placement agent or broker-dealer participated in the placement of
such shares of Common Stock.
On March 29, 1996, prior to the filing of this Registration Statement, the
Company and Heller agreed that, on the closing date of the Offering, Heller
would exercise the Heller Warrants to purchase 962,675 shares of Class A and
Class B Preferred Stock by applying the $7 million outstanding principal amount
under the Heller Facility against the exercise price, and convert the shares of
Class A and Class B Preferred Stock received upon such exercise into 962,675
shares of Common Stock. As an inducement for Heller to exercise the Heller
Warrants and convert the Preferred Stock, the Company has agreed to issue Heller
42,500 additional shares of Common Stock on the closing date of this Offering.
No underwriter, placement agent or broker/dealer participated in the exercise of
the Heller Warrants or the conversion of the shares of Preferred Stock issued
upon such exercise into shares of Common Stock.
The Company believes that the foregoing described issuances of securities,
if they constitute sales, are exempt from registration under the Act by virtue
of the exemption provided by Section 4(2) thereof for transactions not involving
a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
------------- -----------
<S> <C>
1.1 Form of Underwriting Agreement among the Company and the Underwriters (1)
3.1 Amended and Restated Certificate of Incorporation of the Company [incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement (No. 33-95968) on Form S-1 (the 'Registration
Statement')]
3.2 By-Laws of the Company [incorporated by reference to Exhibit 3.2 of the Company's 1993 Annual Report
on Form 10-K (the '1993 10-K')]
3.3 Certificate of Designation of Terms of Preferred Stock [incorporated by reference to Exhibit 3.3 to
the Company's 1992 Annual Report on Form 10-K (the '1992 10-K')]
4.1 Specimen Stock Certificate (1)
5.1 Opinion of Pepper, Hamilton & Scheetz(1)
10.1 Agreement between the Company and Richard J. Censits, dated January 29, 1996 (1)
10.2 Incentive Stock Option Plan of the Company, dated January 1988 [incorporated by reference to Exhibit
10.2 of the Registration Statement]
</TABLE>
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. -- CONTINUED
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
------------- -----------
<S> <C>
10.3 Stock Option Plan of the Company, dated January 1992, as amended (1)
10.4 Nonstatutory Stock Option Plan for Non-Employee Directors of the Company dated, January 1992
[incorporated by reference to Exhibit 10.4 of the Registration Statement]
10.5 Agreement between the Company and Paul E. Weitzel, Jr., dated April 27, 1995 (1)
10.6 Employment Agreement between the Company and David A. Cohen, dated May 1, 1994 (the 'Cohen Employment
Agreement') [incorporated by reference to Exhibit 10.33 of the Company's Form 10-Q for the
three-month period ended June 30, 1994 (the '6/30/94 10-Q')]
10.7 Amendment to the Cohen Employment Agreement, dated March 1, 1996 (1)
10.8 Employment Agreement between the Company and John A. Donohoe, dated May 27, 1994 (the 'Donohoe
Employment Agreement') (1)
10.9 Amendment to the Donohoe Employment Agreement, dated March 1, 1996 (1)
10.10 Employment Agreement between the Company and Ronald F. Scarpone, dated May 27, 1994, as amended March
1, 1996 (1)
10.11 Employment Agreement between the Company and James R. Emshoff, dated August 25, 1995 [incorporated by
reference to Exhibit 10.37 of the Company's Form 10-Q for the three-month period ended September 30,
1995 (the '9/30/95 10-Q')]
10.12 Stock Option Agreement between the Company and James R. Emshoff, dated August 25, 1995 [incorporated
by reference to Exhibit 10.38 of the 9/30/95 10-Q]
10.13 Amended and Restated Senior Subordinated Loan Agreement, between the Company and Heller, dated as of
December 29, 1995 (1)
10.14 Warrant Purchase Agreement between the Company and Heller, dated as of December 14, 1992
[incorporated by reference to Exhibit 3 of the Company's Current Report on Form 8-K filed December
24, 1992 (the '12/24/92 8-K')]
10.15 Registration Rights Agreement between the Company and Heller, dated as of December 14, 1992
[incorporated by reference to Exhibit 6 of the 12/24/92 8-K]
10.16 Warrant to Purchase Class A Convertible Preferred Stock issued to Heller, dated as of May 27, 1994
(the 'Class A Warrant') [incorporated by reference to Exhibit 10.27.7 of the 6/30/94 10-Q]
</TABLE>
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. -- CONTINUED
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
------------- -----------
<S> <C>
10.17 Warrant to Purchase Class B Convertible Preferred Stock issued to Heller, dated as of May 27, 1994
(the 'Class B Warrant') [incorporated by reference to Exhibit 10.27.8 of the 6/30/94 10-Q]
10.18 Amendment to Class A Warrant, dated as of December 29, 1995 (1)
10.19 Amendment to Class B Warrant, dated as of December 29, 1995 (1)
10.20 Asset Purchase Agreement among the Company, Transcriptions, Ltd. and its affiliates and subsidiaries,
dated January 26, 1994 (the 'Transcriptions Agreement') [incorporated by reference to Exhibit 10.30
of the 1993 10-K]
10.21 Amendment to the Transcriptions Agreement, dated September 30, 1995 [incorporated by reference to
Exhibit 10.30.1 of the 9/30/95 10-Q]
10.22 Amendment to the Transcriptions Agreement, dated November 1, 1995 [incorporated by reference to
Exhibit 10.30.2 of the 9/30/95 10-Q]
10.23 Registration Rights Agreement among the Company, David A. Cohen and Edward Forstein [incorporated by
reference to Exhibit 10.30.4 of the 9/30.95 10-Q]
10.24 Amended and Restated Credit Agreement among the Company, Transcriptions, Ltd., the Guarantors named
therein, the Lenders named therein and Chemical Bank, as agent, dated December 29, 1995 (1)
10.25 Letter Agreement between the Company and Heller, dated May 27, 1994, regarding representation on the
Company's Board of Directors [incorporated by reference to Exhibit 10.35 of the 6/30/94 Form 10-Q]
10.26 Asset Purchase Agreement among the Company, MedQuist CCI, L.P., and Medaphis Hospital Services
Corporation, dated December 31, 1995 [incorporated by reference to Exhibit 2 of the Company's Current
Report on Form 8-K filed on January 12, 1996 (the '1/12/96 8-K')]
10.27 Stock Purchase Agreement among the Company, MedQuist Receivables Management Company and Medaphis
Hospital Services Corporation [incorporated by reference to Exhibit 3 of the 1/12/96 8-K]
10.28 Form of Employee Stock Purchase Plan (1)
10.29 Agreement among the Company, Heller and Heller Financial, Inc. dated March 29, 1996 (1)
10.30 Amendment and Assignment of Registration Rights Agreement among Heller Financial, Inc., Heller and
the Company, dated May 27, 1994 (1)
10.31 Second Amendment to Registration Rights Agreement between Heller and the Company, dated December 29,
1995 (1)
10.32 Registration Agreement between the Company and Chemical Bank, dated May 27, 1994
10.33 Form of Revised Employee Stock Purchase Plan (1)
11.0 Statement re: Computation of Per Share Earnings (2)
22.1 Subsidiaries (1)
23.1 Consent of Arthur Andersen LLP (included on page II-6 of this Registration Statement)
23.2 Consent of Amper Politziner & Mattia (included on page II-7 of this Registration Statement)
23.3 Consent of Pepper, Hamilton & Scheetz (included in Exhibit 5.1)
24 Powers of Attorney (included on page II-8 of this Registration Statement)
99.1 Consent of Director Nominee (1)
</TABLE>
------------------
(1) Previously filed.
(2) Filed herewith.
(b) Consolidated Financial Statement Schedules
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
--------------- -----------
<S> <C>
II Valuation and Qualifying Accounts
</TABLE>
All other schedules have been omitted because they are not applicable, not
required, or the required information is included in the Financial Statements or
the notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling
II-4
<PAGE>
ITEM 17. UNDERTAKINGS. -- CONTINUED
person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-5
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
Registration Statement.
Philadelphia, Pa.,
May 20, 1996
ARTHUR ANDERSEN LLP
II-6
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation of our report dated July 15, 1994, except
Note 9 which is dated March 31, 1995, on the combined financial statements of
Transcriptions, Ltd. and Affiliates as of December 31, 1993, 1992 and 1991 and
for the years then ended, which is included in this registration statement on
Form S-1 of MedQuist Inc. and to the reference to our firm under the caption
'experts' in the prospectus.
/s/ Amper, Politziner & Mattia
--------------------------------
AMPER, POLITZINER & MATTIA
May 20, 1996
Edison, New Jersey
II-7
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania, on the 20th day of May, 1996.
MEDQUIST INC.
By: /S/_______________________________
Robert F. Graham
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on May 20th,
1996 in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<S> <C>
/S/ Vice President, Treasurer and Chief Financial Officer
-------------------------------------- (principal financial officer and principal accounting
ROBERT F. GRAHAM officer)
* Chairman of the Board of Directors
--------------------------------------
James R. Emshoff
* Director, President and Chief Executive Officer
-------------------------------------- (principal executive office)
David A. Cohen
* Director
--------------------------------------
William T. Carson
* Director
--------------------------------------
Richard J. Censits
* Director
--------------------------------------
James F. Conway
* Director
--------------------------------------
Frederick S. Fox, III
* Director
--------------------------------------
A. Fred Ruttenberg
* Director
--------------------------------------
John H. Underwood
By: /S/
----------------------------------
ROBERT F. GRAHAM,
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MedQuist Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of MedQuist Inc. and subsidiaries included
in this Registration Statement and have issued our report thereon dated February
23, 1996. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 15(b) of the
Registration Statement is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 23, 1996
S-1
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
BALANCE, CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE,
DESCRIPTION YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
--------------------------------------------- ------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Allowances for doubtful accounts:
1995.................................... $ 316 $ 243 $ 487 $ (496) $ 550
1994.................................... 882 18 145 (729) 316
1993.................................... 1,486 448 -- (1,052) 882
</TABLE>
------------------
* Includes amounts related to discontinued operations.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER NAME OF EXHIBIT
--------------- ---------------
<S> <C>
11.0 Statement re: Computation of Per Share Earnings.
23.1 Consent of Arthur Andersen LLP (included on page II-6 of this Registration Statement)
23.2 Consent of Amper Politziner & Mattia (included on page II-7 of this Registration
Statement)
24.1 Powers of Attorney (included on page II-8 of this Registration Statement)
</TABLE>
<PAGE>
EXHIBIT 11.0
MEDQUIST INC.
EARNINGS PER SHARE CALCULATION
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C> <C>
Net income from continuing operations as reported................................. $607,000
Interest effect:
Excess proceeds applied to reduce debt.......................................... 6,751,000(A)
Effective annual interest rate.................................................. 10.00 (1)
-----------
Annual interst savings.......................................................... 675,100
Tax rate........................................................................ 40.00%
-----------
Adjustment to net income for interest savings, net of tax effect.................. 405,000
-------------
ADJUSTED NET INCOME USED IN EARNINGS PER SHARE.................................... $1,012,000
-------------
Weighted average shares outstanding............................................... 2,362,000
-------------
Total options and warrants outstanding.......................................... 1,624,000
Less: 20% share repurchase limit................................................ 652,000(2)
-----------
Dilutive options and warrants..................................................... 973,000
SHARES USED IN COMPUTING EARNINGS PER SHARE....................................... 3,335,000
-------------
EARNINGS PER SHARE................................................................ $0.30
-------------
Total proceeds from exercise of warrants and options, net of tax benefit.......... 11,841,000
-------------
20% share of repurchase limit................................................... 652,000(2)
Average fair market value per share............................................. $7.81(3)
-----------
Less: proceeds used to repurchase shares.......................................... (5,090,000)
Excess proceeds applied to reduce debt............................................ 6,751,000(A)
-------------
</TABLE>
------------------
(1) Effective interest rate of senior subordinated debt.
(2) APB No. 15 limits share repurchase to 20% of common stock outstanding at the
end of the period. See footnote 1 of notes to the consolidated financial
statements.
(3) Average closing market price of stock during the year ended December 31,
1995.
Exhibit 11.0
<PAGE>
EXHIBIT 11.0
(CONTINUED)
MEDQUIST INC.
EARNINGS PER SHARE CALCULATION
UNAUDITED SUPPLEMENTAL PRO FORMA DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED --------------------
DECEMBER 31, 1995 1995 1996
--------------------- --------- ---------
<S> <C> <C> <C>
Weighted average shares outstanding..................................... 3,223 3,128 3,316
Converted warrants...................................................... 1,005 1,005 1,005
Equity offering......................................................... 2,200 2,200 2,200
Common stock equivalents................................................ 512 553 747
Shares repurchased...................................................... (398) (424) (458)
------- --------- ---------
Weighted average shares adjusted........................................ 6,542 6,462 6,810
------- --------- ---------
------- --------- ---------
</TABLE>
Exhibit 11.0
