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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (THE 'ACT')
MEDQUIST INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NO. 0-19941
NEW JERSEY 22-2531298
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
FIVE GREENTREE CENTRE, SUITE 311, MARLTON, NJ 08053
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (609) 596-8877
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock (No Par Value) AMEX
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES /x/ NO _.
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates was approximately $19,858,967 on March 28, 1996, based on the
closing sales price of registrant's Common Stock as reported on the AMEX as of
such date.
The number of shares of the registrant's Common Stock, no par value,
outstanding as of March 28, 1996 was 2,455,700 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated herein by reference.
Part III -- Proxy Statement to be filed with the Commission in connection
with the 1996 Annual Meeting.
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ITEM 1. 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 Report.
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 continues to implement advances in technology to improve the
delivery of its services. The Company provides clients with its Medical
Transcription System ('MTS'), an integrated transcription and document
management system based upon proprietary software. 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. Clients also use DTS as an integral management tool to monitor physician
timeliness in the dictation, review and sign-off process and to evaluate the
Company's on-time performance.
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. As used
herein, the term the 'Company' includes all of its subsidiaries, including its
subsidiary Transcriptions, Ltd., as well as its predecessors.
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 year ended September 30, 1995,
the American Hospital Association estimated the number of hospital admissions
and outpatient visits in the United States to be 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 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 are
also expanding their use of transcribed medical reports. Accordingly,
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ITEM 1. BUSINESS -- CONTINUED
the Company believes the market for outsourced transcription services will
expand due in part to the following emerging trends.
Outsourcing. In the 1990's outsourcing of services in the healthcare
industry is increasing as a means to reduce administrative burdens and fixed
costs. Hospitals and other healthcare organizations are increasingly outsourcing
their electronic transcription of dictated patient records as their information
needs and volume of dictated reports expand. Particularly as healthcare
providers grow in size and the delivery of medical care becomes decentralized,
outsourcing of transcription services permits providers to reduce fixed overhead
and employee costs, 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 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.
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 volumes of patient records grow with the consolidation
of healthcare organizations. In addition, the Company is seeking to penetrate
the direct care departments such as radiology, emergency, oncology, 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 and to pursue new clients, such as health
maintenance organizations, outpatient clinics and physician practice
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ITEM 1. BUSINESS -- CONTINUED
groups which the Company believes will represent a growing percentage of the
available market. Based on input from new clients, the Company believes that
references from its existing client base represent a key component of its sales
and marketing efforts.
Leverage Technology Leadership. The Company's proprietary software,
operating 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. The Company
intends to continue to incorporate advances in technology to improve the
efficiency of its operations, reduce costs, 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 value added services for its clients and to
participate in the development of the fully 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.
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 transcription and management of
free-form dictation are key components in the increasing implementation of
electronic medical record systems.
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.
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ITEM 1. BUSINESS -- CONTINUED
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 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.
RISK FACTORS
In addition to the other information contained in this Report, the
following risk factors should be considered carefully in evaluating the Company
and its business. This Report 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 Report.
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. Although the Company intends to increase its presence
in these new markets and to expand its services to direct patient care
departments within hospitals, 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.'
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ITEM 1. BUSINESS -- CONTINUED
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 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 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 '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 and 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
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ITEM 1. BUSINESS -- CONTINUED
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 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 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 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
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ITEM 1. BUSINESS -- CONTINUED
or patent applications pending, and existing trade secrets and copyright laws
afford 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. The Company requires its personnel to agree to keep all
medical information confidential and monitors compliance with applicable
confidentiality requirements. Failure to comply with such confidentiality
requirements could result in material liability to the Company. See 'Business --
Government Regulation.'
RISKS ASSOCIATED WITH THE 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 announcements with respect to healthcare reform
measures, acquisitions and results of operations, announcements of technological
innovations or new products or services by the Company or its competitors,
government regulation, 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.'
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
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ITEM 1. BUSINESS -- CONTINUED
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 effect the market price of the Common Stock.
TECHNOLOGY DEVELOPMENT
The Company continually evaluates emerging technologies and applies them as
appropriate to make its services more reliable, efficient and cost-effective,
and to assist its clients in meeting their transcription and document management
needs. The Company is capable of modifying 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 to
particular client needs by modifying its existing proprietary technology. 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, thereby linking 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, 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.
CLIENTS
A majority of the Company's largest clients are 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
Company's largest client accounted for less than 5% of the Company's revenue
during 1995. The following table sets forth certain information relating to the
Company's client profile and their contribution to the Company's revenue in
1995:
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PERCENTAGE
TYPE OF CLIENT OF REVENUES
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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
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100.0%
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ITEM 1. BUSINESS -- CONTINUED
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 intends to develop and implement a formal marketing plan.
Historically, the Company has obtained new clients in large part from
recommendations and references by its existing national client base, and that
references from its existing client base will continue to be a key component of
its 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,
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 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 and
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 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
9
<PAGE>
ITEM 1. BUSINESS -- CONTINUED
applicable law could result in the incurrence of liability for withholding
taxes, disability payments, unemployment payments and interest and penalties by
the Company.
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. 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.
ITEM 2. PROPERTIES
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
10
<PAGE>
ITEM 2. PROPERTIES -- CONTINUED
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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters during the fourth quarter of the
year covered by this report to a vote of the security holders through the
solicitation of proxies or otherwise.
11
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
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 (through March 28).................................................... 13 3/8 8 1/8
</TABLE>
On March 28, 1996, the closing sale price for the Common Stock, as reported
on the American Stock Exchange Composite Tape, was $12.125 per share, and there
were 88 record holders of the Common Stock.
DIVIDEND POLICY
To date, the Company has not paid any dividends on its capital stock. The
Company currently intends to retain any future earnings to fund operations and
the continued development of its business and, therefore, does not anticipate
paying 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, captial requirements, financial condition
and other factors deemed relevant by the Board of Directors. The Company's
senior lender does not permit the payment of any dividends without the consent
of the lenders.
12
<PAGE>
ITEM 6. 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
Report. 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 Report. 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 Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues (1).......................................... $ -- $ -- $ -- $ 24,841 $ 45,127
Costs and expenses:
Cost of revenues................................... -- -- -- 18,677 33,711
Selling, general and administrative................ 1,564 1,533 1,688 2,798 4,325
Depreciation....................................... 66 53 60 639 1,862
Amortization of intangible assets.................. 19 10 12 264 496
-------- -------- -------- -------- --------
Total operating expenses......................... 1,649 1,596 1,760 22,378 40,394
-------- -------- -------- -------- --------
Operating income (loss)............................... (1,649) (1,596) (1,760) 2,463 4,733
Interest expense...................................... 296 393 1,426 2,738 3,695
-------- -------- -------- -------- --------
Income (loss) from continuing operations before income
taxes.............................................. (1,945) (1,989) (3,186) (275) 1,038
Income tax provision (benefit)........................ (804) (867) (1,290) (109) 431
-------- -------- -------- -------- --------
Income (loss) from continuing operations.............. (1,141) (1,122) (1,896) (166) 607
Discontinued operations (2)........................... 2,293 2,629 3,746 1,612 (1,729)
Extraordinary item (3)................................ -- -- -- -- (545)
-------- -------- -------- -------- --------
Net income (loss)..................................... $ 1,152 $ 1,507 $ 1,850 $ 1,446 $ (1,667)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Income (loss) per share (4):
Continuing operations.............................. $ (0.50) $ (0.41) $ (0.40) $ 0.09 $ 0.30
Discontinued operations (2)........................ 1.00 0.97 1.02 0.49 (0.52)
Extraordinary item (3)............................. -- -- -- -- (0.16)
-------- -------- -------- -------- --------
Net income (loss) per share...................... $ 0.50 $ 0.56 $ 0.62 $ 0.58 $ (0.38)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Shares used in computing income (loss)
per share (4)...................................... 2,290 2,697 3,656 3,316 3,335
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................................... $ (244) $ (373) $ 1,108 $ 776 $ 4,926
Total assets......................................... 8,598 27,556 23,339 51,403 58,095
Long-term debt, net of current portion............... 2,849 13,663 12,395 30,415 15,956
Subordinated payable to related parties.............. -- -- -- -- 17,337
Shareholders' equity................................. 4,517 11,937 9,071 10,692 14,970
</TABLE>
- - ------------------
(1) Transcriptions, Ltd. was acquired by the Company effective May 1, 1994. All
prior businesses have been treated as discontinued operations. See (2)
below.
13
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA -- CONTINUED
(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. See Note 1 of Notes to
Consolidated Financial Statements of the Company.
14
<PAGE>
ITEM 7. 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 Report.
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 Report relate to its continuing transcription business. 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. 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. Fees for 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 1994 and 1995. 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 31,
--------------
1994 1995
---- ----
<S> <C> <C>
Continuing Operations:
Revenues............................................................................ 100 % 100 %
Costs and expenses:
Cost of revenues.................................................................. 75.2 74.7
Selling, general and administrative............................................... 11.3 9.6
Depreciation...................................................................... 2.6 4.1
Amortization of intangibles assets................................................ 1.0 1.1
Operating income.................................................................... 9.9 10.5
Interest expense.................................................................... 11.0 8.2
Income (loss) from continuing operations before income taxes........................ (1.1) 2.3
Income tax provision (benefit)...................................................... (0.4) 1.0
Income (loss) from continuing operations............................................ (0.7) 1.3
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- CONTINUED
CONTINUING OPERATIONS
Revenues. Revenues increased 82.0% 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 (23.0%) increase in 1995 revenues over 1994
pro forma revenues reflected $3.4 million of revenues generated from new
clients, $4.3 million of net additional revenues from existing clients and
$804,000 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.
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 receivables management division 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.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- CONTINUED
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.
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, and its credit facility with certain lenders, including Chemical Bank
(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 from $275,000
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) the greater of 0.5% to 1.5% in excess of either (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 December 31, 1995, the weighted average
interest rate on all loans outstanding under the Chemical Facility was 10% per
annum. As of December 31, 1995, the full amount of the Term Loans were
outstanding and no 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. 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 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.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- CONTINUED
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.
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. The Company is obligated to use
commercially reasonable efforts to pay the $18,375,000 on August 31, 1996 by
means of a public offering or through borrowings from its senior lenders. If the
Company is unsuccessful in raising the entire $18,375,000, the unpaid portion
will begin to bear interest under a subordinated note at the alternate base rate
of the Chemical Facility, plus 2.5%. See Notes 2 and 7 of Notes to Consolidated
Financial Statements of the Company.
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, and will be required to fund the payment of the debt portion of the
deferred exchange price for Transcription, Ltd.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statement Schedule The information called
for by this Item is set forth on Pages F-1 through F-16.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission in connection with the
1996 Annual Meeting.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission in connection with the
1996 Annual Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission in connection with the
1996 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission in connection with the
1996 Annual Meeting.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ----------- -----------------------------------------------------------------------------------------------------
<S> <C>
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 [incorporated by reference to Exhibit 4.1 to the Registration Statement]
10.1 Agreement between the Company and Richard J. Censits, dated January 29, 1996.
10.2 Incentive Stock Option Plan of the Company, dated January 1988 [incorporated by reference to Exhibit
10.2 of the Registration Statement]
10.3 Stock Option Plan of the Company, dated January 1992, as amended.
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
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.
10.8 Employment Agreement between the Company and John A. Donohoe, dated May 27, 1994 (the 'Donohoe
Employment Agreement')
10.9 Amendment to the Donohoe Employment Agreement, dated March 1, 1996.
10.10 Employment Agreement between the Company and Ronald F. Scarpone, dated May 27, 1994, as amended March
1, 1996.
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.
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].
</TABLE>
19
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K -- CONTINUED
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ----------- -----------------------------------------------------------------------------------------------------
<S> <C>
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].
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.
10.19 Amendment to Class B Warrant, dated as of December 29, 1995.
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.
10.30 Amendment and Assignment of Registration Agreement among Heller Financial, Inc., Heller and the
Company, dated May 27, 1994 [incorporated by reference to Exhibit 10.30 of the Registration
Statement].
10.31 Second Amendment to Registration Agreement between Heller and the Company, dated December 29, 1995
[incorporated by reference to Exhibit 10.31 of the Registration Statement].
10.32 Registration Agreement between the Company and Chemical Bank, dated May 27, 1994 [incorporated by
reference to Exhibit 10.32 of the Registration Statement].
10.33 The Company's Employee Stock Purchase Plan [incorporated by reference to Exhibit 10.33 of the
Registration Agreement].
11.0 Statement re: Computation of Per Share Earnings.
22.1 Subsidiaries
23.1 Consent of Arthur Andersen LLP
24.1 Powers of Attorney (included on signature page)
</TABLE>
(B) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C> <C>
1. The consolidated financial statements of the Company and its subsidiaries filed as part of this Report
are listed on the attached Index to Financial Statements and Financial Statement Schedules. See page
F-1.
2. The schedule to the consolidated statements of the Company and its subsidiaries filed as part of this
Report is listed in the attached Index to Financial Statements and Financial Statement Schedules. See
page F-1.
</TABLE>
(C) REPORTS ON FORM 8-K
During the fourth quarter of 1995, the Company filed no Reports on Form
8-K.
20
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Marlton, State of New Jersey, on March 10, 1996.
MEDQUIST INC.
By: ____/s/__DAVID A. COHEN_________
David A. Cohen
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Report has been signed below by the following persons in the capacities
indicated on March 10, 1996.
Each person below, in so signing, also makes, constitutes and appoints
David A. Cohen, his true and lawful attorney-in-fact, with full power of
substitution and resubstitution, in his name, place and stead to execute and
cause to be filed with the Securities and Exchange Commission any or all
amendments to this Report.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- - ------------------------------------------ ------------------------------------------------------------
<C> <S>
/s/ DAVID A. COHEN
--------------------- Director, President and Chief Executive Officer (principal
David A. Cohen executive officer)
/s/ ROBERT F. GRAHAM
--------------------- Vice President, Treasurer and Chief Financial Officer
Robert F. Graham (principal financial officer and principal accounting
officer)
* Chairman of the Board and Director
---------------------
James R. Emshoff
* 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/ DAVID A. COHEN
----------------------------
David A. Cohen
Attorney-in-Fact
</TABLE>
21
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
FINANCIAL STATEMENT SCHEDULE II--
Valuation and Qualifying Accounts..................................................................... F-17
</TABLE>
F-1
<PAGE>
ARTHUR ANDERSEN LLP
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 and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 net 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.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements and Financial Statement Schedule 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 audits 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
F-2
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1994 1995
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 807 $ 1,812
Accounts receivable, net of allowance of $145 and $257.................................... 6,956 9,769
Deferred income taxes..................................................................... 645 966
Prepaid expenses and other................................................................ 1,301 754
------- -------
Total current assets................................................................. 9,709 13,301
Property and equipment, net................................................................. 4,752 6,725
Intangible assets, net...................................................................... 15,887 37,426
Net assets of discontinued operations....................................................... 20,743 180
Other....................................................................................... 312 463
------- -------
$51,403 $58,095
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................................................... $ 4,889 $ 2,246
Accounts payable.......................................................................... 624 2,164
Accrued payroll........................................................................... 1,320 1,092
Accrued expenses.......................................................................... 2,100 2,873
------- -------
Total current liabilities............................................................ 8,933 8,375
------- -------
Long-term debt.............................................................................. 30,415 15,956
------- -------
Subordinated payable to related parties..................................................... -- 17,337
------- -------
Other long-term liabilities................................................................. 866 848
------- -------
Deferred income taxes....................................................................... 497 609
------- -------
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 and 2,446 shares issued and
outstanding............................................................................ 3,244 4,639
Common stock to be issued to related parties, 861 shares.................................. -- 4,550
Retained earnings......................................................................... 7,448 5,781
------- -------
Total shareholders' equity........................................................... 10,692 14,970
------- -------
$51,403 $58,095
------- -------
------- -------
</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>
YEAR ENDED DECEMBER 31
----------------------------
1993 1994 1995
------ ------- -------
<S> <C> <C> <C>
Revenues.......................................................................... $ -- $24,841 $45,127
------ ------- -------
Costs and expenses:
Cost of revenues................................................................ -- 18,677 33,711
Selling, general and administrative............................................. 1,688 2,798 4,325
Depreciation.................................................................... 60 639 1,862
Amortization of intangible assets............................................... 12 264 496
------ ------- -------
Total operating expenses..................................................... 1,760 22,378 40,394
------ ------- -------
Operating income (loss)........................................................... (1,760) 2,463 4,733
Interest expense.................................................................. 1,426 2,738 3,695
------ ------- -------
Income (loss) from continuing operations before income taxes...................... (3,186) (275) 1,038
Income tax provision (benefit).................................................... (1,290) (109) 431
------ ------- -------
Income (loss) from continuing operations.......................................... (1,896) (166) 607
Discontinued operations, net of income taxes:
Income from operations.......................................................... 1,997 1,612 1,451
Estimated gain (loss) on disposal............................................... 1,749 -- (3,180)
------ ------- -------
Income (loss) before extraordinary item........................................... 1,850 1,446 (1,122)
Loss on early extinguishment of debt, net of income tax benefit................... -- -- 545
------ ------- -------
Net income (loss)................................................................. $1,850 $ 1,446 $(1,667)
------ ------- -------
------ ------- -------
Income (loss) per share:
Income (loss) from continuing operations........................................ $(0.40) $ 0.09 $ 0.30
Discontinued operations......................................................... 1.02 0.49 (0.52)
Extraordinary item.............................................................. -- -- (0.16)
------ ------- -------
Net income (loss) per share.................................................. $ 0.62 $ 0.58 $ (0.38)
------ ------- -------
------ ------- -------
Shares used in computing income (loss) per share (Note 1)......................... 3,656 3,316 3,335
------ ------- -------
------ ------- -------
</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 SHARES TO BE
OUTSTANDING ISSUED RECEIVABLE
---------------- ---------------- RETAINED FROM
NUMBER AMOUNT NUMBER AMOUNT EARNINGS SHAREHOLDER TOTAL
------ ------ ------ ------ -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992........................... 2,896 $8,222 -- $ -- $4,152 $(437) $11,937
Net income......................................... -- -- -- -- 1,850 -- 1,850
Exercise of common stock options, including tax
benefit......................................... 326 1,080 -- -- -- -- 1,080
Redemption of common stock in connection with sale
of business..................................... (999) (6,233) -- -- -- -- (6,233)
Repayment of receivable............................ -- -- -- -- -- 437 437
------ ------ ------ ------ -------- ----------- -------
Balance, December 31, 1993........................... 2,223 3,069 -- -- 6,002 -- 9,071
Net income......................................... -- -- -- -- 1,446 -- 1,446
Exercise of common stock options, including tax
benefit......................................... 27 175 -- -- -- -- 175
------ ------ ------ ------ -------- ----------- -------
Balance, December 31, 1994........................... 2,250 3,244 -- -- 7,448 -- 10,692
Net loss........................................... -- -- -- -- (1,667) -- (1,667)
Exercise of common stock options, including tax
benefit......................................... 173 1,210 -- -- -- -- 1,210
Issuance of common stock in connection with
business acquisition............................ 23 185 -- -- -- -- 185
Common stock to be issued in connection with
Transcriptions Ltd. acquisition................. -- -- 861 4,550 -- -- 4,550
------ ------ ------ ------ -------- ----------- -------
Balance, December 31, 1995........................... 2,446 $4,639 861 $4,550 $5,781 $-- $14,970
------ ------ ------ ------ -------- ----------- -------
------ ------ ------ ------ -------- ----------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1993 1994 1995
------ ------- -------
<S> <C> <C> <C>
Operating activities:
Net income (loss)................................................................. $1,850 $ 1,446 $(1,667)
Adjustments to reconcile net income loss to net cash provided by operating
activities-
Depreciation and amortization................................................ 1,641 2,115 4,005
Amortization of debt discount................................................ 220 161 131
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)
Changes in assets and liabilities, excluding effects of acquisitions and
divestitures --
Accounts receivable..................................................... 2,137 561 (2,377)
Prepaid expenses and other.............................................. (220) (508) 706
Other assets............................................................ (93) (81) (128)
Accounts payable........................................................ (639) 805 1,127
Accrued payroll......................................................... 186 (587) (326)
Accrued expenses........................................................ (2,511) (989) 282
Other long-term liabilities............................................. (132) 143 (91)
------ ------- -------
Net cash provided by operating activities............................ 144 3,931 6,138
------ ------- -------
Investing activities:
Purchases of property and equipment, net.......................................... (704) (982) (3,448)
Acquisitions, net of cash acquired................................................ (3,514) (21,738) (7)
Net cash proceeds from divestitures............................................... 5,291 -- 16,723
Other............................................................................. (120) 692 --
------ ------- -------
Net cash provided by (used in) investing activities.................. 953 (22,028) 13,268
------ ------- -------
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 --
Repayments of long-term debt...................................................... (2,056) (3,555) (18,806)
Repayments of obligations under capital leases.................................... (737) (241) (213)
Net proceeds from issuance of common stock........................................ 672 154 796
Repayment of shareholder receivable............................................... 437 -- --
------ ------- -------
Net cash provided by (used in) financing activities..................... (1,234) 17,603 (18,401)
------ ------- -------
Net increase (decrease) in cash and cash equivalents................................ (137) (494) 1,005
Cash and cash equivalents, beginning of year........................................ 1,438 1,301 807
------ ------- -------
Cash and cash equivalents, end of year.............................................. $1,301 $ 807 $ 1,812
------ ------- -------
------ ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(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.
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.
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.
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
F-7
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(in thousands, except per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- CONTINUED
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, the Company paid
interest of $1,145, $2,108 and $3,155 respectively, and income taxes of $2,492,
$257 and $478, respectively. Capital lease obligations of $593 and $531 were
incurred on equipment leases entered into in 1994 and 1995, 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.
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>
F-8
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(in thousands, except per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- CONTINUED
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 is
not expected to have a material effect on the Company's financial condition or
results of operations.
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 adoption of SFAS No. 123 is not
expected to have a material effect on the Company's financial condition or
results of operations.
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
F-9
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(in thousands, except per share amounts)
(2) ACQUISITIONS: -- CONTINUED
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
------- -------
(UNAUDITED)
<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.
(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>
F-10
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(in thousands, except per share amounts)
(3) DISCONTINUED OPERATIONS: -- CONTINUED
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
-----------------
1994 1995
------- ------
<S> <C> <C>
Furniture, equipment and software.................................................. $ 5,626 $9,509
Leasehold improvements............................................................. 126 78
------- ------
5,752 9,587
Less -- Accumulated depreciation and amortization.................................. (1,000) (2,862)
------- ------
$ 4,752 $6,725
------- ------
------- ------
</TABLE>
(5) INTANGIBLE ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1994 1995
------- -------
<S> <C> <C>
Excess of cost over net asset value of acquired businesses........................ $14,553 $33,899
Customer lists.................................................................... -- 3,800
Deferred financing costs.......................................................... 1,935 608
Other............................................................................. 15 --
------- -------
16,503 38,307
Less -- Accumulated amortization.................................................. (616) (881)
------- -------
$15,887 $37,426
------- -------
------- -------
</TABLE>
F-11
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(in thousands, except per share amounts)
(6) LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1994 1995
------- -------
<S> <C> <C>
Senior term loans payable to banks, escalating quarterly principal installments
(see below)..................................................................... $21,000 $ 9,500
Revolving credit facility (see below)............................................. 5,809 --
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 and $578, respectively (see Note 8)............................ 6,291 6,422
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
Convertible subordinated notes, due in January 1996............................... 641 175
Subordinated promissory notes repaid in 1995...................................... 561 --
Capital lease obligations......................................................... 459 826
Other notes payable............................................................... 76 13
------- -------
35,304 18,202
Less -- Current portion........................................................... (4,889) (2,246)
------- -------
$30,415 $15,956
------- -------
------- -------
</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 either (i) LIBOR plus 2% to 3% or
(ii) 0.5% to 1.5% in excess of the greater of either (x) the bank's prime rate,
(y) federal funds plus 1.0% or (z) the bank's certificate of deposit rate,
subject to certain restrictions, as defined. The weighted average interest rate
at December 31, 1995, was 10%.
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.
The convertible subordinated notes were repaid in January 1996.
F-12
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(in thousands, except per share amounts)
(6) LONG-TERM DEBT: -- CONTINUED
Long-term debt maturities as of December 31, 1995, are as follows:
<TABLE>
<CAPTION>
<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.
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.
F-13
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(in thousands, except per share amounts)
(8) SHAREHOLDERS' EQUITY: -- CONTINUED
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.
(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
------ ---------
------ ---------
</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>
F-14
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(in thousands, except per share amounts)
(10) INCOME TAXES: -- CONTINUED
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>
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>
<CAPTION>
<S> <C>
1996................................................................................. $3,373
1997................................................................................. 1,080
1998................................................................................. 891
1999................................................................................. 485
2000................................................................................. 158
------
$5,987
------
------
</TABLE>
F-15
<PAGE>
(11) COMMITMENTS AND CONTINGENCIES: -- CONTINUED
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.
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 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) QUARTERLY FINANCIAL DATA (UNAUDITED):
Quarterly financial data for the years ended December 31, 1994 and 1995,
are summarized below:
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues.................................................... $ -- $ 6,111 $ 9,126 $ 9,604
Pretax income (loss) from continuing operations............. (506) (618) 492 357
Net income (loss) from continuing operations................ (483) (196) 297 216
Net income (loss) per share (from continuing operations).... (0.11) (0.02) 0.12 0.10
</TABLE>
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues................................................... $ 10,426 $ 10,806 $ 11,538 $12,357
Pretax income (loss) from continuing operations............ (197) 212 667 356
Net income (loss) from continuing operations............... (115) 124 390 208
Net income (loss) per share (from continuing operations)... -- 0.07 0.13 0.10
</TABLE>
F-16
<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.
F-17
