<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 10, 1996
REGISTRATION NO. 333-3050
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MEDQUIST INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
New Jersey 8741
(State or other jurisdiction (Primary Standard Industrial
of incorporation or organization) Classification Code Number)
22-2531298
(I.R.S. Employer
Identification No.)
Five Greentree Centre
Suite 311
Marlton, New Jersey 08053
(609) 596-8877
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
------------------------
John M. Suender
Vice President & General Counsel
MedQuist Inc.
Five Greentree Centre
Suite 311
Marlton, New Jersey 08053
(609) 596-8877
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
------------------------
COPIES TO:
James D. Epstein, Esq. Alexander D. Lynch, Esq.
Pepper, Hamilton & Scheetz Brobeck, Phleger & Harrison LLP
3000 Two Logan Square 1301 Avenue of the Americas
Philadelphia, PA 19103-2799 New York, NY 10019
(215) 981-4000 (212) 581-1600
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
===============================================================================
<PAGE>
MEDQUIST INC.
CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS
---------------------------------------------------- ----------------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of
Prospectus........................................ Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Inside Front Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges......................... Summary; Risk Factors
4. Use of Proceeds..................................... Summary; Risk Factors; Use of Proceeds; Management's
Discussion and Analysis of Financial Condition and
Results of Operations
5. Determination of Offering Price..................... Outside Front Cover Page of Prospectus; Price Range
of Common Stock
6. Dilution............................................ Not Applicable
7. Selling Security Holders............................ Outside Front Cover Page of Prospectus; Use of
Proceeds; Principal Shareholders; Underwriting
8. Plan of Distribution................................ Outside Front Cover Page of Prospectus; Underwriting
9. Description of Securities to be Registered.......... Summary; Capitalization; Description of Capital
Stock
10. Interests of Named Experts and Counsel.............. Not Applicable
11. Information with Respect to the Registrant.......... Outside Front Cover Page of Prospectus; Summary;
Risk Factors; Use of Proceeds; Price Range of
Common Stock; Dividend Policy; Capitalization;
Selected Consolidated Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management;
Certain Transactions; Principal Shareholders;
Description of Capital Stock; Shares Eligible for
Future Sale; Available Information; Consolidated
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities....................................... Not Applicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 10, 1996
[MEDQUIST LOGO]
2,200,000 SHARES
COMMON STOCK
All of the 2,200,000 shares of Common Stock offered hereby are being
issued and sold by MedQuist Inc. ('MedQuist' or the 'Company'). On May 9, 1996,
the last sale price of the Company's Common Stock, as reported on the American
Stock Exchange Composite Tape, was $19.875 per share. See 'Price Range of Common
Stock.' The Common Stock is traded on the American Stock Exchange under the
symbol 'MBS.' The Common Stock has been approved for listing on the Nasdaq
National Market under the symbol 'MEDQ.' Approximately $18,375,000 of the net
proceeds from the Offering will be used to pay certain indebtedness to related
parties, including an aggregate of approximately $13,100,000 payable to the
Company's Chief Executive Officer and to its Chief Operating Officer.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE 'RISK FACTORS' BEGINNING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=================================================================================================================
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS COMPANY (1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
- -----------------------------------------------------------------------------------------------------------------
Total (2).................................... $ $ $
=================================================================================================================
</TABLE>
(1) Before deducting expenses payable by the Company, estimated at $400,000.
(2) The Company and certain Selling Shareholders have granted to the
Underwriters a 30-day option to purchase up to an additional 307,160 and
22,840 shares of Common Stock, respectively, solely to cover
over-allotments, if any. See 'Underwriting.' If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ , respectively, and
the proceeds to the Selling Shareholders will be $ .
------------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ('Robertson, Stephens &
Company'),
San Francisco, California, on or about , 1996.
ROBERTSON, STEPHENS & COMPANY
VOLPE, WELTY & COMPANY
PENNSYLVANIA MERCHANT GROUP LTD
The date of this Prospectus is May , 1996.
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS; AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
-----------
Summary...................................................... 3
Risk Factors................................................. 6
Use of Proceeds.............................................. 11
Dividend Policy.............................................. 11
Price Range of Common Stock.................................. 12
Capitalization............................................... 13
Selected Consolidated Financial Data......................... 14
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 16
Business..................................................... 21
Management................................................... 29
Certain Transactions......................................... 39
Principal Shareholders....................................... 40
Description of Capital Stock................................. 42
Shares Eligible for Future Sale.............................. 45
Underwriting................................................. 46
Legal Matters................................................ 47
Experts...................................................... 47
Available Information........................................ 47
Index to Consolidated Financial Statements................... F-1
------------------------
The Company furnishes to its shareholders annual reports containing
financial statements audited by independent public accountants.
'MedQuist(Registered)' is a registered trademark of the Company, and 'MTS,'
'DTS' and 'Transcriptions, Ltd.' are trademarks of the Company.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
SUMMARY
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus, including the matters set forth under the
caption 'Risk Factors,' which could cause actual results to differ materially
from those indicated by such forward-looking statements. The following summary
is qualified in its entirety by the more detailed information, including 'Risk
Factors' and Consolidated Financial Statements and Notes thereto, appearing
elsewhere in this Prospectus.
THE COMPANY
The Company is a leading national provider of electronic transcription and
document management services to the healthcare industry. Through its proprietary
software, open architecture environment and network of more than 1,500 trained
transcriptionists, the Company converts free-form medical dictation into
electronically formatted patient records which healthcare providers use in
connection with patient care and for administrative purposes. The Company's
customized outsourcing services enable clients to improve the accuracy of
transcribed medical reports, reduce report turnaround times, shorten billing
cycles and reduce overhead and other administrative costs. The Company believes
that the electronic capture and delivery of free-form dictation are key
components in the increasing implementation by healthcare providers of
electronic medical record systems.
The Company develops long term client relationships due to its
technological expertise, efficient and cost-effective services and experienced
management team. The Company's diversified client base includes more than 400
hospitals and other healthcare organizations such as outpatient clinics, health
maintenance organizations and physician practice groups. The Company has a
history of customer satisfaction and retention and has provided services for an
average of over five years for its 25 largest clients in 1995. The Company
performed services in 1995 for 88%, 92% and 100% of those clients which were its
25 largest clients in 1992, 1993 and 1994, respectively.
Growth in the demand for medical transcription services is directly
impacted by the number of hospital admissions and outpatient visits. Each
hospital admission or outpatient visit generates dictated or written data which
must be entered into a patient's record. For the quarter ended September 30,
1995, the American Hospital Association estimated that the numbers of hospital
admissions and outpatient visits in the United States were 8.3 million (an
increase of approximately 3% over the corresponding period in 1992) and 112
million (an increase of approximately 22% over the corresponding period in
1992), respectively.
The Company continues to implement advances in technology to improve the
delivery of its services. The Company utilizes its Medical Transcription System
('MTS'), an integrated transcription and document management system based upon
proprietary software, to service the transcription and document management needs
of its clients. The Company's technical staff customizes MTS to address initial
data capture, conversion of data into electronic format, editing of data and
routing of electronically formatted reports to the client's host computer
system. For electronic data interchange MTS incorporates the HL-7 format or
other interface protocols. The Company's Dictation Tracking System ('DTS')
enables the Company and its clients to track the status of particular patient
data and transcribed reports at any point in time and to evaluate the Company's
on-time performance. Clients also use DTS as an integral management tool to
monitor physician timeliness in the dictation, review and sign-off process.
The Company's objectives are to maintain its leadership position as a
provider of electronic transcription and document management services to the
healthcare industry and to enhance that position as the information needs of
healthcare providers continue to expand and evolve. The key elements of the
Company's strategy include: expanding relationships with existing clients to
capture their growing transcription requirements; extending its current client
base by attracting new hospital clients, health maintenance organizations,
outpatient clinics and physician practice groups; leveraging its technological
leadership to create customized solutions to client needs and changing industry
standards; capitalizing on emerging technologies such as voice recognition and
Internet based communications; and pursuing strategic acquisitions.
The executive offices of the Company are located at Five Greentree Centre,
Suite 311, Marlton, New Jersey 08053, and its telephone number is (609)
596-8877.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company...................... 2,200,000 shares
Common Stock Outstanding after the Offering.............. 6,522,338 shares (1)
Use of Proceeds.......................................... To repay existing indebtedness (including a
subordinated payable to related parties) incurred in
the acquisition of Transcriptions, Ltd.
American Stock Exchange Symbol........................... MBS
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues (2)................................................. $ -- $ 24,841 $ 45,127 $ 10,426 $ 13,978
Operating income (loss) (2).................................. (1,760) 2,463 4,733 762 1,790
Income (loss):
Continuing operations..................................... (1,896) (166) 607 (115) 546
Discontinued operations (3)............................... 3,746 1,612 (1,729) 441 --
Extraordinary item (4).................................... -- -- (545) -- --
--------- --------- --------- --------- ---------
Net income (loss)....................................... $ 1,850 $ 1,446 $ (1,667) $ 326 $ 546
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per share (5):
Continuing operations..................................... $ (0.40) $ 0.09 $ 0.30 $ -- $ 0.14
Discontinued operations (3)............................... 1.02 0.49 (0.52) 0.13 --
Extraordinary item (4).................................... -- -- (0.16) -- --
--------- --------- --------- --------- ---------
Net income (loss) per share............................. $ 0.62 $ 0.58 $ (0.38) $ 0.13 $ 0.14
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in computing net income (loss) per share (5)..... 3,656 3,316 3,335 3,130 4,363
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
TRANSCRIPTIONS, LTD. DATA:
Revenues(6).............................................. $ 20,020 $ 23,025 $ 27,103 $ 36,634 $ 45,127
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------------------
ACTUAL PRO FORMA (7) AS ADJUSTED (8)
--------- -------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital..................................................... $ 6,104 $ 6,104 $ 19,481
Total assets........................................................ 59,082 59,082 69,122
Current portion of long-term debt................................... 3,337 3,337 --
Long-term debt, net of current portion.............................. 16,054 9,599 --
Subordinated payable to related parties............................. 17,726 17,726 --
Total shareholders' equity.......................................... 15,572 22,027 62,729
</TABLE>
4
<PAGE>
- ------------------
(1) Includes: (a) 962,675 shares of Common Stock to be issued to Heller Equity
Capital Corporation ('Heller') upon the closing of this Offering pursuant to
the exercise of warrants to purchase Preferred Stock (the 'Heller Warrants')
by cancelling the $7,000 principal amount of a senior subordinated note
(carrying value of $6,455 at March 31, 1996 due to original issue discount)
and the simultaneous conversion of such Preferred Stock into Common Stock
(the Heller Warrants were originally issued in December 1992 and currently
have an exercise price of $7.27 per share), and 42,500 shares of Common
Stock to be issued to Heller in connection therewith (collectively, the
'Heller Transaction'); and (b) 861,463 shares of Common Stock to be issued
in connnection with the payment of the deferred purchase price for
Transcriptions, Ltd. Excludes: (i) 689,202 shares of Common Stock which may
be issued upon exercise of outstanding options; (ii) 320,296 shares of
Common Stock which may be issuable upon exercise of options to purchase
Common Stock which may be granted in the future; and (iii) 75,351 shares of
Common Stock reserved for issuance pursuant to the exercise of warrants (at
$6.74 per share as of March 31, 1996) held by Chemical Bank ('Chemical').
The weighted average exercise price of all outstanding options as of March
31, 1996 was $7.19 per share. See 'Management -- Director Compensation,'
'--Executive Compensation,' 'Certain Transactions,' and Notes 2, 6, 8 and 9
of Notes to Consolidated Financial Statements of the Company.
(2) Transcriptions, Ltd. was acquired by the Company effective May 1, 1994 and
its business is the only operating business of the Company. All of the
Company's prior businesses have been treated as discontinued operations. See
(3) below.
(3) On November 14, 1995, the Company signed a letter of intent to sell its
receivables management business. The operations and net assets of the
Company's receivables management business and previously divested businesses
have been accounted for as discontinued operations. Discontinued operations
are presented net of tax and include a gain on disposal of $1,749 in 1993
and a loss on disposal of $3,180 in 1995. See Note 3 of Notes to
Consolidated Financial Statements of the Company.
(4) Represents the loss on early extinguishment of debt, net of income taxes.
(5) The Company's total outstanding options and warrants to purchase Common
Stock exceed 20% of the total outstanding Common Stock. Therefore, the
income (loss) per share computations are modified as required under
Accounting Principle Board Opinion No. 15. Upon the completion of this
Offering and the closing of the Heller Transaction, the Company will no
longer be subject to the modified treasury stock method of Accounting
Principle Board Opinion No. 15. See Note 1 of Notes to Consolidated
Financial Statements of the Company.
(6) The revenues for Transcriptions, Ltd. prior to its acquisition by the
Company on May 1, 1994 have been derived from its historical financial
statements. The 1994 revenues reflect Transcriptions, Ltd.'s revenues for
four months and the Company's revenues for eight months. See 'Business --
Company History' and the Combined Financial Statements of Transcriptions,
Ltd.
(7) Pro forma to reflect the Heller Transaction, including an estimated
non-recurring deduction of $718 from net income available to common
shareholders to be incurred in connection with issuance of 42,500 shares of
common stock to Heller to induce Heller to exercise the warrants and
simultaneously convert the Preferred Stock into Common Stock. The actual
non-recurring deduction will be based on the discounted fair value of the
Common Stock at the date of issuance.
(8) Adjusted to reflect the Heller Transaction, and the sale of 2,200,000 shares
of Common Stock offered by the Company hereby at an assumed public offering
price of $19.875 per share and the application of the estimated net proceeds
therefrom. See 'Use of Proceeds.'
------------------------
Unless otherwise noted, all information in this Prospectus assumes that (i) the
Underwriters' over-allotment option has not been exercised and (ii) the Heller
Transaction has been completed. As used in this Prospectus, except where the
context otherwise requires, the terms 'MedQuist' and the 'Company' include all
of its subsidiaries, including Transcriptions, Ltd., the current subsidiary of
the Company, as well as Transcriptions, Ltd., the predecessor acquired by the
Company in May 1994.
5
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing shares of the Common Stock offered hereby.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus.
RISKS ASSOCIATED WITH THE BUSINESS
Dependence on Single Line of Business. The Company's revenues are derived
primarily from the provision of electronic transcription services to hospitals
and other healthcare organizations on an outsourced basis. The Company's future
success will depend on the continued market acceptance of its transcription
services and the continued trend towards outsourcing of transcription services.
A reduction in demand or increase in competition in the market for its
transcription services would have a material adverse effect on the Company's
business, financial condition and results of operations. See 'Business.'
Rapid Technological Change. The healthcare information services industry
is characterized by rapid technological change, evolving client needs and
emerging technical standards. The introduction of competing services or products
incorporating new technologies, such as voice recognition capabilities, and the
emergence of new technical standards could render some or all of the Company's
services unmarketable. The Company believes that its future success depends on
its ability to enhance its current services and develop new services that
address the increasingly sophisticated needs of its customers. The failure of
the Company to develop and introduce service enhancements and new services in a
timely and cost-effective manner in response to changing technologies or client
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations. See 'Business -- Technology
Development' and '-- Strategy.'
Inability to Expand Into New Markets. To date, the Company's services have
been provided primarily to the medical record departments of hospitals. However,
healthcare services are increasingly being provided at sites other than
hospitals, such as outpatient clinics and physician practice groups. As part of
its strategy, the Company intends to increase its presence in these new markets
and to expand its services to direct patient care departments within hospitals.
However, the Company has limited experience in such markets and departments,
which may require significant modifications to the Company's services or
adjustments to its pricing. The Company's business, financial condition and
results of operations may be materially and adversely affected if its efforts to
expand into new markets and departments are not successful. See 'Business --
Strategy.'
Dependence on Key Personnel. The Company's future success depends upon its
ability to attract and retain its key managerial personnel. The loss of services
of certain of the Company's executive officers or the inability of the Company
to attract additional management personnel could have a material adverse effect
upon the Company's business, financial condition and results of operations.
Certain of its key executive officers, including David A. Cohen, the President
and Chief Executive Officer, John A. Donohoe, Jr., the Chief Operating Officer,
and Ronald Scarpone, the Chief Information Officer, have employment agreements
with the Company. Mr. Scarpone's employment agreement terminates on December 31,
1997, and Mr. Cohen's and Mr. Donohoe's employment agreements terminate on
December 31, 1998. Each such agreement permits the executive to resign, at any
time, by giving the Company at least three months prior notice. The Company does
not have key-man insurance on any of its executive officers. See 'Management.'
Potential for Significant Fluctuations in Quarterly Operating Results. The
Company has experienced, and may in the future experience, significant quarter
to quarter fluctuations in its results of operations. Such fluctuations may
result in volatility in the price of the Common Stock. Quarterly results of
operations may fluctuate as a result of a variety of factors, including demand
for the Company's services, the opening of new offices, the timing of
introduction of new services and service enhancements by the Company or its
competitors, the market acceptance of new services, the size and timing of
client contracts, changes in client budgets, the size and timing of
acquisitions, the integration of acquired businesses into the Company's
operations, the number and timing of new hires, competitive conditions in the
industry and general economic
6
<PAGE>
conditions. Further, the Company's contracts generally involve significant
client commitment and may require time-consuming authorization procedures within
the client's organization. For these and other reasons, the sales cycles for the
Company's services are typically lengthy and subject to a number of factors
outside of the Company's control. As a result, the Company's revenues are
difficult to forecast, and the Company believes that period to period
comparisons of results of operations are not necessarily meaningful and should
not be relied upon as an indication of future results of operations. In
addition, the Company's transcription business has experienced substantial
growth in recent periods and there can be no assurance that such rate of growth
in revenues and profits can be maintained in the future. Due to the foregoing
factors, it is possible that in future quarters the Company's operating results
will be below the expectations of public market analysts and investors. Such an
event could have a material adverse effect on the price of the Common Stock. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Unaudited Selected Pro Forma Quarterly Data' and 'Business --
Strategy.'
Ability to Attract and Retain Qualified Transcriptionists. The Company's
future success depends upon its ability to attract and retain qualified
transcriptionists. Competition for transcriptionists is intense, and no
assurance can be given that the Company will be successful in attracting and
retaining the personnel necessary to conduct its business successfully. The
inability of the Company to attract, hire and retain such personnel would have a
material adverse effect upon the Company's business, financial condition and
results of operations. The Company takes the position that its transcriptionists
are independent contractors for state tax, benefits and unemployment purposes
and statutory employees for federal income tax purposes. A successful challenge
to the Company's position or a change in applicable law could result in the
incurrence of liability for withholding taxes, disability payments, unemployment
payments, interest and penalties by the Company, and could have a material
adverse effect on the Company's costs of hiring and retaining transcriptionists.
See 'Business -- Employees.'
Risks Associated With Acquisitions. The Company acquired Transcriptions,
Ltd. in May 1994, made two other acquisitions of smaller transcription companies
in 1995, and intends to seek other acquisitions which will likely require the
consent of its senior lenders. There can be no assurance that the Company will
be successful in identifying suitable acquisition candidates, financing such
acquisitions, negotiating terms favorable to the Company, consummating
acquisitions or integrating the acquired businesses into the Company's
operations. Moreover, in connection with acquisitions, the Company may be
required to incur additional indebtedness or other liabilities which could have
a material adverse effect on the Company's liquidity and capital resources, or
to issue shares of its capital stock, which could result in dilution to its
shareholders. See 'Business -- Strategy.'
Management of Changing Business. The Company has experienced significant
changes, including the acquisition and growth of its transcription business and
the divestiture of its other business. Such changes have placed and may continue
to place a significant strain on the Company's management, client service
personnel and operations. In order to manage such changes in the future, the
Company must continue to implement and improve its operational, financial and
management information systems, and hire, train and manage its employees. If the
Company is unable to implement such systems and manage such changes effectively,
the Company's business, financial condition and results of operations could be
materially and adversely affected. See 'Business -- Strategy.'
Competition. The transcription services industry is highly fragmented and
primarily consists of small regional or local companies, and a limited number of
national companies, with which the Company currently competes directly. The
Company believes that its ability to compete successfully depends upon many
factors within and outside of its control, including the timing and market
acceptance of new services and service enhancements developed by the Company and
its competitors, service quality, performance, price, reliability and client
support. In addition, the healthcare information industry includes a number of
companies with substantially greater financial, technical and marketing
resources than the Company. Such companies, if they were to enter the
transcription business, could respond more quickly than the Company to evolving
technological developments, changing client needs or emerging technical
standards, or could devote greater resources to the development, marketing and
sale of their services. Competition may increase due to consolidation of
transcription companies, and current and potential competitors may establish
cooperative relationships among themselves or with third parties to increase
their ability to address the needs of the
7
<PAGE>
Company's current and prospective clients. Increased competition may result in
price reductions for the Company's services, reduced operating margins and the
inability of the Company to increase its market share. There can be no assurance
that the Company will be able to compete successfully against current or future
competitors or that competitive pressures will not have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the market available to the Company is limited by healthcare
organizations which maintain in-house transcription departments. See 'Business
- -- Competition.'
Changes in the Healthcare Industry. The healthcare industry is subject to
changing political, economic and regulatory influences that may affect the
outsourcing arrangements of healthcare providers. Federal and state legislators
have proposed programs to reform the United States healthcare system and other
proposals are in the development stage. In general, these programs and proposals
tend to emphasize managed care, seek to lower reimbursement rates and otherwise
attempt to control the environment in which healthcare providers operate.
Healthcare providers may react to these proposals and the uncertainty
surrounding such proposals by curtailing outsourcing arrangements or deferring
decisions regarding the use of outsourced services. Many healthcare providers
are consolidating to create larger healthcare delivery organizations. This
consolidation reduces the number of potential clients for the Company's services
and increases the bargaining power of these organizations which could lead to
reductions in the amounts paid for the Company's services. The impact of these
developments in the healthcare industry is difficult to predict and could have a
material adverse effect on the Company's business, financial condition and
results of operations. See 'Business -- Government Regulation.'
Dependence on Proprietary Rights; Risks of Infringement. The Company's
success depends upon its proprietary technology. The Company regards the
software underlying its services as proprietary, and relies primarily on a
combination of contract, copyright and trademark law, trade secrets,
confidentiality agreements and contractual provisions to protect its proprietary
rights. The Company has not registered its MTS, DTS or Transcriptions, Ltd.
trademarks and has no patents or patent applications pending. Existing trade
secrets and copyright laws afford the Company limited protection. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's software or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's software is difficult. There can be no assurance that the
obligations to maintain the confidentiality of the Company's trade secrets and
proprietary information will effectively prevent disclosure of the Company's
confidential information or provide meaningful protection for the Company's
confidential information, or that the Company's trade secrets or proprietary
information will not be independently developed by the Company's competitors.
There can be no assurance that copyrights owned by the Company will provide
competitive advantages or will not be challenged or circumvented by its
competitors. Litigation may be necessary for the Company to defend against
claims of infringement, to enforce copyrights or to protect trade secrets and
could result in substantial cost to, and diversion of management efforts by, the
Company. There can be no assurance that the Company would prevail in any such
litigation.
The Company is not aware that any of its software, trademarks or other
proprietary rights infringe the proprietary rights of third parties. However,
there can be no assurance that third parties will not assert infringement claims
against the Company in the future. Any such claims, with or without merit, can
be time consuming and expensive to defend and may require the Company to enter
into royalty or licensing agreements or cease the infringing activities. The
failure to obtain such royalty agreements, if required, and the Company's
involvement in such litigation could have a material adverse effect on the
Company's financial condition and results of operations. See 'Business --
Intellectual Property.'
Confidentiality Requirements. The medical information transcribed by the
Company is of an extremely sensitive nature. In providing its services, the
Company is subject to certain statutory, regulatory and common law requirements
regarding the confidentiality of medical information. Failure to comply with
such confidentiality requirements could result in material liability to the
Company. See 'Business -- Government Regulation.'
RISKS ASSOCIATED WITH THE OFFERING OF COMMON STOCK
Potential Volatility of Stock Price. The market price of the Common Stock
has been, and may in the
8
<PAGE>
future be, highly volatile. Factors such as acquisitions, technological
innovations, new products or services, changes in government regulation and
healthcare legislation, fluctuations in the Company's operating results and
general market and economic conditions could cause the market price of the
Common Stock to fluctuate substantially. In addition, the stock market in
general has experienced extreme price and volume fluctuations which has resulted
in substantial volatility of the market prices of healthcare service companies
that has often been unrelated to the operating performance of these companies.
These or other factors may adversely affect the market price of the Common
Stock. See 'Price Range of Common Stock.'
Proceeds to Benefit Related Parties. The Company intends to use
approximately $18,375,000 of the net proceeds from this Offering to fund the
debt portion of the deferred purchase price payable for Transcriptions, Ltd.
This amount is payable to the Company's Chief Executive Officer, its Chief
Operating Officer and a Vice President of its Transcription, Ltd. subsidiary.
See 'Use of Proceeds' and 'Certain Transactions -- Acquisition of
Transcriptions, Ltd.'
Shares Eligible For Future Sale. Sales of substantial amounts of Common
Stock in the public market following this Offering could adversely affect the
market price of the Common Stock and the Company's ability to raise additional
equity capital. Upon completion of this Offering, and after giving effect to the
Heller Transaction and the issuance of shares of Common Stock in connection with
the payment of the deferred purchase price for Transcriptions, Ltd., the Company
will have 6,522,338 shares of Common Stock outstanding. Of these shares, the
2,200,000 shares of Common Stock offered hereby (plus up to 330,000 additional
shares if the Underwriters exercise their over-allotment option in full), the
1,650,000 shares sold in the Company's initial public offering and approximately
694,000 shares of Common Stock issued upon exercise of employee options will be
freely tradeable without restriction or further registration except by
'affiliates' of the Company, as that term is defined under the Act, subject to
the resale limitations of Rule 144 under the Securities Act of 1933, as amended
(the 'Act'). Approximately 1,975,000 shares of Common Stock may not be sold
unless they are registered under the Act or are sold pursuant to an exemption
from registration, such as the exemption provided by Rule 144 under the Act.
Certain of the Company's officers, directors and shareholders have agreed with
Robertson, Stephens & Company LLC that, until 180 days after the date of this
Prospectus, they will not sell approximately 380,000 shares of Common Stock
beneficially owned by them, and Mr. David Cohen, the Company's Chief Executive
Officer, who beneficially owns 604,373 shares of Common Stock (including 568,566
shares of Common Stock issuable on August 31, 1996 as partial payment of the
deferred purchase price for Transcriptions, Ltd.), has agreed to similar
restrictions for a period of 270 days after the date of this Prospectus.
Additionally, Heller and Chemical, who beneficially own 1,005,175 and 75,351
shares of Common Stock, respectively, have agreed to similar restrictions on the
public sale of such shares of Common Stock for 270 and 180 days, respectively,
after the date of this Prospectus. In its sole discretion and at any time
without notice, Robertson, Stephens & Company LLC may release all or any portion
of the shares subject to these lock-up agreements. If a shareholder other than
Heller obtains a release from a lock-up agreement, Heller will be entitled to a
release of the same number of shares. The Company has also agreed not to sell
any shares of Common Stock, other than shares to be issued in the Heller
Transaction, shares or options issued or to be issued under the Company's stock
option and stock purchase plans, shares of Common Stock issued upon the exercise
of presently outstanding warrants, or shares, warrants or convertible securities
issued in connection with future acquisitions, until at least 180 days after the
date of this Prospectus, except with the prior written consent of Robertson,
Stephens & Company LLC. In addition, 1,531,100 shares of Common Stock issuable
in the future in connection with employee benefit plans may be sold in the
public market from time to time pursuant to the Company's registration
statements on Form S-8. Certain holders of the Company's securities, including
Heller and Chemical, are entitled to certain registration rights. The Company
has filed a registration statement on Form S-3 under the Act to register the
resale by Heller and Chemical, subject to the foregoing lockup agreements, of
962,675 and 75,351 shares of Common Stock, respectively. If such holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, such sales could have a material
adverse effect on the market price for the Common Stock. See 'Shares Eligible
For Future Sale.'
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
9
<PAGE>
circumstances. In addition, the Company's Amended and Restated Certificate of
Incorporation gives the Board of Directors the authority without shareholder
approval to issue up to 3,950,000 shares of Preferred Stock, in one or more
series, with rights, preferences and limitations that could adversely affect the
voting power and the other rights of the holders of the Common Stock. The
Company's Amended and Restated Certificate of Incorporation also provides for
staggered terms for the members of the Board of Directors such that no more than
one-third of its members stands for reelection in any one year. The Company has
entered into certain severance arrangements which provide for payments to
certain of its officers upon a 'change in control' (as defined therein) of the
Company. Moreover, the terms of the Company's 1992 Stock Option Plan (the '1992
Option Plan') provide that outstanding options automatically vest and become
exercisable upon a 'change in control' (as defined therein) of the Company.
These provisions and arrangements may have the effect of delaying, deferring or
making more costly a change in control of the Company, including transactions in
which shareholders might otherwise receive a premium for their shares over the
then current market price, and, therefore, could adversely affect the market
price of the Common Stock. See 'Management' and 'Description of Capital Stock --
Takeover Protection.'
10
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale by the Company of the 2,200,000 shares of
Common Stock offered hereby will be approximately $40.7 million ($46.4 million
if the Underwriter's over-allotment option granted by the Company is exercised
in full), based on our assumed public offering price of $19.875 per share, less
estimated underwriting discounts and commissions, and estimated expenses payable
by the Company. The Company plans to use approximately $18,375,000 of the net
proceeds to pay the debt portion of the deferred purchase price payable to
related parties in connection with the acquisition of Transcriptions, Ltd. (of
which an aggregate of approximately $13.1 million is payable to the Company's
Chief Executive Officer and to its Chief Operating Officer) and will apply the
balance to repay a portion of the borrowings outstanding under the Company's
senior credit facility with certain lenders including Chemical (the 'Chemical
Facility'), first to reduce the outstanding balance under the revolving credit
facility (the 'Revolving Credit Facility') and, thereafter, to prepay the term
loans (the 'Term Loans'). After giving effect to the application of the net
proceeds from the Offering, the Company's borrowing availability under the
Revolving Credit Facility at March 31, 1996 would have been $8.1 million. See
'Certain Transactions.'
The Chemical Facility provides for an aggregate of $9.5 million of Term
Loans payable in 24 quarterly installments ending December 31, 2001, and up to a
$10 million Revolving Credit Facility, subject to a borrowing base limitation
based on a percentage of eligible accounts receivable, expiring December 31,
1998. The weighted average interest rate under the Term Loans and the Revolving
Credit Facility at March 31, 1996 was 8.625%. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.'
The Company will not receive any of the net proceeds from the sale of up to
22,840 shares of Common Stock by the Selling Shareholders pursuant to the
exercise of the Underwriter's over-allotment option. See 'Underwriting.'
DIVIDEND POLICY
The Company has never declared or paid any dividends on its capital stock.
The Company currently intends to retain future earnings, if any, to finance
operations and expansion, and does not expect to pay any cash dividends on its
Common Stock in the foreseeable future. Future cash dividends, if any, will be
determined by the Board of Directors, and will be based upon the Company's
earnings, capital requirements, financial condition and other factors deemed
relevant by the Board of Directors. The Chemical Facility does not permit the
payment of any dividends without the consent of the lenders.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
Since September 20, 1994, the Common Stock has been traded on the American
Stock Exchange under the symbol 'MBS.' From May 12, 1992, when the Company
completed its initial public offering, until the commencement of trading on the
American Stock Exchange, the Common Stock was quoted on the Nasdaq National
Market. The following table sets forth the high and low reported closing sale
prices for the Common Stock for the period during which the Common Stock has
been traded on the American Stock Exchange and the range of high and low bid
quotations for the period in which the Common Stock was quoted on the Nasdaq
National Market. The bid quotations for the Nasdaq National Market reflect
inter-dealer prices, do not include retail mark-ups, mark-downs or commissions
and may not necessarily reflect actual transactions.
HIGH LOW
--------- ---------
1994
First Quarter......................................... $ 7 1/8 $ 4 1/2
Second Quarter........................................ 7 1/4 6 1/4
Third Quarter......................................... 7 1/8 5 7/8
Fourth Quarter........................................ 9 6 3/8
1995
First Quarter......................................... 8 1/8 6 3/4
Second Quarter........................................ 9 1/4 6 3/8
Third Quarter......................................... 10 1/8 6 3/8
Fourth Quarter........................................ 9 3/8 6 3/4
1996
First Quarter......................................... 13 8 3/8
Second Quarter (through May 9)........................ 19 7/8 13 3/8
On May 9, 1996, the closing sale price for the Common Stock, as reported on
the American Stock Exchange Composite Tape, was $19.875 per share, and there
were 88 record holders of the Common Stock.
The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol 'MEDQ.'
12
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1996; (i) the actual
capitalization of the Company; (ii) the pro forma capitalization of the Company
as adjusted to reflect the Heller Transaction; and (iii) the pro forma
capitalization of the Company as adjusted to reflect the sale of 2,200,000
shares of Common Stock offered hereby at an assumed public offering price of
$19.875 per share and the application of the estimated net proceeds therefrom.
The information set forth below should be read in conjunction with 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
the Consolidated Financial Statements of the Company (including the Notes
thereto), included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt........................................... $ 3,337 $ 3,337 $ --
========= ========== ===========
Long-term debt, net of current portion...................................... $ 16,054 $ 9,599 $ --
--------- ----------- -----------
Subordinated payable to related parties..................................... 17,726 17,726 --
--------- ----------- -----------
Shareholders' equity:
Class A preferred stock, no par value, 650 shares authorized, none
issued................................................................. -- -- --
Class B preferred stock, no par value, 400 shares authorized, none
issued................................................................. -- -- --
Common Stock, no par value, 20,000 shares authorized, 2,455 shares issued
and outstanding (actual), 3,461 shares issued and outstanding (pro
forma) and 5,661 shares issued and outstanding (as adjusted) (1)....... 4,695 11,866 52,568
Common Stock to be issued to related parties, 861 shares (2).............. 4,550 4,550 4,550
Retained earnings......................................................... 6,327 5,611 5,611
--------- ----------- -----------
Total shareholders' equity........................................... 15,572 22,027 62,729
--------- ----------- -----------
Total capitalization.............................................. $ 49,352 $ 49,352 $ 62,729
========= ========== ===========
</TABLE>
- ------------------
(1) Excludes 764,553 shares of Common Stock which may be issued upon exercise of
options and warrants outstanding as of March 31, 1996, and an additional
320,296 shares of Common Stock which may be issuable upon exercise of
options to purchase Common Stock which may be granted in the future. As of
March 31, 1996, the weighted average exercise prices of all outstanding
options and warrants were $7.19 per share and $6.74, respectively. See
'Management -- Director Compensation,' '-- Executive Compensation,' 'Certain
Transactions,' and Notes 2, 8 and 9 of Notes to Consolidated Financial
Statements of the Company.
(2) See 'Certain Transactions -- Acquisition of Transcriptions, Ltd.' and Notes
2 and 7 of Notes to Consolidated Financial Statements of the Company.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below reflects selected
consolidated financial data of the Company as of and for the periods indicated,
after giving retroactive effect to the Company's discontinued operations. The
selected consolidated financial data as of and for each of the three years ended
December 31, 1995 have been derived from the Consolidated Financial Statements
of the Company which have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report included elsewhere in this
Prospectus. The selected consolidated financial data as of and for each of the
years ended December 31, 1991 and 1992 have been derived from Consolidated
Financial Statements of the Company not included in this Prospectus. The
selected consolidated statement of operations data for the three months ended
March 31, 1995 and 1996 and the selected consolidated balance sheet data as of
March 31, 1996 have been derived from unaudited consolidated financial
statements of the Company that, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations for these periods in accordance
with generally accepted accounting principles. The consolidated results of
operations for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for any interim period or for the
full year. Because of the discontinued operations, annual period to period
comparison of results of operations are not meaningful. This data should be read
in conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto, and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues (1)............................... $ -- $ -- $ -- $ 24,841 $ 45,127 $ 10,426 $ 13,978
--------- --------- --------- --------- --------- --------- ---------
Costs and expenses:
Cost of revenues......................... -- -- -- 18,677 33,711 7,676 10,435
Selling, general and administrative...... 1,564 1,533 1,688 2,798 4,325 1,599 888
Depreciation............................. 66 53 60 639 1,862 280 587
Amortization of intangible assets........ 19 10 12 264 496 109 278
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses.............. 1,649 1,596 1,760 22,378 40,394 9,664 12,188
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss).................... (1,649) (1,596) (1,760) 2,463 4,733 762 1,790
Interest expense........................... 296 393 1,426 2,738 3,695 959 865
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes...................... (1,945) (1,989) (3,186) (275) 1,038 (197) 925
Income tax provision (benefit)............. (804) (867) (1,290) (109) 431 (82) 379
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations... (1,141) (1,122) (1,896) (166) 607 (115) 546
Discontinued operations (2)................ 2,293 2,629 3,746 1,612 (1,729) 441 --
Extraordinary item (3)..................... -- -- -- -- (545) -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).......................... $ 1,152 $ 1,507 $ 1,850 $ 1,446 $ (1,667) $ 326 $ 546
========= ========= ========= ========= ========= ========= =========
Income (loss) per share (4):
Continuing operations.................... $ (0.50) $ (0.41) $ (0.40) $ 0.09 $ 0.30 $ -- $ 0.14
Discontinued operations (2).............. 1.00 0.97 1.02 0.49 (0.52) 0.13 --
Extraordinary item (3)................... -- -- -- -- (0.16) -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per share........... $ 0.50 $ 0.56 $ 0.62 $ 0.58 $ (0.38) $ 0.13 $ 0.14
========= ========= ========= ========= ========= ========= =========
Shares used in computing income (loss)
per share (4)............................ 2,290 2,697 3,656 3,316 3,335 3,130 4,363
========= ========= ========= ========= ========= ========= =========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
TRANSCRIPTIONS, LTD. DATA:
Revenues (5).............................. $ 20,020 $ 23,025 $ 27,103 $ 36,634 $ 45,127
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------------------- -----------
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................. $ (244) $ (373) $ 1,108 $ 776 $ 4,926 $ 6,104
Total assets................................ 8,598 27,556 25,041 51,403 58,095 59,082
Current portion of long-term debt........... 372 1,125 1,146 4,889 2,246 3,337
Long-term debt, net of current portion...... 2,849 13,663 12,395 30,415 15,956 16,054
Subordinated payable to related parties..... -- -- -- -- 17,337 17,726
Shareholders' equity........................ 4,517 11,937 9,071 10,692 14,970 15,572
</TABLE>
- ------------------
(1) Transcriptions, Ltd. was acquired by the Company effective May 1, 1994 and
its business is the only operating business of the Company. All of the
Company's prior businesses have been treated as discontinued operations. See
(2) below.
(2) On November 14, 1995, the Company executed a letter of intent to sell its
receivables management business. The operations and net assets of the
Company's receivables management business and previously divested businesses
have been accounted for as discontinued operations. Discontinued operations
are presented net of tax and include a gain on disposal of $1,749 in 1993
and a loss on disposal of $3,180 in 1995. See Note 3 of Notes to
Consolidated Financial Statements of the Company.
(3) Represents the loss on early extinguishment of debt, net of income taxes.
(4) The Company's total outstanding options and warrants to purchase Common
Stock exceed 20% of the total outstanding Common Stock. Therefore, the
income (loss) per share computations are modified as required under
Accounting Principle Board Opinion No. 15. Upon the completion of this
Offering and the closing of the Heller Transaction, the Company will no
longer be subject to the modified treasury stock method of Accounting
Principle Board Opinion No. 15. See Note 1 of Notes to Consolidated
Financial Statements of the Company.
(5) The revenues for Transcriptions, Ltd. prior to its acquisition by the Comany
on May 1, 1994 have been derived from its historical financial statements.
The 1994 revenues reflect Transcriptions, Ltd.'s revenues for four months
and the Company's revenues for eight months. See 'Business -- Company
History' and the Combined Financial Statements of Transcriptions, Ltd.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under 'Risk Factors' and elsewhere in
this Prospectus.
GENERAL
The Company is a leading national provider of electronic transcription and
document management services to the healthcare industry. As a result of
acquisition and divestiture activity from 1992 through 1995, the Company's
operations have changed considerably and the financial statements included in
this Prospectus relate to its continuing transcription business. See 'Business
- -- Company History.' Accordingly, the historical consolidated operating results
of the Company set forth in the Consolidated Financial Statements do not reflect
the financial results of Transcriptions, Ltd. prior to its May 1994 acquisition
date. See Combined Financial Statements of Transcriptions, Ltd. included
elsewhere in this Prospectus. As a result, investors should not rely on these
statements as an indication of historical operating performance of the Company's
business or as a prediction of future operating performance.
Revenues and cost of revenues are included only from the May 1994
acquisition of Transcriptions, Ltd., although selling, general and
administrative expenses, depreciation, amortization and interest are included
for each of the periods indicated. Revenue from transcription related services
are based primarily on contracted rates, and revenue is recognized upon the
rendering of services and delivery of reports. Cost of revenues consists of all
direct costs associated with providing transcription related services, including
payroll, telecommunications, software customization, repairs and maintenance,
rent and other direct costs. Selling, general and administrative expenses
include costs associated with the Company's senior executive management and with
marketing and sales, finance, legal and other administrative functions.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data in the Company's Consolidated Statements of Operations as a
percentage of net revenues for the years ended December 31, 1994 and 1995 and
the three months ended March 31, 1995 and 1996. The Company did not have
revenues from continuing operations in 1993 and, accordingly, information as a
percentage of revenues for that year is not meaningful.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER
31, MARCH 31,
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Continuing Operations:
Revenues.............................................................. 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues.................................................... 75.2 74.7 73.6 74.7
Selling, general and administrative................................. 11.3 9.6 15.4 6.3
Depreciation........................................................ 2.6 4.1 2.7 4.2
Amortization of intangibles assets.................................. 1.0 1.1 1.0 2.0
Operating income...................................................... 9.9 10.5 7.3 12.8
Interest expense...................................................... 11.0 8.2 9.2 6.2
Income (loss) from continuing operations before income taxes.......... (1.1) 2.3 (1.9) 6.6
Income tax provision (benefit)........................................ (0.4) 1.0 (0.8) 2.7
Income (loss) from continuing operations.............................. (0.7) 1.3 (1.1) 3.9
</TABLE>
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
Revenues. Revenues increased 34% to $14 million in the three months ended
March 31, 1996 from $10.4 million in the comparable 1995 period. The $3.6
million increase reflected approximately $2.3 million of
16
<PAGE>
net additional revenues generated from existing clients, $400,000 of revenues
from new clients and $900,000 of revenues from the Company's two 1995 medical
transcription acquisitions.
Cost of Revenues. Cost of revenues increased 35.1% from $7.7 million in
the three months ended March 31, 1995 to $10.4 million in the comparable 1996
period. As a percentage of revenues, cost of revenues increased from 73.6% in
the first quarter of 1995 to 74.7% for the comparable 1996 period. The
percentage increase in cost of revenues primarily resulted from increases in the
Company's telecommunications costs.
Selling, General and Administrative. Selling, general and administrative
expenses decreased to 44.5% to $888,000 in the three months ended March 31, 1996
from $1.6 million in the comparable 1995 period. As a percentage of revenues,
selling, general and administrative expenses decreased from 15.4% in the first
quarter of 1995 to 6.3% in the comparable 1996 period. Included in the 1995
selling, general and administrative costs were non-recurring retirement and
severance costs of $522,000 associated with the departure of certain executive
personnel.
Depreciation. Depreciation expense increased 109.6% from $280,000 for the
three months ended March 31, 1995 to $587,000 for the comparable 1996 period.
The increase in depreciation expense resulted primarily from $3.4 million of
capital expenditures during 1995.
Amortization. Amortization of intangible assets increased 155.0% to
$278,000 for the three months ended March 31, 1996 as compared to $109,000 for
the comparable 1995 period. The increase is directly attributable to the
additional intangible assets associated with the increased purchase price
related to the fixing of the deferred purchase price for Transcriptions, Ltd.
which began to be amortized effective December 29, 1995.
Interest. Interest expense decreased 9.8% from $959,000 for the three
months ended March 31, 1995 to $865,000 for the comparable 1996 period. The
decrease was due to the prepayment of approximately $16.7 million of the
Chemical Facility with the net proceeds from the sale of the receivables
management business in December 1995, partially offset by an increase of
$390,000 related to the non-cash interest associated with the accretion of the
discounted non-interest bearing subordinated payable to related parties in
connection with the fixing of the debt portion of the deferred purchase price
for Transcriptions, Ltd. in December 1995.
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
CONTINUING OPERATIONS
Revenues. Revenues increased 82% to $45.1 million in 1995 from $24.8
million in 1994. Revenues from continuing operations are included only from the
May 1994 acquisition of Transcriptions, Ltd. On a pro forma basis, as if the
acquisition had occurred on January 1, 1994, revenues would have been $36.6
million in 1994. The $8.5 million (23%) increase in 1995 revenues over 1994 pro
forma revenues reflected approximately $3.4 million of revenues generated from
new clients, $4.3 million of net additional revenues from existing clients and
$800,000 of revenues from the Company's two 1995 medical transcription
acquisitions.
Cost of Revenues. Cost of revenues increased from $18.7 million in 1994 to
$33.7 million in 1995, reflecting the full year of continuing operations in
1995.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $1.7 million in 1993 to $2.8 million in 1994, and
further increased to $4.3 million in 1995. As a percentage of revenues, selling,
general and administrative expenses decreased from 11.3% in 1994 to 9.6% in
1995, reflecting the full year of continuing operations in 1995. The aggregate
increase in selling, general and administrative expenses in 1995 resulted
primarily from $697,000 of non-recurring retirement and severance costs
associated with the departure of certain executive personnel, expenditures
incurred during the fourth quarter in connection with the opening of three new
locations, and the effect of a full year of continuing operations.
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,
17
<PAGE>
reflecting the full year of continuing operations in 1995. This expense level
will increase by approximately $670,000 in 1996 as the intangible assets
associated with the fixing of the deferred purchase price for Transcriptions,
Ltd. begin to be amortized. In 1993, the Company incurred $12,000 of
amortization expenses.
Interest. Interest expense increased from $1.4 million in 1993 to $2.7
million in 1994, and further increased to $3.7 million in 1995. These increases
were primarily due to the increase in the Company's borrowings which were
incurred in connection with the May 1994 acquisition of Transcriptions, Ltd. The
Company's future interest expense will be affected by a monthly non-cash
interest charge of approximately $130,000 from January 1, 1996 to August 31,
1996 associated with the fixing of the debt portion of the deferred purchase
price for Transcriptions, Ltd.
DISCONTINUED OPERATIONS
For the years ended December 31, 1993, 1994 and 1995, the discontinued
operations generated net revenue of $29.1 million, $21.4 million and $18.8
million and net income of $2.0 million, $1.6 million and $1.5 million,
respectively. The 1995 divestiture of the receivables management business
generated a net loss of $3.2 million. Included in this net loss is net income of
$113,000 related to the operation of the business from November 14, 1995 through
December 29, 1995. The 1993 divestiture generated net income of $1.7 million.
EXTRAORDINARY ITEM
During 1995, the Company recorded an extraordinary loss on the early
extinguishment of debt of $545,000. The extraordinary loss is the result of the
write off of certain deferred financing costs incurred in May 1994.
UNAUDITED SELECTED PRO FORMA QUARTERLY DATA
The following table sets forth the unaudited selected pro forma quarterly
data for the periods indicated assuming that the following transactions were
effected as of January 1, 1995; (i) the prepayment of approximately $16.7
million of the Chemical Facility with the proceeds from the sale of the
receivables management business on December 29, 1995; (ii) the fixing of the
Transcriptions, Ltd. deferred purchase price on December 29, 1995, causing
additional amortization and interest expense; (iii) the Heller Transaction; and
(iv) the repayment of the subordinated payable to related parties (the debt
portion of the deferred purchase price for Transcriptions, Ltd.) and a portion
of the Chemical Facility with the proceeds from this Offering. This data does
not reflect an estimated non-recurring deduction from net income to arrive at
net income available to common shareholders of $718 to be incurred in connection
with the issuance of 42,500 shares of common stock to Heller to induce Heller to
exercise the warrants and simultaneously convert the Preferred Stock into Common
Stock. The actual non-recurring deduction will be based on the discounted fair
value of the Common Stock at the date of issuance.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
PRO FORMA STATEMENTS OF OPERATIONS DATA: 1995 1995 1995 1995 1996
- ------------------------------------------------------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES
AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues............................................... $ 10,426 $ 10,806 $ 11,538 $ 12,357 $ 13,978
Income per share from continuing operations............ $ 0.04 $ 0.07 $ 0.11 $ 0.09 $ 0.14
Shares used in computing pro forma income per share.... 6,462 6,525 6,508 6,599 6,810
</TABLE>
Quarterly results of operations may fluctuate as a result of a variety of
factors, including demand for the Company's services, the opening of new
offices, the timing of introduction of new services and service enhancements by
the Company or its competitors, market acceptance of new services, the size and
timing of individual client contracts, changes in client budgets, the size and
timing of acquisitions, the integration of acquired businesses into the
Company's operations, the number and timing of new hires, competitive conditions
in the industry and general economic conditions. Further, the Company's
contracts generally involve significant client commitment and may require
time-consuming authorization procedures within the client organization. For
these and other reasons, the sales cycles for the Company's services are
typically lengthy and subject to a number of factors outside of the Company's
control. As a result, the Company's
18
<PAGE>
revenues are difficult to forecast, and the Company believes that period to
period comparisons of results of operations are not necessarily meaningful and
should not be relied upon as an indication of future results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had working capital of $4.9 million,
including $1.8 million of cash and cash equivalents. During 1995, the Company's
operating activities provided cash of $6.1 million and during 1994 these
activities provided $3.9 million. The increase in cash provided by operating
activities is primarily related to an increase in depreciation and amortization
and a loss in the disposal of discontinued operations, offset by an increase in
accounts receivable and a decrease in net income. At March 31, 1996, the Company
had working capital of $6.1 million, including $1.2 million of cash and cash
equivalents. During the first quarter of 1996, the Company's operating
activities used cash of $821,000 as compared to an increase in cash of $288,000
during the first quarter of 1995. The decrease in cash generated by operating
activities during the first quarter of 1996 was primarily related to an increase
in accounts receivable and decreases in accrued payroll and expenses, offset by
increases in net income, depreciation and amortization, and amortization of debt
discount.
During 1995, the Company purchased $3.4 million of capital equipment and
completed the acquisition of two transcription businesses for approximately
$834,000 in cash and 22,840 shares of Common Stock. These expenditures were
financed through cash flow from operations, the issuance of a subordinated note
payable (which was paid in March 1996), and the Chemical Facility. During the
three months ended March 31, 1996, the Company purchased $998,000 of capital
equipment. These expenditures were financed through cash flow from operations,
capital lease arrangements and the Chemical Facility.
The Company entered into the Chemical Facility when it acquired
Transcriptions, Ltd. in May 1994. The Chemical Facility was restructured in
December 1995 to provide for an aggregate of $9.5 million of Term Loans payable
in 24 quarterly installments ending December 31, 2001 (increasing to $475,000),
and a $10.0 million Revolving Credit Facility expiring December 31, 1998, which
is subject to a borrowing base limitation based on a percentage of eligible
accounts receivable. The Term Loans and the Revolving Credit Facility are
secured by substantially all of the assets of the Company. The Term Loans and
the Revolving Credit Facility bear interest at resetting rates selected by the
Company from various alternatives computed by adding a margin to one of the
interest rate alternatives described below. The interest rate alternatives are
either (i) 0.5% to 1.5% in excess of the greater of (x) Chemicals' base lending
rate, (y) the federal funds rate plus 1.0% or (z) the bank's certificate of
deposit rate, or (ii) LIBOR plus 2.0% to 3.0%. The applicable margins are
determined based upon the Company's compliance with its total debt coverage
ratio. In the case of LIBOR-based loans, the margin is 2%, 2.5% or 3%, if such
ratio is less than 2.75:1, between 2.76:1 and 3.5:1, or greater than 3.51:1,
respectively. In the case of other loans, the margin is .5%, 1% or 1.5%, if such
ratio is less than 2.75:1, between 2.76:1 and 3.5:1, or greater than 3.51:1,
respectively. At March 31, 1996, the weighted average interest rate on all loans
outstanding under the Chemical Facility was 8.625% per annum. As of March 31,
1996, approximately $9.3 million of the Term Loans were outstanding and $2.3
million of borrowings under the Revolving Credit Facility were outstanding. The
Revolving Credit Facility can be used for working capital and general corporate
purposes or, subject to a $7.5 million maximum, for future acquisitions.
Borrowings for acquisitions under the Revolving Credit Facility ('Acquistion
Loans') are repayable in equal quarterly installments ending December 31, 2001.
Except with respect to this Offering, the Chemical Facility generally requires
that the net proceeds of equity financings by the Company be used first to
prepay outstanding amounts under the Term Loans, then to prepay Acquisition
Loans, and thereafter to reduce the outstanding balance under Revolving Credit
Facility. In addition, 50% of defined Excess Cash Flow for each year commencing
with 1996 is required to be used first to prepay outstanding amounts under the
Term Loans, then to prepay Acquisition Loans and thereafter to reduce borrowings
under the Revolving Credit Facility. Excess Cash Flow is defined to mean, with
respect to any fiscal year, the amount by which the Company's consolidated net
cash flow exceeds its aggregate of consolidated regularly scheduled principal
payments of indebtedness and consolidated cash interest expense. To the extent
any amounts under the Revolving Credit facility are repaid, the Company may
reborrow such amounts. The Chemical Facility includes certain financial and
other covenants applicable to the Company, including limitations on capital
expenditures, maintaining a
19
<PAGE>
fixed charge coverage ratio, as well as ratios of total funded debt to adjusted
net cash flow, and total other debt to adjusted net cash flow within certain
levels, having positive net income in each fiscal quarter, and maintaining
EBITDA (earnings before income taxes, extraordinary items, interest expense,
depreciation and amortization) above certain levels.
On March 29, 1996, Heller entered into an agreement with the Company
pursuant to which, on the closing date of the Offering, Heller will exercise the
Heller Warrants by applying the $7 million of outstanding principal amount under
the Heller Facility against the exercise price (cancelling the note related
thereto having a carrying value of $6.5 million at March 31, 1996 due to
original issue discount), and converting the Class A and Class B Preferred Stock
received upon such exercise into 962,675 shares of Common Stock. Additionally,
in connection with such exercise and conversion, the Company has agreed to issue
to Heller an additional 42,500 shares of Common Stock. The cancellation of the
Heller subordinated debt will result in a reduction in the Company's interest
expense of $490,000 per year.
After the application of the net proceeds from this Offering, the Company
believes that cash flow generated from the Company's operations and its
borrowing capacity under the Chemical Facility (estimated at $8.1 million) and
certain capital leasing arrangements should be sufficient to meet its working
capital and capital expenditure requirements through December 31, 1997.
Additional funds may be required in connection with future acquisitions, if any.
In connection with the fixing on December 29, 1995 of the deferred purchase
price for the acquisition of Transcriptions, Ltd., the Company agreed to pay
$24.5 million on August 31, 1996 in the form of 861,463 shares of Common Stock
and $18,375,000 in cash. Because the deferred purchase price is not due until
August 31, 1996, the cash portion has been discounted and presented as a
subordinated payable at December 31, 1995. See Notes 2 and 7 of Notes to
Consolidated Financial Statements of the Company. The Company intends to use a
portion of the proceeds from this Offering to pay the debt portion of the
deferred purchase price. See 'Use of Proceeds.'
20
<PAGE>
BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under 'Risk Factors' and
elsewhere in this Prospectus.
GENERAL
The Company is a leading national provider of electronic transcription and
document management services to the healthcare industry. Through its proprietary
software, open architecture environment and network of more than 1,500 trained
transcriptionists, the Company converts free-form medical dictation into
electronically formatted patient records which healthcare providers use in
connection with patient care and for other administrative purposes. The
Company's customized outsourcing services enable clients to improve the accuracy
of transcribed medical reports, reduce report turnaround times, shorten billing
cycles and reduce overhead and other administrative costs. The Company believes
that the electronic capture and delivery of free-form physician dictation are
key components in the increasing implementation by healthcare providers of
electronic medical record systems.
The Company develops long term client relationships due to its
technological expertise, efficient and cost-effective services and an
experienced management team. The Company's diversified client base includes more
than 400 hospitals and other healthcare organizations such as outpatient
clinics, health maintenance organizations and physician practice groups. The
Company has a history of client satisfaction and retention and has provided
services for an average of over five years for its 25 largest clients in 1995.
The Company performed services in 1995 for 88%, 92% and 100% of those clients
which were its 25 largest customers in 1992, 1993 and 1994, respectively.
The Company continues to implement advances in technology to improve the
delivery of its services. The Company utilizes its Medical Transcription System,
an integrated transcription and document management system based upon
proprietary software, to service the transcription and document management needs
of its clients. The Company's technical staff customizes MTS to address initial
data capture, conversion of data into electronic format, editing of data and
routing of electronically formatted reports to the client's host computer
system. For electronic data interchange, MTS incorporates the HL-7 format or
other interface protocols. The Company's Dictation Tracking System enables the
Company and its clients to track the status of particular patient data and
transcribed reports at any point in time and to evaluate the Company's on-time
performance. Clients also use DTS as an integral management tool to monitor
physician timeliness in the dictation, review and sign-off process.
INDUSTRY OVERVIEW
Growth in the demand for medical transcription services is directly
impacted by the number of hospital admissions and outpatient visits. Each
hospital admission or outpatient visit generates dictated or written data which
must be entered into a patient's record. For the quarter ended September 30,
1995, the American Hospital Association estimated that the numbers of hospital
admissions and outpatient visits in the United States were 8.3 million (an
increase of approximately 3% over the corresponding period in 1992) and 112
million (an increase of approximately 22% over the corresponding period in
1992), respectively.
Medical transcription is the process by which free-form dictated patient
data is captured in a useable format, routed to the appropriate location,
reviewed and approved by the dictating healthcare provider, and inserted into a
patient's medical record. Physicians and other individual healthcare providers
use this information for direct patient care delivery purposes and
administrative personnel use the information for billing and other
administrative purposes. Historically, the majority of dictated reports and
related transcription expenditures were generated by hospital medical record
departments, where transcription services represent a significant expenditure.
Examples of these reports include patient histories, discharge summaries,
operative reports and consults. Increasingly, other hospital departments, such
as radiology, emergency, oncology, pediatrics and cardiology, are dictating
reports to improve their delivery of care and administrative functions. Health
maintenance organizations, outpatient clinics and physician practice groups
21
<PAGE>
are also expanding their use of transcribed medical reports. Accordingly, the
Company believes the market for outsourced transcription services will continue
to expand.
Outsourcing. During the 1990's, the healthcare industry has increasingly
outsourced services as a means to reduce administrative burdens and fixed costs.
Within hospitals and other healthcare organizations, medical record departments
have contracted with third parties for electronic transcription of dictated
patient records as their information needs, documentation requirements and
volume of dictated reports have expanded. As healthcare providers grow in size
and the delivery of medical care becomes decentralized, the outsourcing of
transcription services permits providers to reduce overhead and costs, ease
administrative burdens, improve quality of reports, access leading technologies
without development and investment risk and obtain the expertise to implement
and manage a system tailored to their specific requirements.
Growth in Information Systems. As healthcare organizations expand and the
delivery of care becomes increasingly decentralized, the insurance industry and,
in some cases, healthcare accreditation organizations are requiring expanded use
of transcribed reports to facilitate communication between various parts of a
healthcare network, to improve the quality and efficiency of patient care, and
to retain and provide reliable information in the event of malpractice
litigation. Moreover, the growing information needs of hospitals and other
healthcare organizations are driving the creation of electronic medical record
systems as the first step in the implementation of the computer based patient
record and the ability to perform outcomes analysis. The Company believes that
electronic medical transcription services are a core component of such systems
and records since they provide the ability to capture, access and manipulate the
patient data which forms the basis of the patient record.
Delivery of Care. As the health insurance industry continues to shift from
traditional fee-for-service reimbursement to managed care forms of reimbursement
such as 'capitation,' healthcare providers and payors are creating integrated
healthcare delivery systems consisting of hospitals, health maintenance
organizations, outpatient clinics and physician practice groups which must
coordinate the exchange of patient information and the delivery of patient care.
The accurate and efficient capture of patient data, and the distribution and
storage of and access to patient medical records are critical to such
coordination. Similar coordination is required as healthcare organizations,
often with different information systems, consolidate and increase in size
through mergers and acquisitions. Increasingly, healthcare organizations are
recognizing that centralizing patient data into an accessible system can create
economics of scale to reduce overall healthcare costs and improve the efficient
delivery of patient care.
Consolidation. The medical transcription industry is highly fragmented. An
industry trade organization estimates that there are approximately 1,500
providers of medical transcription services, most of which are small local or
regional companies. Many of these companies lack the financial resources or the
technological capabilities necessary to provide outsourced transcription
services to healthcare providers nationwide. As healthcare organizations
themselves consolidate and increase in size, and their information needs become
more complex, providers and payors increasingly require large and sophisticated
vendors.
STRATEGY
The Company's objectives are to maintain its leadership position as a
provider of electronic transcription and document management services to the
healthcare industry and to enhance that position as the information needs of
healthcare providers continue to expand and evolve. The key elements of the
Company's strategy include the following:
Expand Existing Client Relationships. A majority of the Company's
transcription services are provided to hospital medical record departments.
Through its close and continuing client relationships, the Company seeks to
increase its services as these departments outsource more of their transcription
requirements and as the volume of patient records continues to grow. In
addition, the Company is seeking to penetrate direct care departments at
hospitals such as radiology, emergency, oncology, pathology, pediatrics and
cardiology, within its existing client base. Historically, these departments
have not dictated their patient data or outsourced the transcription of their
patient data to the same extent as medical record departments.
Extend Current Client Base. The Company is seeking to extend its base of
traditional hospital clients
22
<PAGE>
and to pursue new clients such as health maintenance organizations, outpatient
clinics and physician practice groups which the Company believes will represent
a growing percentage of the available market. Based upon input from new clients,
the Company believes that references from its existing client base represent a
key component of its sales and marketing efforts. In addition, the Company has
begun to hire dedicated sales people to enhance its marketing efforts.
Leverage Technology Leadership. The Company's proprietary software, which
operates within an open architecture environment, and the Company's
technological expertise enable it to create customized systems tailored to
specific client requirements and changing industry standards. In order to
provide greater value added services to its clients, the Company intends to
continue to incorporate advances in technology to expand the breadth and
functionality of its services (such as outcome analysis capabilities) and
enhance its competitive position.
Capitalize on Emerging Technologies. The Company is initiating
relationships with developers and end-users of emerging technologies, such as
voice-recognition, physician clinical work stations and Internet based
communications, to create new value added services for its clients and to
participate in the development of the computer based patient record. In light of
preliminary discussions with such developers and end-users, the Company believes
that such relationships can accelerate the development and commercialization of
emerging technologies in the medical transcription and document management
field, including opportunities in telecommunications technology to improve the
efficiency of its operations and to reduce costs..
Pursue Strategic Acquisitions. The Company intends to pursue acquisitions
of other transcription companies which expand its client base, network of
qualified transcriptionists or geographic presence, as well as acquisitions,
joint ventures and other relationships which expand its technological expertise.
As the only publicly traded company engaged primarily in the provision of
medical transcription services, the Company believes that it can capitalize on
consolidation opportunities within the fragmented medical transcription
industry.
THE MEDQUIST INTEGRATED SYSTEM
The Company integrates proprietary software with sophisticated digital
dictation equipment, a network of more than 1,500 transcriptionists and an
experienced management team to provide customized solutions for hospitals and
other healthcare providers. Through its outsourced transcription and document
management services, the Company captures and stores free-form medical
dictation, professionally transcribes such dictation into accurate reports, and
electronically receives, reviews and distributes final reports to a client by
up-loading them into the client's computer system for placement into a patient's
medical record. Authorized individuals at multiple locations can access this
electronic information when needed for administrative, billing and patient care
purposes. The Company believes that the electronic transcription and management
of free-form dictation are key components in the increasing implementation of
electronic medical record systems.
23
<PAGE>
The following chart illustrates the full capabilities of the Company's
electronic transcription and document management system:
[GRAPHIC]
In the printed document there is a flow chart graphically describing how
medical reports are electronically transmitted .
1. MTS is accessed by healthcare professionals over standard telephone lines.
2. Free-form dictation is received by the Company and routed to a
fault-tolerant dictation system at one of its branch offices.
3. Transcriptionists access the free-form data stored at any of the Company's
locations through a special telephone transcribing station permitting the
shifting of work to reduce backlog.
4. Once transcribed, reports are reviewed and proofread for accuracy.
5. Reports are compiled at the Company's offices for distribution to the
client.
6. Reports are electronically forwarded to the client and uploaded to its host
computer.
7. Physicians and other healthcare professionals can access the reports at
remote locations.
8. DTS enables both the client and the Company to track the status of reports
as they move through the system and to monitor physician timeliness in
their dictation, review and sign-off process.
24
<PAGE>
The following are the key characteristics of the Company's electronic
transcription and document management system:
Customization/Open-Architecture. MTS operates in an open architecture
environment providing flexibility to address individual client needs. The
Company is capable of modifying MTS to interface with existing or legacy
systems. The Company's technical staff works closely with its clients, both
before and after installation, to develop system modifications and refinements.
For example, MTS allows database abstracting and can generate reports which
clients can use for administrative, management or direct delivery of patient
care purposes (i.e. outcomes analysis studies).
Fast, Accurate and Reliable Reports. The Company believes that due to its
large number (more than 1,500) of trained transcriptionists and its ability to
allocate work among them efficiently, it is able to reduce the production
turnaround times for transcribed medical reports. MTS allows a match of client
turnaround requirements and transcriptionist availability that an in-house staff
or smaller organization generally cannot provide. MTS also provides editing and
electronic review capabilities, such as specific reference to pages or clauses
to alert clients to potential deficiencies, that increase accuracy and
reliability. The quality of its transcriptionists and the capabilities of MTS
enable the Company to deliver its services on a cost-effective basis.
Distribution/Routing System. MTS speeds the distribution of transcribed
reports within the client's healthcare organization. MTS enables the Company to
exchange patient data with the client, using either the HL-7 format or another
interface protocol selected by the client. As a result, completed reports are
uploaded directly into the client's computer system. Once received at the client
host computer, authorized healthcare professionals throughout the client's
organization can access the report.
Tracking System. DTS enables a client and individual healthcare providers
to review the status of particular patient data and transcribed reports at any
point in time and to advise the Company whether the production of a particular
report requires acceleration. Through DTS, the client and the Company are able
to monitor the Company's on-time performance, especially with respect to
critical reports requiring turnaround times of less than 24 hours. Healthcare
providers also use DTS as an integral management tool to monitor physician
timeliness in their dictation, review and sign-off process.
TECHNOLOGY DEVELOPMENT
To assist its clients in meeting their transcription and document
management needs, the Company modifies MTS to interface with existing or legacy
systems. The Company works directly with its clients, both before and after
implementation of its systems, to create customized solutions. The Company
continually evaluates emerging technologies and applies them as appropriate to
make its services more reliable, efficient and cost-effective. For example, the
Company partners with its clients to customize MTS to enable electronic data
exchange in accordance with the HL-7 format, or other interface protocols, to
link the various components of the client's healthcare network.
The Company has also made technological enhancements to MTS to increase the
speed and accuracy of its transcriptionists. Completed projects include the
development of keys and keystroke combinations which translate into commonly
used, often misspelled, medical and technical terms. Additional improvements in
the MTS online spellcheck and editing systems are currently under development,
as are enhancements to the Company's electronic signature capability, the
Company's use of facsimile servers to facilitate the distribution of transcribed
reports to multiple locations, and the conversion of ASCII text into HTML
documents for transmission over computer networks.
The Company is currently working to develop an Internet/MTS access route
which is reliable and secure, provides an acceptable response time and reduces
telephone charges, a major component of the Company's cost structure.
Additionally, the Company is in discussions with a developer of voice
recognition technology to refine that technology for application in the medical
transcription environment. The successful application of voice recognition
technology to the medical transcription process would enable the Company to
concentrate on more value added data access and manipulation services, such as
data exchange and data analysis services, as compared to initial data capture.
There can be no assurance that the Company will be successful in responding to
technological developments, emerging technical standards or evolving customer
needs, on a timely basis or at all, or that any service enhancements or new
services, if developed and introduced, will
25
<PAGE>
achieve market acceptance.
CLIENTS
The Company's diversified client base includes more than 400 hospitals and
other healthcare organizations such as outpatient clinics, health maintenance
organizations and physician practice groups. A majority of the Company's largest
clients are hospitals, including large metropolitan hospitals and major teaching
hospitals. Additional clients include health maintenance organizations and
out-patient clinics. The Company's clients are located in 38 states and the
District of Columbia. The following table sets forth certain information
relating to the Company's client profile and their contribution to the Company's
revenue in 1995:
PERCENTAGE
TYPE OF CLIENT OF REVENUES
- -------------------------------------------------------------- ---------------
Hospital Medical Record Departments........................... 78.3%
Other Hospital Departments.................................... 13.3
HMOs, Out-Patient Clinics and Other Healthcare Providers...... 7.8
Physician Practice Groups..................................... 0.6
------
100.0%
======
Due to its technological expertise and experience, and efficient and
cost-effective services, the Company has developed long-term client
relationships. The Company has a history of customer satisfaction and retention
and has provided services for an average of over five years for its 25 largest
clients in 1995. The Company performed services in 1995 for 88%, 92% and 100% of
those clients which were its 25 largest clients in 1992, 1993 and 1994,
respectively. During 1993, 1994 and 1995, annual revenue from each of the
Company's 25 largest clients ranged from $287,000 to $993,000, $351,000 to
$2,000,000 and $487,000 to $2,100,000, respectively. The Company's largest
client accounted for less than 5% of the Company's revenue during 1995. The
following table sets forth the average revenue per client for each of the years
indicated:
AVERAGE REVENUE
YEAR PER CLIENT
- -------------------------------------------------------- -----------------
1993.................................................... $105,000
1994.................................................... $136,000
1995.................................................... $142,000
The Company emphasizes client support and partnering with its clients. The
partnership begins when the Company's implementation team works with a new
client to develop a customized transcription services plan. The team then
executes the plan, provides ongoing support and develops service improvements
and enhancements as the relationship evolves. The Company's support team
includes 40 systems administrators. As part of its support efforts, the Company
also actively solicits input from clients and other sources (such as trade
groups) on how to improve existing services and develop new services. For
example, in January 1996, the Company held a user group meeting that was
attended by the health information directors of many of its largest clients.
SALES AND MARKETING
All office managers and operational vice presidents, as well as the
Company's senior management including the Chief Executive Officer, have sales
responsibilities. The Company recently hired its first regional director of
sales and another dedicated salesperson, and intends to develop and implement a
formal marketing plan to assist marketing efforts with traditional hospital
clients and to help penetrate emerging markets. Based on input from new clients,
the Company believes that, historically, new clients have utilized its services
in large part due to recommendations and references by its existing national
client base, and that references from the existing client base will continue to
be a key component of the Company's marketing and sales strategy. In addition to
its traditional transcription services to hospital medical record departments,
the Company's target markets include patient care departments, such as
radiology, emergency rooms, oncology, pathology, pediatrics and cardiology,
health maintenance organizations, physician practice groups and outpatient
clinics.
When performing sales and marketing responsibilities, the Company's
employees utilize a consultative sales and marketing approach by establishing a
working relationship with its clients through a series of direct meetings with
the chief financial officer, health information manager, chief information
officer and other key
26
<PAGE>
individuals at the client's organization. In this manner, the Company obtains
information concerning the particular needs of a client, and educates the client
as to how the Company's services can be customized to meet those needs. As part
of its marketing efforts, the Company also advertises in national healthcare
trade publications (including those sponsored by the American Health Information
Management Association), and participates in industry conventions.
COMPETITION
The Company currently competes in a highly fragmented industry which is
predominately populated by small regional or local companies, with a limited
number of national companies. According to American Association for Medical
Transcriptionists, there are approximately 1,500 companies providing medical
transcription services in the United States. The Company believes that it
competes for clients on the basis of price, ability to customize services, the
reliability, accuracy and turnaround time of transcribed reports. In addition to
competition, the market available to the Company is limited by healthcare
organizations which maintain in-house transcription departments.
EMPLOYEES
As of March 26, 1996, the Company employed 483 persons, of whom 23 are
administrative, 22 are branch office managers, 40 are technical and systems
support, two are sales and marketing, 210 are clerical and other support
personnel, and 186 are transcriptionists. In addition, 1,354 persons provide
transcription services to the Company from their homes. The Company compensates
its transcriptionists under an incentive-based compensation structure based upon
their performance (including accuracy, speed and output). The Company believes
that its ability to engage at-home transcriptionists enables it to compete
effectively for the limited number of skilled transcriptionists. By being able
to work out of their homes, qualified transcriptionists can make their own
hours, eliminate commuting costs and time and have the benefits of flexible work
hours. Additionally, many of the Company's transcriptionists are working parents
with children and the ability to work at home permits them to reduce child care
costs. The Company takes the position that its transcriptionists are independent
contractors for state tax, benefits and unemployment purposes and statutory
employees for federal income tax purposes. A successful challenge to the
Company's position or a change in applicable law could result in the incurrence
of liability for withholding taxes, disability payments, unemployment payments,
interest and penalties by the Company. See 'Risk Factors -- Ability to Attract
and Retain Qualified Transcriptionists.'
The Company utilizes a quality control program for training its
transcriptionists to permit greater accuracy of transcribed reports. The Company
has hired a national recruiter for screening and testing applicants for
positions as transcriptionists and maintains relationships with transcriptionist
schools to develop applicant pools. Screening procedures include testing
applicants' skills to determine whether they meet the Company's standards.
None of the Company's employees is represented by a labor union. The
Company considers its relations with its employees to be good.
GOVERNMENT REGULATION
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the outsourcing arrangements of healthcare
providers. Federal and state legislators have proposed programs to reform the
United States healthcare system and other proposals are in the development
stage. In general, these programs and proposals tend to emphasize managed care,
seek to lower reimbursement rates and otherwise attempt to control the
environment in which providers operate.
In providing its services, the Company is subject to certain statutory,
regulatory and common law requirements regarding the confidentiality of such
medical information. The Company requires its personnel to agree to keep all
medical information confidential and monitors compliance with applicable
confidentiality requirements.
Federal and state regulators are making increasing efforts to investigate
claims of false billing for government reimbursement and have secured
substantial payments from healthcare providers to resolve these claims. Because
these claims often result from a lack of appropriate documentation to support
billing, these government investigational efforts may stimulate a need for more
comprehensive transcription services.
27
<PAGE>
Additionally, healthcare accreditation organizations and governmental
authorities have begun to require more efficient transcription of patient
medical records as part of the requirements for a hospital or other healthcare
organization to receive and maintain its accreditation.
It presently cannot be determined if any additional healthcare legislation
or self-regulatory proposals (whether relating to reimbursement, accreditation,
billing practices, confidentiality, the healthcare industry in general or
otherwise) will be introduced, the form that any such legislation or proposals
would take, whether such legislation or proposals would be enacted or adopted
and, if enacted or adopted, what effect, if any, such legislation or proposals
would have on the healthcare industry in general and the Company in particular.
INTELLECTUAL PROPERTY
The Company considers its MTS and DTS trademarks and its corporate names
MedQuist and Transcriptions, Ltd. to be important to the operation of its
business and the marketing of its services. The Company has been issued a
registered trademark for the corporate name 'MedQuist.' No registered trademark
has been issued for MTS, DTS or the corporate name Transcriptions, Ltd. The
Company regards the software underlying its services as proprietary, and relies
primarily on a combination of contract, copyright and trademark law, trade
secrets, confidentiality agreements and contractual provisions to protect its
proprietary rights. The Company has no patents or patent applications pending,
and relies on existing trade secrets and copyright laws to afford it protection
against unauthorized use. The Company is not aware that any of its software,
trademarks or other proprietary rights infringe the proprietary rights of third
parties. See 'Risk Factors -- Dependence on Proprietary Rights; Risks of
Infringement.'
FACILITIES
The Company does not own any real property. The Company leases office and
other space for 24 service centers in 21 states. The Company's typical service
center ranges in size from 1,000 to 7,000 square feet and is leased for a term
ranging from three to five years. The Company moved its executive offices in May
1995 to its current 14,000-square foot location and has four years remaining on
its lease. The Company believes that there is adequate office space available to
it should it need to move or expand and that minimal leasehold improvements are
required in order to open a new location.
LEGAL PROCEEDINGS
Although the Company from time to time in the course of the operation of
its business is subject to various legal proceedings, the Company is not
currently a party to any material pending legal proceeding nor, to the knowledge
of the Company, is any material legal proceeding currently threatened.
COMPANY HISTORY
The Company was incorporated in New Jersey in 1987 as a group of outpatient
healthcare businesses affiliated with a non-profit healthcare provider. During
the last several years, the Company sold its outpatient businesses, acquired
Transcriptions, Ltd. in May 1994 and two other small transcription businesses in
1995, and sold its receivables management division in December 1995. The Company
received $17.3 million in cash for its receivables management division and
applied the net proceeds of $16.7 million to reduce its bank debt.
As a result of the foregoing acquisitions and divestitures, the Company now
focuses on providing electronic transcription and document management services
to hospitals and other healthcare providers. Transcriptions, Ltd. commenced its
medical transcription business in 1970. Prior to 1991, Transcriptions, Ltd.
supplemented internal growth by granting franchises in certain areas. The
Company does not intend to grant any future franchises and, to date, the Company
has acquired all of the franchises other than in Georgia, Florida and the New
York City metropolitan area. The Company's revenue derived from its franchises
in 1995 was $317,000. Each of the Company's three remaining franchisees has the
exclusive right to provide medical transcription services to clients in its
territory utilizing the Company's proprietary systems and software, except that
if the franchisee is unable or unwilling to service a new client in its
territory in a timely and commercially reasonable manner, the Company may
provide the services to that client directly.
28
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------------------------
<S> <C> <C>
James R. Emshoff.......................... 53 Chairman of the Board and Director
David A. Cohen............................ 55 President, Chief Executive Officer and Director
John A. Donohoe, Jr....................... 41 Executive Vice President and Chief Operating Officer
Robert F. Graham.......................... 33 Vice President, Treasurer and Chief Financial Officer
Ronald F. Scarpone........................ 51 Vice President and Chief Information Officer
John M. Suender........................... 35 Vice President, General Counsel and Secretary
William T. Carson, Jr. (1)(2)(3).......... 63 Director
Richard J. Censits........................ 58 Director
James F. Conway (2)....................... 68 Director
Frederick S. Fox, III (1)(2)(3)........... 59 Director
A. Fred Ruttenberg (2)(3)................. 53 Director
John H. Underwood (1)(2)(3)............... 37 Director
Terrence J. Mulligan...................... 50 Director Nominee
</TABLE>
- ------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Nominating Committee
James R. Emshoff has been a director of the Company since December 1992 and
Chairman of the Board since November 1995. Mr. Emshoff also served as acting
President and Chief Executive Officer from April 1995 through November 1995.
Since August 1992, Mr. Emshoff has been the Chairman and Chief Executive Officer
of IndeCap Enterprises, Inc., a firm providing consulting services on corporate
restructuring issues and venture participation in the outsourcing of management
service functions. From February 1991 to August 1992, Mr. Emshoff was Chairman
and Chief Executive Officer of Wellesley Medical Management Inc., an owner and
operator of primary healthcare centers. From January 1985 to February 1991, Mr.
Emshoff was President and Chief Executive Officer of Citicorp Diners Club.
David A. Cohen joined the Company in May 1994 as President of the
Transcriptions, Ltd. subsidiary and has been an executive officer and director
of the Company since July 1994 and the Company's President and Chief Executive
Officer since November 1995. Mr. Cohen joined Transcriptions, Ltd. in 1973 and
served as its Chief Executive Officer for more than 15 years.
John A. Donohoe, Jr. joined the Company in May 1994 as Executive Vice
President of the Company's Transcriptions, Ltd. subsidiary. Mr. Donohoe became
Chief Operating Officer of the Company in November 1995. Mr. Donohoe was
employed by Transcriptions, Ltd. since 1974, serving in numerous management
capacities. Mr. Donohoe is a member of the board of directors of the Medical
Transcription Industry Alliance.
Robert F. Graham, a certified public accountant, has been Vice President,
Treasurer and Chief Financial Officer of the Company since December 1993. Prior
to his promotion to that position, Mr. Graham served as Corporate Controller and
Chief Accounting Officer of the Company starting in December 1992 and as an
Assistant Controller starting in July 1992. Prior to joining the Company, Mr.
Graham was with Deloitte & Touche, Philadelphia, Pennsylvania since 1985.
Ronald F. Scarpone has been Vice President and Chief Information Officer of
the Company since
29
<PAGE>
January 1996. Mr. Scarpone joined the Company in May 1994 as Vice President -
Information Services. Mr. Scarpone was employed by Transcriptions, Ltd. since
1989 and served as its Vice President of Information Services since September
1993.
John M. Suender has been General Counsel of the Company since September
1992 and a Vice President and the Secretary of the Company since October 1992.
From September 1988 until joining the Company, Mr. Suender was with the law firm
of Pepper, Hamilton & Scheetz, Philadelphia, Pennsylvania.
William T. Carson, Jr., a director of the Company since January 1991, was
President of Sullivan-Carson, Inc., a textile manufacturing firm in Haddonfield,
New Jersey, for 25 years until 1988. In 1988, he became Vice President and a
director of Covenant Bank, Haddonfield, New Jersey, positions he currently
holds.
Richard J. Censits has been a director of the Company since January 1987.
Mr. Censits was Chief Executive Officer from January 1, 1987 until his
resignation in March 1995, and was President of the Company until September
1994. Mr. Censits served as the Vice President and Chief Financial Officer of
Campbell Soup Company from 1974 to 1986. Mr. Censits currently serves as a
director of Checkpoint Systems, Inc., DiMark, Inc. and Energy North, Inc.
James F. Conway, a director of the Company since January 1987, has been the
General Manager and principal shareholder of Mister Softee, Inc., an ice cream
franchise company located in Runnemede, New Jersey, since 1956.
Frederick S. Fox, III has been a director of the Company since January 1987
and served as its Chairman of the Board until August 1993. Mr. Fox is President
of TFAM, Inc. ('TFAM'), a provider of commercial real estate brokerage and asset
management services, which he founded in 1991. Prior to founding TFAM, Mr. Fox
served as Executive Vice President of Fox & Lazo, Incorporated, a real estate
brokerage company with which he has been associated since 1960.
A. Fred Ruttenberg has been a director of the Company since December 1991.
Mr. Ruttenberg has, since September 1986, been a partner in the law firm of
Blank, Rome, Comisky & McCauley, Cherry Hill, New Jersey, which acts as special
counsel to the Company for certain matters.
John H. Underwood has been a director of the Company since July 1994. Since
1989, Mr. Underwood has been a Principal with Heller, a subsidiary of Heller
International Group engaged in the business of making equity and debt
investments in small concerns, where he is responsible for overseeing a
portfolio of private equity investments made by Heller, including its investment
in the Company. Mr. Underwood was nominated to the Board of Directors in 1994 to
serve as Heller's representative pursuant to the terms of certain credit
arrangements between the Company and Heller. Mr. Underwood is also a Senior Vice
President of Heller Financial, Inc. and is currently a director of seven other
privately held companies. From 1986 to 1989, Mr. Underwood served as a Vice
President of Citicorp North America, Inc. as a member of its leveraged capital
group.
Terrence J. Mulligan has been nominated to serve as a member of the Board
of Directors. Mr. Mulligan has held several senior executive positions with
Baxter International, Inc. since 1986, including his current position as Group
Vice President, Health Systems, since 1994, Group Vice President, Multi-Hospital
Systems from 1993 to 1994, and Senior Vice President, Corporate Sales and
Marketing from 1988 to 1993. Mr. Mulligan also serves on the Senior Management
Committee and the Operating Management Committee at Baxter International, Inc.
Baxter International, Inc., through its subsidiaries, is a leading manufacturer
and marketer of healthcare products and services worldwide, concentrating its
research and development programs in biotechnology, cardiovascular medicine,
renal therapy and related medical fields. Mr. Mulligan currently serves as a
member of the Board of Visitors of the University of Iowa College of Business
Administration, a member of the Board of Directors of the Baxter Foundation, a
private philanthropic organization, and a member of the Board of Directors and a
past President of the University of Iowa Alumni Association. If elected by the
Company's shareholders, it is anticipated that Mr. Mulligan will commence
serving on the Company's Board of Directors promptly after completion of this
Offering.
CLASSIFIED BOARD OF DIRECTORS
30
<PAGE>
Pursuant to the Company's Amended and Restated Certificate of
Incorporation, the Company's Board of Directors is divided into three classes of
directors each containing, as nearly as possible, an equal number of directors.
Directors within each class are elected to serve three-year terms and
approximately one-third of the directors sit for election at each annual meeting
of the Company's shareholders. The terms of Messrs. Cohen and Underwood expire
in 1996; the terms of Messrs. Emshoff, Fox and Ruttenberg expire in 1997; and
the terms of Messrs. Carson, Censits and Conway expire in 1998. If elected at
the 1996 shareholders' meeting, Mr. Mulligan's term will expire in 1999. A
classified board of directors may have the effect of deterring or delaying any
attempt by any group to obtain control of the Company by a proxy contest since
such third party would be required to have its nominees elected at two separate
annual meetings of the Board of Directors in order to elect a majority of the
members of the Board of Directors. Directors who are elected to fill a vacancy
(including vacancies created by an increase in the number of directors) must be
confirmed by the shareholders at the next annual meeting of shareholders whether
or not such director's term expires at such annual meeting.
DIRECTOR COMPENSATION
In 1995, each director who was not an executive officer of the Company was
paid an annual retainer of $4,000, an additional $1,000 for each meeting of the
Board of Directors attended (or $500 if attended by teleconference) and an
additional $500 for each committee meeting attended. In addition, Mr. Underwood
does not accept any cash or non-cash compensation as a director. In 1995, the
average cash compensation paid to a director (excluding those who received no
compensation) was $17,000.
Subject to the approval of the Company's shareholders, commencing in 1996,
each director who is not an executive officer of the Company, in lieu of the
foregoing retainer and meeting fees, will be entitled to deferred compensation
in the form of Common Stock having a fair market value of $18,000 on the date of
grant. The Board approved this change in the form of compensation in order to be
consistent with its philosophy of aligning interests of Board members more
closely with shareholder interests. Under the deferred compensation plan, Common
Stock will not be issued until the date a director leaves the Board. Fair market
value of a particular grant equals the closing price of the Common Stock on the
date of grant. For tax purposes, a director may choose not to defer receipt of
Common Stock under a particular grant, but will nevertheless be prohibited from
selling the Common Stock prior to leaving the Board.
Pursuant to the terms of the Company's Nonstatutory Stock Option Plan for
Non-employee Directors, during each calendar year in which a non-employee
director serves, and so long as such director serves in such capacity on June 1
of such calendar year, such director is granted an option to purchase 3,000
shares of Common Stock at an exercise price equal to the Common Stock's fair
market value on the date of the grant of the option, which options are
exercisable for a 10-year period commencing on the one-year anniversary of the
grant date. Such options, to the extent not exercised, terminate 30 days after
the individual ceases to be a director of the Company. Up to 100,000 shares of
Common Stock are available for issuance to directors under this plan. The
Company intends to register under the Act the shares of Common Stock issuable
pursuant to this plan. See 'Shares Eligible for Future Sale.'
COMMITTEES OF THE BOARD
The Company's Board of Directors has appointed an Audit Committee, a
Nominating Committee and a Compensation Committee.
Audit Committee. The Audit Committee, which currently consists of Messrs.
Fox (Chairman), Underwood and Carson, has the authority and responsibility: to
hire one or more independent public accountants to audit MedQuist's books,
records and financial statements and to review the Company's systems of
accounting (including its systems of internal control); to discuss with such
independent public accountants the results of such audit and review; to conduct
periodically independent reviews of the systems of accounting (including systems
of internal control); and to make reports periodically to the Board of Directors
with respect to its findings.
31
<PAGE>
Compensation Committee. The Compensation Committee, which currently
consists of Messrs. Conway (Chairman), Carson, Fox, Ruttenberg and Underwood, is
responsible for fixing the compensation of the Chief Executive Officer, and
making recommendations to the Board of Directors with respect to the
compensation of other executive officers and other compensation matters such as
with respect to stock option plans and approving the targets under any bonus
plans. The Compensation Committee administers the 1992 Option Plan.
Nominating Committee. The Nominating Committee, which currently consists
of Messrs. Carson (Chairman), Fox, Ruttenberg and Underwood makes
recommendations to the Board of Directors with respect to management and other
nominees to the Board, reviews shareholder nominees to the Board of Directors
and periodically reports its findings to the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee (Messrs. Conway, Carson,
Fox, Ruttenberg or Underwood) has any interlocking or other relationship with
the Company that would call into question their independence with respect to his
duties. Mr. Underwood is a principal of Heller, which has engaged in certain
financing transactions with the Company. See 'Certain Transactions.'
LIMITATION OF DIRECTORS' LIABILITY; INDEMNIFICATION MATTERS
The Company's Amended and Restated Certificate of Incorporation provides
that no director shall be personally liable to the Company or its shareholders
for monetary damages for breach of any duty in his or her capacity as a director
owed to the Company or to the shareholders of the Company, except for liability
for breach of the director's duty of loyalty to the Company or its shareholders,
for acts or omissions not in good faith or which involve a knowing violation of
law, or for any act or omission which results in receipt by the director of an
improper personal benefit.
Section 14A:3-5 of the Corporation Law of the State of New Jersey ('NJCL')
permits each New Jersey business corporation to indemnify its directors,
officers, employees and agents against expenses and liability for each such
person's acts taken in his or her capacity as a director, officer, employee or
agent of the corporation if such actions were taken in good faith and in a
manner which he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal proceeding, if he
or she had no reasonable cause to believe his or her conduct was unlawful.
Article 10 of the Company's Bylaws provides that the Company, to the full extent
permitted by Section 14A:3-5 of the NJCL, shall indemnify all past and present
directors or officers of the Company and may indemnify all past or present
employees or other agents of the Company. To the extent that a director,
officer, employee or agent of the Company has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in such
Article 10, or in defense of any claim, issue, or matter therein, he or she
shall be indemnified by the Company against expenses in connection therewith.
Such expenses shall be paid by the Company in advance of the final disposition
of the action, suit or proceeding as authorized by the Board of Directors upon
receipt of an undertaking to repay the advance if it is ultimately determined
that such person is not entitled to indemnification.
32
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company for
services rendered in all capacities during the calendar years 1993, 1994 and
1995 to those persons who served as its chief executive officer during 1995, and
to the four most highly-compensated executive officers and key employees (other
than the chief executive officer) whose annual salary and bonus exceeded
$100,000 and who were serving at December 31, 1995 (collectively, the 'Named
Officers').
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------
AWARDS
ANNUAL COMPENSATION --------------
-------------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME YEAR SALARY ($) BONUS ($) COMPENSATION ($)(1) OPTIONS (#) COMPENSATION ($)
- -------------------------- --------- ----------- ----------- ------------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
David A. Cohen (2)........ 1995 $ 173,077 $ 45,000 $ 0 50,000 $ 1,635(3)
1994 100,000 26,250 0 25,000 1,250(3)
1993 -- -- -- -- --
John A. Donohoe, Jr. (4).. 1995 159,134 22,333 0 52,464(5) 0
1994 90,000 11,800 0 10,000 0
1993 -- -- -- -- --
Ronald F. Scarpone (6).... 1995 110,000 17,333 0 5,000(5) 735(3)
1994 73,333 14,667 0 5,000 0
1993 -- -- -- -- --
John M. Suender (7)....... 1995 105,000 16,000 0 19,174(5) 200(3)
1994 100,000 5,000 0 3,000 200(3)
1993 93,900 18,780 11,193 0 0
Robert F. Graham (8)...... 1995 93,000 18,600 0 15,000 200(3)
1994 85,000 4,250 0 5,000 200(3)
1993 75,000 15,000 8,940 0 0
James R. Emshoff (9)...... 1995 76,346 28,500 0 110,435(5) 0
1994 -- -- -- -- --
1993 -- -- -- -- --
Richard J. Censits (10)... 1995 250,000 0 0 10,000 335,000(11)
1994 240,000 30,000 0 75,000 0
1993 240,000 120,000 85,824 0 545,000(11)
Paul E. Weitzel, Jr.
(12).................... 1995 58,333 0 0 3,000 116,667(13)
1994 164,600 13,500 0 55,000 0
1993 125,000 37,500 29,800 0 0
</TABLE>
- ------------------
(1) Reflects a bonus based on the Company's financial performance in 1993 but
not payable until 1996 and then only if the executive is still a Company
employee. In the case of Mr. Censits, such amount was paid on January 1,
1995.
(2) Mr. Cohen joined the Company in May 1994 as President of its
Transcriptions, Ltd. subsidiary with an annual base salary of $150,000. In
November 1995, he became the Company's President and Chief Executive
Officer with an annual base salary of $250,000.
33
<PAGE>
(3) Represents employer matching contributions under the Company's 401(k) plan
and premiums paid by the Company on term life insurance.
(4) Mr. Donohoe joined the Company in May 1994 as Executive Vice President of
its Transcriptions, Ltd. subsidiary with an annual base salary of $135,000.
In November 1995, he became the Company's Chief Operating Officer with an
annual base salary of $165,000.
(5) Includes bonus foregone at the election of the Named Officer pursuant to a
deferred compensation program in which the officer elected to receive
options to purchase Common Stock in lieu of bonus. Under the program, in
February 1996, Mr. Donohoe received 2,464 options, Mr. Suender received
2,174 options, Mr. Emshoff received 10,435 options and Mr. Scarpone
received 2,029 options.
(6) Mr. Scarpone joined the Company in May 1994 as Vice President--Information
Services of the Company's Transcriptions, Ltd. subsidiary with an annual
base salary of $110,000. In January 1996, he became the Company's Vice
President and Chief Information Officer with an annual base salary of
$120,000.
(7) Mr. Suender serves as Vice President, General Counsel and Secretary.
(8) Mr. Graham serves as Vice President, Treasurer and Chief Financial Officer.
(9) Mr. Emshoff serves as Chairman of the Board, and served as acting President
and Chief Executive Officer from April 1995 until Mr. Cohen permanently
filled the position in November 1995.
(10) Mr. Censits served as Chief Executive Officer until his resignation in
March 1995. Mr. Censits continues to serve as a member of the Board of
Directors.
(11) The amount represents accrued amounts associated with Mr. Censits'
retirement benefits. The 1993 accrual represents a charge based on the
Company's estimate of the balance of all future costs associated with
retirement benefits under Mr. Censits' employment contract. Because of the
change in Mr. Censits' employment contract in March 1995, additional
accruals were made in 1995 to reflect the present value of the retirement
payments of $75,000 per annum commencing January 1, 1996, health coverage
and other benefits as provided in his employment contract.
(12) Mr. Weitzel served as the Company's Chief Executive Officer during March
and April 1995.
(13) Represents amounts paid to Mr. Weitzel during 1995 pursuant to a severance
agreement.
34
<PAGE>
STOCK OPTIONS
The following table presents information with respect to grants of stock
options pursuant to the Company's option plans during 1995, to the Named
Officers. No stock appreciation rights were granted to any officer of the
Company during 1995.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------------------ ANNUAL RATES OF
% OF TOTAL STOCK PRICE
NUMBER OF OPTIONS APPRECIATION
SECURITIES GRANTED EXERCISE OR FOR OPTION TERMS(1)
UNDERLYING OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION --------------------
NAME GRANTED(2)(3) IN 1995 ($/SHARE) DATE 5% 10%
- ---------------------------- --------------------- ------------------- --------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
David A. Cohen.............. 50,000(4) 17.1% $ 9.50 09/18/05 $ 299,250 $ 755,250
John A. Donohoe, Jr......... 5,000(5) 1.7 7.25 01/01/05 22,838 57,638
45,000(4) 15.4 9.50 09/18/05 269,325 679,725
Ronald F. Scarpone.......... 5,000(5) 1.7 7.25 01/01/05 22,838 57,638
John M. Suender............. 2,000(5) .7 7.25 01/01/05 9,135 23,055
15,000(4) 5.1 9.50 09/18/05 89,775 226,575
Robert F. Graham............ 15,000(4) 5.1 9.50 09/18/05 89,775 226,575
James R. Emshoff............ 15,000(5) 5.1 8.13 05/15/05 76,781 193,781
60,000(6) 20.5 8.13 08/25/00 136,500 307,125
25,000(4) 8.5 9.50 09/18/05 149,625 377,625
Richard J. Censits.......... 10,000(5) 3.4 7.25 01/01/05 45,675 115,275
Paul E. Weitzel, Jr......... 3,000(5) 1.0 7.25 01/01/05 13,703 34,583
</TABLE>
- ------------------
(1) Amounts reported in the column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration of
their term, assuming the specified compounded rates of appreciation of the
Common Stock over the term of the options. These numbers are calculated
based on rules promulgated by the Commission and do not represent the
Company's estimate of future Common Stock price. Actual gains, if any, on
stock option exercises and Common Stock holdings are dependent on the timing
of such exercise and the future market price of the Common Stock. There can
be no assurance that the rates of appreciation assumed in this table can be
achieved or that the amounts reflected will be received by the individuals.
This table does not take into account any appreciation in the price of the
Common Stock from the date of grant to the present date. The values shown
are net of the exercise price, but do not include deductions for taxes or
other expenses associated with the exercise.
(2) Granted pursuant to the 1992 Option Plan.
(3) Excludes options granted to Messrs. Donohoe (2,464 options), Suender (2,174
options), Emshoff (10,435 options) and Scarpone (2,029 options) on February
8, 1996, which were granted under a deferred compensation program in which
such officers elected to receive such options in lieu of bonus based upon
1995 performance.
(4) Vest in 20% increments on each anniversary of the grant date for five years.
(5) Vest in 50% increments on the first and second anniversary of the grant
date.
(6) Vest 100% on August 25, 1996.
35
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table summarizes the aggregate option exercises in the last
fiscal year and fiscal year-end value of unexercised options on an aggregate
basis.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK UNDERLYING VALUE OF UNEXERCISED
IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SHARES AT DECEMBER 31, 1995 DECEMBER 31, 1995(1)
ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Cohen............... 0 $ 0 12,500 62,500 $ 20,313 $ 20,313
John A. Donohoe.............. 0 0 5,000 55,000 8,125 12,500
Ronald F. Scarpone........... 0 0 2,500 7,500 4,063 8,138
John M. Suender.............. 0 0 3,000 17,000 10,305 1,750
Robert F. Graham............. 0 0 5,000 15,000 17,175 0
James R. Emshoff............. 0 0 6,000 100,000 12,750 0
Richard J. Censits........... 0 0 116,000 10,000 462,960 8,750
Paul E. Weitzel, Jr.......... 63,000 170,590 0 0 0 0
</TABLE>
- ------------------
(1) Based on the closing price on the American Stock Exchange of $8.125 per
share of Common Stock on December 29, 1995.
EMPLOYEE STOCK PURCHASE PLAN
The Stock Purchase Plan permits substantially all full-time employees of
the Company to purchase shares of Common Stock through payroll deduction. An
aggregate of up to 250,000 shares of Common Stock may be purchased under this
plan. Any employee who is regularly scheduled to work at least 20 hours per week
may participate in the Stock Purchase Plan (including the Named Officers), other
than any employee who owns Company stock possessing five percent or more of the
total combined voting power or value of all classes of Company stock. The Stock
Purchase Plan permits the Company to set a purchase price for shares of Common
Stock that is between 85% and 100% of fair market value (as defined in the Stock
Purchase Plan), and employees currently may purchase shares of Common Stock at
90% of fair market value. The Stock Purchase Plan, which is subject to
shareholder approval (currently scheduled for a vote at the Company's next
annual shareholders' meeting), is designed and intended to meet the requirements
of Section423 of the Internal Revenue Code and, accordingly, defers any gain
attributable to shares of Common Stock so purchased until the time that such
shares are sold and treats any gain or loss relating to such shares as capital
gain or loss. The Company intends to register under the Act the shares of Common
Stock issuable pursuant to this plan. See 'Shares Eligible for Future Sale.'
401(K) PLAN
Employees of the Company (including the Named Officers) are eligible to
participate in a 401(k) Plan. Under the plan, employees contribute monies
through salary reduction and the Company matches a specific percentage of the
employees' contributions. Commencing in 1996, Company matching contributions
will be made in shares of Common Stock. Up to 250,000 shares of Common Stock are
available to employees under this plan. The number of shares of Common Stock to
be contributed for each participant is determined by dividing the dollar value
of the matching contribution for such participant by the fair market value (as
defined therein) of a share of Common Stock. Employees will retain the right to
direct the investment of their own contributions and Company matching
contributions made before 1996 among several alternative investments, but
matching contributions for 1996 and later years must be invested in shares of
Common Stock. An employee who is entitled to a distribution from the 401(k) Plan
will receive the cash value of his or her accounts, including the Common Stock
account. The Company intends to register under the Act the shares of Common
Stock issuable pursuant to this plan. See 'Shares Eligible for Future Sale.'
36
<PAGE>
EMPLOYMENT CONTRACTS
David A. Cohen. In connection with the acquisition of Transcriptions,
Ltd., the Company entered into an employment agreement with Mr. Cohen, which was
amended effective January 1, 1996. The agreement, which expires on December 31,
1998, provides that Mr. Cohen is currently entitled to receive a $250,000 base
salary, plus discretionary bonus compensation in an amount up to 50% of his base
salary. Upon accepting employment, Mr. Cohen also received options to purchase
25,000 shares of Common Stock pursuant to the 1992 Option Plan. He is also
entitled to other benefits normally provided to the Company's other senior
executive officers. The agreement terminates upon Mr. Cohen's death or
disability. Additionally, Mr. Cohen may resign by giving the Company at least
three months' prior notice or the Company may terminate Mr. Cohen at any time
with or without cause. If Mr. Cohen's employment is terminated without cause,
the Company is required to continue to pay Mr. Cohen's base salary through the
end of the term. Upon any termination, Mr. Cohen has agreed to retain in
confidence and not otherwise to use any confidential or proprietary information
of the Company. Additionally, for a three-year period following any termination
of the agreement, Mr. Cohen is prohibited from competing with the Company or
from soliciting clients, customers or employees of the Company.
John A. Donohoe. In connection with the acquisition of Transcriptions,
Ltd., the Company entered into an employment agreement with Mr. Donohoe, which
was amended effective January 1, 1996. The agreement, which expires on December
31, 1998, provides that Mr. Donohoe is currently entitled to receive a $165,000
base salary, plus discretionary bonus compensation in an amount up to 35% of his
base salary. Upon accepting employment, Mr. Donohoe also received options to
purchase 10,000 shares of Common Stock pursuant to the 1992 Option Plan. He is
also entitled to other benefits normally provided to the Company's other senior
executive officers. The agreement contains the same provisions regarding
termination, confidentiality, competition and solicitation as does Mr. Cohen's
agreement.
James R. Emshoff. Effective August 25, 1995, the Company entered into an
employment agreement with Mr. Emshoff. The agreement provides that Mr. Emshoff
is currently entitled to receive a $20,000 base salary, plus Mr. Emshoff is
entitled to participate in any bonus programs adopted by the Board of Directors.
The agreement terminates on August 31, 1996. During the period of Mr. Emshoff's
employment and for a period of two years thereafter, Mr. Emshoff has agreed to
retain in confidence and not otherwise use any confidential or proprietary
information of the Company and not to compete with the Company. Additionally,
for a three year period following any termination of Mr. Emshoff's employment,
Mr. Emshoff is prohibited from divulging any accounts of the Company, competing
with the Company, soliciting clients, customers or employees of the Company, or
disclosing or using proprietary of confidential information of the Company.
Ronald F. Scarpone. In connection with the acquisition of Transcriptions,
Ltd., the Company entered into an employment agreement with Mr. Scarpone, which
was amended effective January 1, 1996. The agreement provides that Mr. Scarpone
is currently entitled to receive a $120,000 base salary, plus bonus compensation
in an amount up to 25% of his base salary. Upon accepting employment, Mr.
Scarpone also received options to purchase 5,000 shares of Common Stock pursuant
to the 1992 Option Plan. He is also entitled to other benefits normally provided
to the Company's other senior executive officers. The term of the agreement
expires December 31, 1997. The agreement contains other provisions comparable to
those in Mr. Cohen's agreement, except that the post-termination prohibition on
competition and solicitation is two years.
Richard J. Censits. Effective January 1, 1993, the Company entered into an
employment agreement with Mr. Censits, which was amended and restated effective
January 1, 1996. As restated, the agreement recognizes that Mr. Censits is no
longer an employee of the Company and is entitled during his lifetime to life
insurance, medical, dental and long-term care coverage for himself and his wife
and a retirement benefit of $75,000 annually. If Mr. Censits dies, his wife is
entitled to continue her medical, dental and long-term care coverage during her
lifetime, and the Company has agreed to loan Mr. Censits' estate the funds
necessary to exercise any options to purchase shares of the Common Stock owned
by Mr. Censits at the time of his death, with the stock held by the Company as
collateral. The loan must be repaid three years after grant or earlier if the
stock is sold. The agreement restricts Mr. Censits from competing with the
Company, hiring employees of the Company or disclosing or using confidential
information of the Company so long as he serves as a member of the Board of
Directors and during any period in which he is receiving benefits under the
agreement.
SEVERANCE ARRANGEMENTS
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The Company adopted a severance plan for certain executive officers. The
plan provides that if a covered executive is terminated for any reason other
than 'cause' (which includes the failure to perform day-to-day duties as
assigned by the Board of Directors) within 12 months after a 'change in
control,' such covered executive is to receive, within 10 days of the
termination, a one time payment equal to all compensation awarded to him or her
in the fiscal year immediately prior to such termination or, if such executive's
compensation was higher or would be higher on an annualized basis, in the fiscal
year in which such termination takes place, plus payment from the Company of any
amount earned (whether vested or not) by such executive pursuant to the
Company's long-term incentive compensation plan. As of the date of this
Prospectus, the Company has not made any payments pursuant to this plan and no
liabilities are currently required to be recorded with respect to this plan. The
term 'change in control' means (a) any liquidation of the Company, (b) the sale
of all or substantially all of the assets of the Company, (c) the acquisition by
any person or group of beneficial ownership of securities representing more than
50% of the combined voting power in the election of directors of the Company
(after giving effect to the exercise of any options, warrants or other
convertible securities held by such person or group), (d) the election of a
majority of the members of the Board of Directors as a result of one or more
proxy contests within any period of three years, (e) approval of a merger,
consolidation or other business combination by the Company's shareholders or (f)
commencement of a tender offer to purchase securities representing more than 50%
of the combined voting power in the election of directors of the Company (after
giving effect to the exercise of any options, warrants or other convertible
securities held by such person or group).
In connection with Mr. Weitzel's April 27, 1995 resignation as President
and Chief Executive Officer, the Company and Mr. Weitzel entered into a
severance agreement. Under the terms of the agreement, Mr. Weitzel was entitled
to (i) continued payment of his base salary and health benefits for an initial
six month period and (ii) the immediate vesting of all options granted to Mr.
Weitzel and the right to exercise same over a six month period. Additionally,
the Company agreed to continue payment of Mr. Weitzel's base salary and health
benefits beyond six months until he obtains other employment, but not beyond
April 28, 1996. Mr. Weitzel received $175,000 in severance payments under this
Agreement, and the Company's obligation to make such payment was recorded as an
expense in 1995. Mr. Weitzel has exercised all of his options. Commencing April
28, 1995, Mr. Weitzel is restricted for a period of two years from disclosing or
using any confidential information of the Company or directly or indirectly
competing with the Company and, for a period of three years, from divulging or
using his knowledge of customer accounts or soliciting Company employees.
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<PAGE>
CERTAIN TRANSACTIONS
Acquisition of Transcriptions, Ltd. The Company acquired Transcriptions,
Ltd. in May 1994 and paid $16.6 million in cash and agreed to pay additional
purchase price on a deferred basis in an amount equal to 5.2 times the average
annual pre-tax income (as more particularly described in the acquisition
agreement) of Transcriptions, Ltd. during the 24 months following the closing of
the acquisition, less $19.2 million. The Company also discharged $5.8 million of
interest-bearing debt of Transcriptions, Ltd. On December 29, 1995, the parties
agreed to fix the amount of the deferred purchase price at $24.5 million,
payable on August 31, 1996 as follows: (i) $18,375,000 in cash and (ii)
$6,125,000 in the form of Common Stock valued at $7.11 per share, or 861,463
shares. The Company has granted certain registration rights with respect to such
shares of Common Stock. The Company is obligated to pay the cash portion of the
deferred purchase price from the proceeds of this Offering. Mr. David Cohen, a
director, the President and Chief Executive Officer of the Company, received
approximately 66 1/2% of the purchase price paid at closing and is entitled to
receive approximately 66 1/2% of the deferred purchase price when paid. John A.
Donohoe, the Chief Operating Officer of the Company, received 5% of the purchase
price paid at closing and is entitled to receive approximately 5% of the
deferred purchase price when paid. See 'Description of Capital Stock --
Registration Rights' and 'Use of Proceeds.'
Loan to Mr. Censits. MedQuist loaned Mr. Censits $300,000 at no interest
in connection with his exercise of options in 1993 to purchase Common Stock. The
loan was repaid in full on March 1, 1996, its due date.
Heller Arrangements. In December 1992, the Company entered into a $7
million senior subordinated credit facility with Heller (the 'Heller Facility')
and issued to Heller warrants to purchase an aggregate of 962,675 shares of
Class A and Class B Preferred Stock, which are convertible into shares of Common
Stock on a share-for-share basis. The Heller Warrants currently have an exercise
price of $7.27 per share. In March 1996, prior to the filing of the Registration
Statement of which this Prospectus is a part, the Company and Heller agreed
that, on the closing date of this Offering, Heller would exercise the Heller
Warrants by applying the $7 million principal amount under the Heller Facility
against the exercise price, and simultaneously convert the shares of Preferred
Stock received upon such exercise into 962,675 of shares of Common Stock. As an
inducement for Heller to exercise the Heller Warrants and convert the Preferred
Stock, the Company has agreed to issue Heller 42,500 additional shares of Common
Stock on the closing date of this Offering. See 'Shares Eligible for Future
Sale.' The Company has filed a registration statement to register under the Act
the 962,625 shares for resale by Heller. Heller has agreed not to sell publicly
such shares, or the additional 42,500 shares, without the consent of Robertson,
Stephens & Company LLC, for a period of 270 days after the date of this
Prospectus. The Company has also granted Heller certain registration rights. See
'Description of Capital Stock -- Registration Rights.' Heller is entitled to
designate one nominee to the Board of Directors. In 1994 Heller first exercised
this right and designated Mr. Underwood, a Principal at Heller, as its nominee.
Mr. Underwood was elected as a director in July 1994, when the Board of
Directors was expanded by its current membership to consist of eight directors,
and he will stand for election to a three-year term at the 1996 annual meeting
of shareholders.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of May 1, 1996 and as adjusted to
reflect the sale of the Common Stock offered hereby (i) by each person or group
known to the Company to be the beneficial owner of more than 5% of Common Stock,
(ii) by each of the Company's Named Officers and directors and (iii) by all
executive officers and directors of the Company as a group. Except as otherwise
noted and subject to community property laws, where applicable, each beneficial
owner of the Common Stock listed below has sole investment and voting power with
respect to their shares of Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
----------------------------------------
PERCENT OF CLASS
----------------------------
NUMBER BEFORE AFTER
NAME AND ADDRESS (2) OF SHARES OFFERING(3) OFFERING(4)
- --------------------------------------------------------------- ---------- ------------- -------------
<S> <C> <C> <C>
Heller Equity Capital Corporation.............................. 1,005,175(5) 29.0% 17.8%
500 West Monroe Street
Suite 1100
Chicago, IL 60661
Piedmont Capital Management Corporation........................ 613,300(6) 17.7 10.8
1 James Center, Suite 1400
Richmond, VA 23219
Richard J. Censits............................................. 277,600(7) 7.8 4.8
688 Annemore Lane
Naples, FL
David A. Cohen................................................. 31,500(8) * *
James R. Emshoff............................................... 26,000(9) * *
William T. Carson, Jr.......................................... 37,400 10) 1.1 *
James F. Conway................................................ 24,025 11) * *
Frederick S. Fox, III.......................................... 30,400 12) * *
A. Fred Ruttenberg............................................. 24,066 13) * *
John H. Underwood.............................................. 1,005,175 14) 29.0 17.8
John A. Donohoe, Jr............................................ 12,500 15) * *
Robert F. Graham............................................... 5,428 16) * *
Ronald F. Scarpone............................................. 7,500 17) * *
John M. Suender................................................ 6,828 18) * *
Paul E. Weitzel, Jr............................................ 0 * *
All executive officers and directors as a group (12 persons)... 1,488,422 19) 39.8% 25.1%
</TABLE>
- ------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the 'Commission'), and includes voting
or investment power with respect to the shares beneficially owned. Shares
of Common Stock subject to options or warrants currently exercisable or
exercisable within 60 days after May 1, 1996 are deemed outstanding for
computing the percentage ownership of the person holding such options or
warrants, but are not deemed outstanding for computing the percentage
ownership of any other person.
(2) Except where otherwise noted, the address of all persons listed is c/o
MedQuist Inc., Five Greentree Centre, Suite 311, Marlton, New Jersey 08053.
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<PAGE>
(3) Applicable percentage of ownership as of March 31, 1996 is based upon
3,460,875 shares of Common Stock outstanding, which gives effect to the
Heller Transaction. Excludes 861,463 shares of Common Stock to be issued on
August 31, 1996 in connection with the payment of the deferred purchase
price for Transcriptions, Ltd.
(4) Applicable percentage ownership after this Offering is based upon 5,660,875
shares of Common Stock outstanding which gives effect to the Heller
Transaction and the issuance of 2,200,000 shares of Common Stock offered
hereby. Excludes 861,463 shares of Common Stock to be issued on August 31,
1996 in connection with the payment of the deferred purchase price for
Transcriptions, Ltd.
(5) Heller is a wholly-owned subsidiary of Heller International Corporation, a
Delaware corporation which is a wholly-owned subsidiary of The Fuji Bank,
Limited, a Japanese banking corporation. See Note 14 below.
(6) Reflects information set forth in a Schedule 13G filed by the holder with
the Commission.
(7) Includes 121,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Censits and exercisable within 60 days after May 1,
1996 and 57,100 shares of Common Stock owned by Mr. Censits' spouse.
(8) Includes 25,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Cohen and exercisable within 60 days after May 1,
1996. Excludes 572,873 shares of Common Stock to be issued on August 31,
1996 in connection with the payment of the deferred purchase price for
Transcriptions, Ltd. After such issuance, Mr. Cohen would beneficially own
13.8% of the outstanding shares of Common Stock prior to completion of this
Offering and 9.2% of the outstanding shares of Common Stock after
completion of this Offering.
(9) Includes 13,500 shares of Common Stock issuable upon the exercise of
options granted to Mr. Emshoff and exercisable within 60 days after May 1,
1996.
(10) Includes 22,400 shares of Common Stock issuable upon the exercise of
options granted to Mr. Carson and exercisable within 60 days after May 1,
1996, and 12,100 shares of Common Stock held for Mr. Carson's benefit in
individual retirement accounts.
(11) Includes 22,400 shares of Common Stock issuable upon the exercise of
options granted to Mr. Conway and exercisable within 60 days after May 1,
1996, and 125 shares of Common Stock owned by Mr. Conway's spouse.
(12) Includes 22,400 shares of Common Stock issuable upon the exercise of
options granted to Mr. Fox and exercisable within 60 days after May 1,
1996, and 500 shares of Common Stock owned by Mr. Fox' son, who has sole
investment and voting power.
(13) Includes 22,400 shares of Common Stock issuable upon the exercise of
options granted to Mr. Ruttenberg and exercisable within 60 days after May
1, 1996.
(14) Represents shares of Common Stock beneficially owned by Heller and referred
to in Note 5 above. Mr. Underwood is a principal of Heller and a director
of the Company, and may be deemed to be the beneficial owner of such
shares. Mr. Underwood disclaims beneficial ownership of such shares of
Common Stock.
(15) Includes 12,500 shares of Common Stock issuable upon the exercise of
options granted to Mr. Donohoe and exercisable within 60 days after May 1,
1996. Excludes 43,073 shares of Common Stock to be issued on August 31,
1996 in connection with the payment of the deferred purchase price for
Transcriptions, Ltd. After such issuance, Mr. Donohoe would beneficially
own 1.3% of the outstanding shares of Common Stock prior to the completion
of this Offering and less than 1% of the outstanding shares of Common Stock
after completion of this Offering.
(16) Includes 5,000 shares of Common Stock issuable upon the exercise of options
granted to Mr. Graham and exercisable within 60 days after May 1, 1996.
(17) Includes 7,500 shares of Common Stock issuable upon the exercise of options
granted to Mr. Scarpone and exercisable within 60 days after May 1, 1996.
(18) Includes 4,000 shares of Common Stock issuable upon the exercise of options
granted to Mr. Suender and exercisable within 60 days after May 1, 1996.
(19) Includes 278,100 options granted to directors and executive officers and
exercisable within 60 days after May 1, 1996. Excludes 611,639 shares of
Common Stock to be issued on August 31, 1996 in connection with the payment
of the deferred purchase price for Transcriptions, Ltd.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue up to 20,000,000 shares of Common Stock,
no par value. As of
March 31, 1996, after giving effect to the Heller Transaction, the Company had
3,460,875 outstanding shares of Common Stock and 1,107,451 shares of Common
Stock reserved for issuance upon exercise of options granted pursuant to the
Company's option plans and outstanding warrants. Holders of shares of Common
Stock are entitled to one vote per share on all matters to be voted upon by the
shareholders. Subject to such preferential rights as the Company's Board of
Directors may grant in connection with future issuances of Preferred Stock,
holders of shares of Common Stock are entitled to receive such dividends as the
Board of Directors may declare in its discretion out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, after payment of liabilities and any liquidation preference on any
shares of Preferred Stock then outstanding, the holders of shares of Common
Stock are entitled to a distribution of any remaining assets of the Company.
Holders of shares of Common Stock have no cumulative voting or preemptive
rights. All outstanding shares of Common Stock are, and the shares of Common
Stock offered hereby, when issued and paid for will be, fully paid and
nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 3,950,000 shares of Preferred
Stock, no par value. The Company does not currently contemplate the issuance of
any shares of Preferred Stock. The Company's Board of Directors, without any
further action by the shareholders, may issue from time to time the authorized
and unissued shares of Preferred Stock in one or more series, and may determine
as to each series the designation and number of shares to be issued and the
relative rights, preferences and limitations of the shares of each series,
including provisions with respect to voting powers, redemption, conversion,
dividend rights and liquidation preferences. The issuance of Preferred Stock
could adversely affect the voting power of the holders of Common Stock or could
have the effect of deterring or delaying any attempt by a person or group to
obtain control of the Company.
WARRANTS
The Company has issued to Chemical warrants to purchase 75,351 shares of
Common Stock which are exercisable, in whole or in part, at any time and from
time to time through May 27, 2001 at an exercise price of $6.74 per share. The
exercise price is subject to adjustment under certain circumstances, including
in the event of a stock split, stock dividend, recapitalization or similar
event, or if the Company issues additional shares of equity securities, or other
securities of the Company convertible into, exchangeable for or exercisable for
equity securities of the Company, and the issuance, conversion or exercise price
is less than the greater of the current exercise price of the warrants issued to
Chemical or the fair value of the equity securities (as more fully defined
therein). These warrants are subject to certain restrictions on transfer. The
Company has granted certain registration rights to register the shares of Common
Stock to be issued upon exercise of these warrants. See '-- Registration
Rights.'
REGISTRATION RIGHTS
Heller. The Company has filed a registration statement to register under
the Act 962,675 shares of Common Stock beneficially owned by Heller for resale
by Heller; provided that Heller has agreed not to sell publicly such shares, or
the additional 42,500 shares being issued to it in the Heller Transaction
(together with the 962,675 shares, the 'Heller Common Stock'), without the
consent of Robertson, Stephens & Company LLC, for a period of 270 days after the
date of this Prospectus. Additionally, under the terms of a registration
agreement (the 'Heller Agreement'), Heller is entitled to request one
registration on Form S-1 of shares of Heller Common Stock in which the Company
will pay all registration expenses other than underwriting discounts and
commissions, and an unlimited number of requests for registration on Form S-1
covering at least 300,000 shares of the Heller Common Stock in which Heller will
pay its share of the registration expenses (including all underwriting discounts
and commissions applicable to the Heller Common Stock sold in such offering).
Under the Heller Agreement, Heller also has the right, with certain limited
exceptions and at its own expense, to request up to three registrations under
Form S-2 or S-3 each covering at least 100,000 shares of the Heller Common Stock
and, in the event the Company proposes to register any of its securities under
the Act for its own account or otherwise, Heller may include in such
registration all or a portion of the
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<PAGE>
Heller Common Stock, subject to certain limitations and exclusions. The Company
is obligated to pay the registration expenses in any piggyback registration
(other than underwriting discounts and commissions). The underwriter in any
requested registration may exclude for market reasons a pro rata portion of the
Heller Common Stock sought to be registered by Heller. The underwriter in any
piggyback registration may exclude all or a portion of the Heller Common Stock
sought to be registered by Heller for marketing reasons, subject to certain
priorities set forth in the Heller Agreement. Heller has waived its right to
include, in the registration statement of which this Prospectus forms a part,
any of the shares of Heller Common Stock.
Sellers of Transcriptions, Ltd. and Affiliates. Under the terms of a
registration rights agreement (the 'TL Registration Rights Agreement') between
the Company and the sellers (the 'Sellers') of Transcriptions, Ltd., the Sellers
(which include David A. Cohen, the Company's Chief Executive Officer, and John
A. Donohue, the Company's Chief Operating Officer) are entitled after August 31,
1997 and before September 1, 2003 to request on two occasions (more than 12
months apart) that the Company effect the registration under the Act of 500,000
or more shares of the 861,463 shares of Common Stock to be received by the
Sellers in partial payment of the deferred purchase price for such transaction
(the 'Seller Common Stock'). The Sellers will pay their pro rata share of the
registration expenses (including all underwriting discounts and commissions on
the sale of the Seller Common Stock) in any such registration. If after August
31, 1997, the Company shall propose to file a registration statement under the
Act, whether or not for its own account, Sellers may include in such
registration all or a portion of the Seller Common Stock, subject to certain
limitations and exclusions. The Company is obligated to pay the registration
expenses in any such registration (other than underwriting discounts and
commissions on the sale of the Seller Common Stock), except that if such
registration is initiated by another shareholder, then the Sellers will pay
their pro rata portion of any such registration expenses (including all
underwriting discounts and commissions on the sale of the Seller Common Stock).
Chemical Bank. The Company has filed a registration statement to register
under the Act the 75,351 shares of Common Stock issuable upon exercise of
certain warrants (the 'Chemical Common Stock') for resale by Chemical, subject
to its 180-day lockup agreement. Additionally, under the terms of a registration
agreement (the 'Chemical Registration Agreement'), Chemical is entitled to
request one registration under the Act of the Chemical Common Stock. The Company
will pay all registration expenses of such registrations other than underwriting
discounts and commissions. The Chemical Registration Agreement provides that the
Company is prohibited from including any securities other than the Chemical
Common Stock and any Heller Common Stock. The Chemical Registration Agreement
also provides that, in the event the Company proposes to register any of its
securities under the Act for its own account or otherwise, Chemical may include
in no more than two such registrations all or a portion of the Chemical Common
Stock, subject to certain limitations and exclusions. The Company will pay the
registration expenses in such a piggyback registration (other than underwriting
discounts and commissions). The underwriter of any requested offering may
exclude all or a portion of the Chemical Common Stock for marketing reasons,
subject to certain priorities set forth in the Chemical Registration Agreement.
Chemical has waived its right to include the Chemical Common Stock in the
registration statement covering this Offering.
Brawm Shareholders. Under the terms of a registration rights agreement
among the Company, Elizabeth Kostick and Susan Stuart, the two former
shareholders of Brawm Transcriptions, Inc. ('Brawm'), if the Company shall
propose to file a registration statement under the Act, whether or not for its
own account, these shareholders may include in such registration all or a
portion of the 22,840 shares of Common Stock received by them in connection with
the Company's acquisition of Brawm in 1995 (the 'Brawm Shares'), subject to
certain limitations and exclusions. The Company is obligated to pay all of the
registration expenses in any such registration (excluding underwriting discounts
and commissions on the sale of the Brawm Shares). The Brawm Shares are subject
to the Underwriters' over-allotment option.
TAKEOVER PROTECTION
The New Jersey Shareholders Protection Act (the 'New Jersey Act') prohibits
certain New Jersey corporations, such as the Company, from entering into certain
'business combinations' with an 'interested shareholder' (defined as any person
who is the beneficial owner of 10% or more of such corporation's outstanding
voting securities) for five years after such person became an interested
shareholder, unless the business combination or the interested shareholder's
acquisition of stock was approved by the corporation's board of directors prior
to such interested shareholder's stock acquisition date. After the five-year
waiting
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<PAGE>
period has elapsed, a business combination between such corporation and an
interested shareholder will be prohibited unless the business combination is
approved by the holders of at least two-thirds of the voting stock not
beneficially owned by the interested shareholder, or unless the business
combination satisfies the New Jersey Act's fair price provision intended to
provide that all shareholders (other than the interested shareholders) receive a
fair price for their shares.
The New Jersey Act defines 'business combination' to include, among other
things: (1) a merger or consolidation between certain corporations and an
interested shareholder or such interested shareholder's affiliates; (2) any
sale, lease, exchange, mortgage, pledge, transfer or other disposition to or
with the interested shareholder, which has an aggregate market value equal to
10% or more of the aggregate market value of all of the assets, outstanding
stock or income of the corporation or its subsidiaries; (3) the issuance or
transfer by a corporation to the interested shareholder of any stock of the
corporation or of its subsidiaries having an aggregate market value equal to or
greater than 5% of the corporation's outstanding stock; (4) the adoption of a
plan or proposal for the liquidation or dissolution of the corporation proposed
by the interested shareholder; (5) any reclassification of securities proposed
by the interested shareholder that has the effect, directly or indirectly, of
increasing any class or series of stock that is owned by the interested
shareholder; and (6) the receipt by the interested shareholder of any loans or
other financial assistance from the corporation.
The New Jersey Act does not apply to certain business combinations,
including those with persons who acquired 10% or more of the voting power of the
corporation prior to the time the corporation was required to file periodic
reports pursuant to the Securities Exchange Act of 1934 or prior to the time the
corporation's securities began to trade on a national securities exchange.
The Company's Amended and Restated Certificate of Incorporation does not
provide for any additional anti-takeover protections other than the ability of
the Board of Directors to issue, from time to time, up to 3,950,000 shares of
Preferred Stock in one or more series without shareholder approval, and the
separation of the Board of Directors into three classes. See 'Management.'
The 1992 Option Plan provides that all outstanding options automatically
vest upon a 'change-in-control' of the Company. For purposes of this vesting
provision, the term 'change-in-control' means (a) any liquidation of the
Company, (b) the sale of all or substantially all of the assets of the Company,
(c) the acquisition by any person or group of beneficial ownership of securities
representing more than 50% of the combined voting power in the election of
directors of the Company (after giving effect to the exercise of any options,
warrants or other convertible securities held by such person or group), (d) the
election of a majority of the members of the Board of Directors as a result of
one or more proxy contests within any period of three years, (e) approval of a
merger, consolidation or other business combination by the Company's
shareholders or (f) commencement of a tender offer to purchase securities
representing more than 50% of the combined voting power in the election of
directors of the Company (after giving effect to the exercise of any options,
warrants or other convertible securities held by such person or group). The
acceleration of unvested options could have an adverse effect upon the ability
of a potential acquirer to gain control of the Company since it will necessarily
increase the cost of any such acquisition.
The Company adopted a severance plan for certain executive officers. The
plan provides that if a covered executive is terminated for any reason other
than 'cause' (which includes the failure to perform day-to-day duties as
assigned by the Board of Directors), within 12 months after a 'change in
control', such covered executive is to receive, within 10 days of the
termination, a one time payment equal to all compensation awarded to him or her
in the fiscal year immediately prior to such termination or, if such executive's
compensation was higher or would be higher on an annualized basis, in the fiscal
year in which such termination takes place, plus payment from the Company of any
amount earned (whether vested or not) by such executive pursuant to the
Company's long-term incentive compensation plan. See 'Management -- Severance
Arrangements' for a definition of the term 'change in control.'
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, after giving effect to the Heller
Transaction and the issuance of shares of Common Stock in connection with the
payment of the deferred purchase price for Transcriptions, Ltd., the Company
will have 6,522,338 shares of Common Stock outstanding. Of these shares, the
2,200,000 shares of Common Stock offered hereby (plus up to 330,000 additional
shares if the Underwriters exercise in full their over-allotment option), the
1,650,000 sold in the Company's initial public offering and approximately
694,000 shares of Common Stock issued upon exercise of employee options will be
freely tradeable without restriction or further registration, except by
'affiliates' of the Company, as that term is defined under the Act, subject to
the resale limitations of Rule 144 under the Act. Accordingly, approximately
1,975,000 shares of Common Stock may not be sold unless they are registered
under the Act or are sold pursuant to an exemption from registration, such as
the exemption provided by Rule 144 under the Act.
In general, Rule 144 allows a person who has beneficially owned Restricted
Shares for at least two years, including persons who may be deemed affiliates of
the Company, to sell, within any three-month period, up to the number of
Restricted Shares that does not exceed the greater of (i) one percent of the
then outstanding shares of Common Stock, and (ii) the average weekly trading
volume during the four calendar weeks preceding the date on which notice of the
sale is filed with the Commission. A person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale and who
has beneficially owned his or her Restricted Shares for at least three years
would be entitled to sell such Restricted Shares without regard to the volume
limitations described above and certain other conditions of Rule 144. The
Commission has proposed certain amendments to Rule 144 that would reduce by one
year the holding periods required for shares subject to Rule 144 and 144(k) to
become eligible for resale in the public market. This proposal, if adopted,
would increase the number of shares of Common Stock eligible for immediate
resale following the expiration of the lock-up agreements described below. No
assurance can be given concerning whether or when the proposal will be adopted
by the Commission.
Notwithstanding the foregoing, certain of the Company's officers, directors
and shareholders have agreed with Robertson, Stephens & Company LLC that, until
180 days after the date of this Prospectus, they will not offer to sell,
contract to sell or otherwise sell, dispose of or grant any rights with respect
to approximately 380,000 shares of Common Stock beneficially owned by them, or
any options or warrants to purchase shares of Common Stock or any securities
convertible into or exchangeable for shares of Common Stock (collectively, the
'Securities') now owned or hereinafter acquired directly by such holder or with
respect to which such holder has power of disposition, other than with the prior
written consent of Robertson, Stephens & Company LLC. Mr. David Cohen, the
Company's Chief Executive Officer, who owns 604,373 shares of Common Stock, has
agreed to similar restrictions for a period of 270 days after the date of this
Prospectus. Heller and Chemical, who own 1,005,175 and 75,351 shares of Common
Stock, respectively, have agreed to similar restrictions on the public sale of
their shares for 270 and 180 days, respectively, after the date of this
Prospectus. In its sole discretion and at any time without notice, Robertson,
Stephens & Company LLC may release all or any portion of the Securities subject
to lock-up agreements. If a shareholder other than Heller obtains a release from
a lock-up agreement, Heller will be entitled to a release of the same number of
shares. The Company has also agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for any shares of Common Stock, or any
options or warrants to purchase Common Stock, other than shares issued pursuant
to the Heller Transaction, shares or options issued or to be issued under the
Company's stock option and stock purchase plans, shares of Common Stock issued
upon the exercise of presently outstanding warrants, or shares, warrants or
convertible securities issued in connection with future acquisitions, until at
least 180 days after the date of this Prospectus except with the prior written
consent of Robertson, Stephens & Company LLC. See 'Underwriting.'
Certain persons and entities are the holders of registration rights with
respect to 1,922,329 shares of Common Stock. The Company has filed a
registration statement under the Act to register the resale by Heller and
Chemical, subject to the foregoing lock-up restrictions, of 962,675 and 75,351
shares of Common Stock, respectively. See 'Description of Capital Stock --
Registration Rights.' The Company also has an effective registration statement
on Form S-8 registering the 735,100 shares issuable upon the exercise of options
granted or available for grant thereunder. The Company also intends to file a
registration statement on Form S-8 to register up to 800,000 additional shares
of Common Stock for issuance pursuant to certain Company benefit plans. Market
sales of a substantial number of shares of Common Stock, or the availability of
such shares for sale in the public market, could adversely affect prevailing
market prices of the Common Stock.
45
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Volpe, Welty & Company, and Pennsylvania
Merchant Group Ltd (the 'Representatives'), have severally agreed with the
Company and the Selling Shareholders, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company the number of shares of
Common Stock set forth opposite their respective names below. The Underwriters
are committed to purchase and pay for all of such shares if any are purchased.
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------- -----------
Robertson, Stephens & Company LLC..........................
Volpe, Welty & Company.....................................
Pennsylvania Merchant Group Ltd............................
Total............................................... 2,200,000
=========
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price, less a concession of not in excess of $__ per share, of which $__
may be reallowed to other dealers. After the public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction shall change the amount the amount of
proceeds to be received by the Company as set forth on the cover page of this
Prospectus.
The Company, and Elizabeth Kostick and Susan Stuart (the 'Selling
Shareholders'), have granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 307,160,
11,420 and 11,420 additional shares of Common Stock, respectively, at the same
price per share as the Company will receive for the 2,200,000 shares that the
Underwriters have agreed to purchase. The Underwriters have agreed to exercise
in full the option granted by the Selling Shareholders, pro rata between the
Selling Shareholders, prior to exercising any portion of the option granted by
the Company, and the Company and the Selling Shareholders will be obligated to
sell shares to the extent the option is exercised. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage of such additional
shares that the number of shares of Common Stock to be purchased by it shown in
the above table represents as a percentage of the 2,200,000 shares to be offered
hereby. If purchased, the additional shares will be sold by the Underwriters on
the same terms as those on which the 2,200,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Shareholders against certain civil
liabilities, including liabilities under the Securities Act.
Pursuant to the terms of lock-up agreements, certain officers, directors,
shareholders and warrantholders of the Company have agreed with Robertson,
Stephens & Company LLC that, for periods ranging from 180 to 270 days after the
date of this Prospectus, they will not, with certain exceptions, sell any shares
of Common Stock now owned or hereinafter acquired by such holder, other than
with the prior written consent of Robertson, Stephens & Company LLC, which may,
in its sole discretion and at any time without notice, release all or any
portion of the Securities subject to lock-up agreements. See 'Shares Eligible
for Future Sale.' The Company has also agreed not to offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for any shares of Common Stock,
or any options or warrants to purchase Common Stock, other than shares or
options issued or to be issued under the Company's stock option and stock
purchase plans, shares of Common Stock issued upon the exercise of presently
outstanding options or warrants, or shares, warrants or convertible securities
issued in connection with future acquisitions, until at least 180 days after the
effective date of this registration statement except with the prior written
consent of Robertson, Stephens & Company LLC.
The Underwriters will not make sales to accounts over which they exercise
discretionary authority (i) in excess of 5% of the number of shares of Common
Stock offered hereby and (ii) unless they obtain specific written consent from
the customer.
46
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Pepper, Hamilton & Scheetz, Philadelphia, Pennsylvania.
Certain legal matters will be passed upon for the Underwriters by Brobeck,
Phleger & Harrison LLP, New York, New York.
EXPERTS
The Consolidated Financial Statements and Schedule of the Company as of
December 31, 1994 and 1995 and for each of the three years in the period ended
December 31, 1995 included in this Prospectus and elsewhere in the Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The Combined Financial Statements of Transcriptions, Ltd., as of December
31, 1991, 1992 and 1993, and for the years then ended, included in this
Prospectus and in the Registration Statement have been audited by Amper,
Politziner & Mattia, independent certified public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act'), and in accordance
therewith files annual and quarterly reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices located at Seven
World Trade Center, Suite 1300, New York, New York 10048, and at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611.
Copies of such material also may also be obtained from the Public Reference
Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the prescribed fees.
The Common Stock is listed on the American Stock Exchange. Reports, proxy
statements and other information concerning the Company may be inspected at the
offices of the American Stock Exchange located at 86 Trinity Place, New York,
New York 10006.
The Company has filed with the Commission a Registration Statement on Form
S-1, including all amendments and exhibits thereto (the 'Registration
Statement'), under the Act, with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus omits
certain information, exhibits, schedules and undertakings set forth in the
Registration Statement. For further information pertaining to the Company and
the Common Stock, reference is made to the Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete, and, with respect to any contract or other document filed as an
exhibit to the Registration Statement, each such statement is qualified in all
respects by reference to such exhibit. Copies of the Registration Statement and
exhibits may be inspected without charge at the public reference facilities of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the
Registration Statement and the exhibits may be obtained from the Commission upon
payment of the prescribed fees by writing to the Public Reference Section of the
Commission at such address.
47
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----------
MEDQUIST INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Shareholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
TRANSCRIPTIONS, LTD., AND AFFILIATES
Independent Auditors' Report................................ F-17
Combined Balance Sheets..................................... F-18
Combined Statements of Operations........................... F-19
Combined Statements of Retained Earnings.................... F-20
Combined Statements of Cash Flows........................... F-21
Notes to Combined Financial Statements...................... F-22
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MedQuist Inc.:
We have audited the accompanying consolidated balance sheets of MedQuist
Inc. (a New Jersey corporation) and subsidiaries as of December 31, 1994 and
1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MedQuist Inc. and
subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 23, 1996
F-2
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 807 $ 1,812 $ 1,181
Accounts receivable, net of allowance of $145 and $257 and $257 in 1994, 1995,
and at March 31, 1996...................................................... 6,956 9,769 11,636
Deferred income taxes......................................................... 645 966 966
Prepaid expenses and other.................................................... 1,301 754 751
--------- --------- -----------
Total current assets..................................................... 9,709 13,301 14,534
Property and equipment, net..................................................... 4,752 6,725 7,136
Intangible assets, net.......................................................... 15,887 37,426 37,162
Net assets of discontinued operations........................................... 20,743 180 --
Other........................................................................... 312 463 250
--------- --------- -----------
$ 51,403 $ 58,095 $ 59,082
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................. $ 4,889 $ 2,246 $ 3,337
Accounts payable.............................................................. 624 2,164 2,575
Accrued payroll............................................................... 1,320 1,092 666
Accrued expenses.............................................................. 2,100 2,873 1,852
--------- --------- -----------
Total current liabilities................................................ 8,933 8,375 8,430
--------- --------- -----------
Long-term debt.................................................................. 30,415 15,956 16,054
--------- --------- -----------
Subordinated payable to related parties......................................... -- 17,337 17,726
--------- --------- -----------
Other long-term liabilities..................................................... 866 848 691
--------- --------- -----------
Deferred income taxes........................................................... 497 609 609
--------- --------- -----------
Commitments and contingencies (Note 11)
Shareholders' equity:
Class A preferred stock, no par value, 650 shares authorized, none issued..... -- -- --
Class B preferred stock, no par value, 400 shares authorized, none issued..... -- -- --
Common stock, no par value, 20,000 shares authorized, 2,250, 2,446 and 2,455
shares issued and outstanding at December 31, 1994 and 1995 and March 31,
1996, respectively......................................................... 3,244 4,639 4,695
Common stock to be issued to related parties, 861 shares...................... -- 4,550 4,550
Retained earnings............................................................. 7,448 5,781 6,327
--------- --------- ----------
Total shareholders' equity............................................... 10,692 14,970 15,572
--------- --------- ----------
$ 51,403 $ 58,095 $ 59,082
========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................................................... $ -- $ 24,841 $ 45,127 $ 10,426 $ 13,978
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of revenues.......................................... -- 18,677 33,711 7,676 10,435
Selling, general and administrative....................... 1,688 2,798 4,325 1,599 888
Depreciation.............................................. 60 639 1,862 280 587
Amortization of intangible assets......................... 12 264 496 109 278
--------- --------- --------- --------- ---------
Total operating expenses............................... 1,760 22,378 40,394 9,664 12,188
--------- --------- --------- --------- ---------
Operating income (loss)..................................... (1,760) 2,463 4,733 762 1,790
Interest expense............................................ 1,426 2,738 3,695 959 865
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before income
taxes..................................................... (3,186) (275) 1,038 (197) 925
Income tax provision (benefit).............................. (1,290) (109) 431 (82) 379
--------- --------- --------- --------- ---------
Income (loss) from continuing operations.................... (1,896) (166) 607 (115) 546
Discontinued operations, net of income taxes:
Income from operations.................................... 1,997 1,612 1,451 441 --
Estimated gain (loss) on disposal......................... 1,749 -- (3,180) -- --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item..................... 1,850 1,446 (1,122) 326 546
Loss on early extinguishment of debt, net of income tax
benefit................................................... -- -- 545 -- --
--------- --------- --------- --------- ---------
Net income (loss)........................................... $ 1,850 $ 1,446 $ (1,667) $ 326 $ 546
========= ========= ========= ========= =========
Income (loss) per share:
Income (loss) from continuing operations.................. $ (0.40) $ 0.09 $ 0.30 $ -- $ 0.14
Discontinued operations................................... 1.02 0.49 (0.52) 0.13 --
Extraordinary item........................................ -- -- (0.16) -- --
--------- --------- --------- --------- ---------
Net income (loss) per share............................ $ 0.62 $ 0.58 $ (0.38) $ 0.13 $ 0.14
========= ======== ========= ========= =========
Shares used in computing income (loss) per share (Note 1)... 3,656 3,316 3,335 3,130 4,363
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------
SHARES OUTSTANDING SHARES TO BE ISSUED RECEIVABLE
---------------------- ---------------------- RETAINED FROM
NUMBER AMOUNT NUMBER AMOUNT EARNINGS SHAREHOLDER
----------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992......................... 2,896 $ 8,222 -- $ -- $ 4,152 $ (437)
Net income....................................... -- -- -- -- 1,850 --
Exercise of common stock options, including tax
benefit....................................... 326 1,080 -- -- -- --
Redemption of common stock in connection with
sale of business.............................. (999) (6,233) -- -- -- --
Repayment of receivable.......................... -- -- -- -- -- 437
----------- --------- ----- --------- --------- -----------
Balance, December 31, 1993......................... 2,223 3,069 -- -- 6,002 --
Net income....................................... -- -- -- -- 1,446 --
Exercise of common stock options, including tax
benefit....................................... 27 175 -- -- -- --
----------- --------- ----- --------- --------- -----------
Balance, December 31, 1994......................... 2,250 3,244 -- -- 7,448 --
Net loss......................................... -- -- -- -- (1,667) --
Exercise of common stock options, including tax
benefit....................................... 173 1,210 -- -- -- --
Issuance of common stock in connection with
business acquisition.......................... 23 185 -- -- -- --
Common stock to be issued in connection with
Transcriptions Ltd. acquisition............... -- -- 861 4,550 -- --
----------- --------- ----- --------- --------- -----------
Balance, December 31, 1995......................... 2,446 4,639 861 4,550 5,781 $ --
Net income (unaudited)........................... -- -- -- -- 546 --
Exercise of common stock options, including tax
benefit (unaudited)........................... 9 56 -- -- -- --
----------- --------- ----- --------- --------- -----------
Balance, March 31, 1996 (unaudited)................ 2,455 $ 4,695 861 $ 4,550 $ 6,327 $ --
========== ========= ===== ========= ========= ===========
<CAPTION>
TOTAL
---------
Balance, December 31, 1992......................... $ 11,937
Net income....................................... 1,850
Exercise of common stock options, including tax
benefit....................................... 1,080
Redemption of common stock in connection with
sale of business.............................. (6,233)
Repayment of receivable.......................... 437
---------
Balance, December 31, 1993......................... 9,071
Net income....................................... 1,446
Exercise of common stock options, including tax
benefit....................................... 175
---------
Balance, December 31, 1994......................... 10,692
Net loss......................................... (1,667)
Exercise of common stock options, including tax
benefit....................................... 1,210
Issuance of common stock in connection with
business acquisition.......................... 185
Common stock to be issued in connection with
Transcriptions Ltd. acquisition............... 4,550
---------
Balance, December 31, 1995......................... 14,970
Net income (unaudited)........................... 546
Exercise of common stock options, including tax
benefit (unaudited)........................... 56
---------
Balance, March 31, 1996 (unaudited)................ $ 15,572
=========
<CAPTION>
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)............................................... $ 1,850 $ 1,446 $ (1,667) $ 326 $ 546
Adjustments to reconcile net income (loss) to net cash provided
by operating activities-
Depreciation and amortization............................... 1,641 2,115 4,005 743 875
Amortization of debt discount............................... 220 161 131 33 422
Estimated (gain) loss on disposal of discontinued
operations............................................... (3,942) -- 4,286 -- --
Provision for restructuring of discontinued segment......... 2,148 -- -- -- --
Loss on early extinguishment of debt........................ -- -- 545 -- --
Gain on debt retirement..................................... (124) -- -- -- --
Deferred income tax provision (benefit)..................... (377) 865 (355) 61 --
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures --
Accounts receivable.................................... 2,137 561 (2,377) (792) (1,867)
Prepaid expenses and other............................. (220) (508) 706 (36) 3
Other assets........................................... (93) (81) (128) (12) 393
Accounts payable....................................... (639) 805 1127 (247) 411
Accrued payroll........................................ 186 (587) (326) 10 (426)
Accrued expenses....................................... (2,511) (989) 282 (137) (1,021)
Other long-term liabilities............................ (132) 143 (91) 339 (157)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities......................................... 144 3,931 6,138 288 (821)
--------- --------- --------- --------- ---------
Investing activities:
Purchases of property and equipment, net........................ (704) (982) (3,448) (424) (817)
Acquisitions, net of cash acquired.............................. (3,514) (21,738) (7) -- --
Net cash proceeds from divestitures............................. 5,291 -- 16,723 -- --
Other........................................................... (120) 692 -- (108) (24)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities......................................... 953 (22,028) 13,268 (532) (841)
--------- --------- --------- --------- ---------
Financing activities:
Proceeds from issuance of long-term debt........................ -- 22,525 -- -- --
Deferred financing costs........................................ -- (1,530) (178) -- --
Net borrowings on revolving line of credit...................... 450 250 -- 150 2,308
Repayments of long-term debt.................................... (2,056) (3,555) (18,806) (519) (1,259)
Repayments of obligations under capital leases.................. (737) (241) (213) (61) (74)
Net proceeds from issuance of common stock...................... 672 154 796 72 56
Repayment of shareholder receivable............................. 437 -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities.... (1,234) 17,603 (18,401) (358) 1,031
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............. (137) (494) 1,005 (602) (631)
Cash and cash equivalents, beginning of year...................... 1,438 1,301 807 807 1,812
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of year............................ $ 1,301 $ 807 $ 1,812 $ 205 $ 1,181
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Background
MedQuist Inc. is a leading national provider of electronic transcription
and document management services to the healthcare industry. MedQuist Inc. was
incorporated in New Jersey in 1987 as a group of outpatient healthcare
businesses affiliated with a non-profit healthcare provider. In 1992 and 1993,
the outpatient businesses were sold (see Note 3) and, in 1994, Transcriptions,
Ltd. was acquired (see Note 2). In November 1995, MedQuist Inc. discontinued its
receivables management business. The operations and net assets of the
receivables management business and the outpatient businesses, which together
formed one business segment, have been accounted for as discontinued operations
(see Note 3).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
MedQuist Inc. and its subsidiaries (the 'Company'). All material intercompany
balances and transactions have been eliminated.
Interim Financial Statements
The financial statements as of March 31, 1996 and for the three months
ended March 31, 1995 and 1996 are unaudited and, in the opinion of management,
include all adjustments (consisting only of normal and recurring adjustments)
necessary for a fair presentation of results for these interim periods. The
results for the three months ended March 31, 1996 are not necessarily indicative
of the results to be expected for the entire year.
Use of Estimates
The preparation of financial statements, in accordance with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported assets and liabilities and contingency
disclosures at the date of the financial statements and the reported operations
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Fees for transcription-related services are based primarily on contracted
rates, and revenue is recognized upon the rendering of services and delivery of
records. Included in revenues are franchise fees of $216 and $317 for the years
ended December 31, 1994 and 1995 and $77 and $69 for the three months ended
March 31, 1995 and 1996, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.
Prepaid Expenses and Other
Prepaid expenses and other consists primarily of recoverable income taxes,
prepaid insurance and prepaid rent.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
have been provided using the straight-line method over the estimated useful
lives of the assets, which range from three to five years for furniture,
equipment and software, and the lease term for leasehold improvements. Repairs
and maintenance costs are expensed as incurred. Additions and betterments are
capitalized. Gains or losses on the disposition of property and equipment are
charged to operations.
F-7
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- CONTINUED
Intangible Assets
Intangible assets include the excess of cost over net asset value of
acquired businesses, customer lists and deferred financing costs and are being
amortized over 20 to 40 years, 20 years and 5 to 6 years, respectively.
Subsequent to its acquisitions, the Company continually evaluates whether later
events and circumstances have occurred that indicate the remaining estimated
useful life of intangible assets may warrant revision or that the remaining
balance may not be recoverable. When factors indicate that intangible assets
should be evaluated for possible impairment, the Company uses an estimate of the
related undiscounted operating income over the remaining life of the intangible
asset in measuring whether the intangible asset is recoverable. As of December
31, 1995, management believes that no revision to the remaining useful lives or
write-down of intangible assets is required.
Accrued Expenses
Accrued expenses consists primarily of deferred revenue, accrued interest,
deferred telephone credits, and accrued professional fees. At December 31, 1994
and 1995 and March 31, 1996, deferred revenue was $475, $466 and $261,
respectively.
Severance Costs
In fiscal 1995, two of the Company's then Chief Executive Officers
resigned. In connection with such resignations, the Company incurred severance
and retirement costs of $697 and $522 for the year ended December 31, 1995, and
the three months ended March 31, 1995, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
$0, $96, $162, $41 and $24, for the years ended December 31, 1993, 1994 and 1995
and for the three months ended March 31, 1995 and 1996, respectively.
Statements of Cash Flow Information
For the years ended December 31, 1993, 1994 and 1995, and the three months
ended March 31, 1995 and 1996 the Company paid interest of $1,145, $2,108,
$3,155, $839 and $409, respectively, and income taxes of $2,492, $257, $478, $30
and $800, respectively. Capital lease obligations of $593, $531, $329 and $181
were incurred on equipment leases entered into in 1994 and 1995 and the three
months ended March 31, 1995 and 1996, respectively. In 1994, the Company
refinanced $5,265 of long-term debt and $820 under its line of credit. In 1993,
the Company sold a business to a shareholder for consideration that included 999
shares of the Company's common stock.
F-8
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- CONTINUED
The following table displays the net non cash assets and liabilities that
were consolidated as a result of business acquisitions, including the impact of
fixing the Transcriptions deferred purchase price in 1995 (see Note 2):
DECEMBER 31,
--------------------
1994 1995
--------- ---------
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
========= =========
Income Taxes
Income taxes are calculated using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, 'Accounting for Income
Taxes' (SFAS No. 109). Accordingly, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Effective January 1, 1993, the Company adopted SFAS No. 109. The cumulative
effect of the change in accounting for income taxes was not material and is,
therefore, not presented separately in the consolidated statement of operations.
Income (Loss) Per Share
The Company's total outstanding common stock options and warrants exceed
20% of the total outstanding common stock. Therefore, the income per share
computations are modified, as required under Accounting Principles Board Opinion
No. 15, to assume all outstanding common stock options and warrants were
exercised and the related proceeds were used to repurchase up to 20% of the
total outstanding common stock. Any remaining proceeds are assumed to be used to
reduce borrowings, thereby reducing interest expense, net of tax. Because
interest expense has not been allocated to discontinued operations (see Note 3),
the reduction of interest expense only impacts income per share from continuing
operations.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 'Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ' (SFAS No. 121).
SFAS No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill. The Company is required
to adopt SFAS No. 121 effective January 1, 1996. The adoption of SFAS No. 121
did not have any effect on the Company's financial condition or results of
operations.
F-9
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- CONTINUED
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, 'Accounting for Stock-Based
Compensation' (SFAS No. 123). SFAS No. 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans. This statement
also applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. The Company is required to adopt
SFAS No. 123 effective January 1, 1996. The Company has elected to adopt the
disclosure requirement of this statement.
Reclassifications
Certain reclassifications have been made to prior year financial statements
to conform with the current year presentation.
(2) ACQUISITIONS:
Effective May 1, 1994, the Company purchased substantially all of the
assets of Transcriptions, Ltd. and affiliates ('Transcriptions') as well as
assuming certain liabilities, as defined, for $16,930 in cash, including
acquisition costs of $322, plus the payment of Transcriptions interest bearing
debt of $5,816, plus a deferred purchase price based on future operating
results. The deferred purchase price consideration was to equal 5.2 times the
average annual pre-tax income, as defined, during the 24 month period ended May
31, 1996, less $19,200 and was payable on or before August 31, 1996.
Effective December 29, 1995, and in connection with the sale of the
receivables management division (see Note 3), the Company fixed the deferred
purchase price by agreeing to pay the former owners of Transcriptions $18,375 in
cash and 861 shares of Common Stock (valued at $4,550 for financial reporting
purposes) on August 31, 1996. Accordingly, the $18,375 of cash consideration has
been discounted and presented as a subordinated payable of $17,337 at December
31, 1995 (see Note 7) and the shares to be issued have been presented as such in
shareholders' equity at December 31, 1995.
Upon fixing the deferred purchase price, the total purchase price for the
Transcriptions acquisition was $44,633. The acquisition has been accounted for
using the purchase method with the purchase price allocated to the fair value of
the acquired assets and liabilities. The results of operations of Transcriptions
are included in the accompanying consolidated statements of operations from May
1, 1994.
The following unaudited pro forma summary presents the results of
operations of the Company as if the Transcriptions acquisition, including the
payment of the deferred purchase price which causes additional amortization and
interest expense, had occurred on January 1, 1994. The pro forma information
does not purport to be indicative of the results that would have been attained
if the operations had actually been combined during the periods presented and is
not necessarily indicative of operating results to be expected in the future.
1994 1995
--------- ---------
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
In August 1995, the Company entered into a merger agreement with Brawm
Transcriptions, Inc. The agreement provided for net cash consideration of $7 and
23 shares of the Company's Common Stock valued at $185. In November 1995, the
Company entered into an agreement to purchase substantially all of the assets
and certain liabilities of Transcriptions, Ltd. of Michigan, a former
franchisee, for a $827, 9% Subordinated Promissory Note which is due in March
1996. The results of operations of these two acquisitions are included in the
accompanying consolidated statement of operations since the dates of
acquisition. The purchase price allocation for these acquisitions has not been
finalized as of December 31, 1995. Pro forma information is not presented as
these acquisitions are not material to the Company.
F-10
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(3) DISCONTINUED OPERATIONS:
Since December 1992, the Company has sold or eliminated all of the
businesses within its discontinued segment as follows:
CONSIDERATION DIVESTITURE
BUSINESS RECEIVED DATE
-------- ------------- -----------
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
On November 14, 1995, the Company signed a letter of intent to sell its
receivables management business, the last remaining businesses in the segment.
Accordingly, the operations and net assets of all divested businesses in this
segment have been accounted for as discontinued operations and the operating
results and net assets are reported in such manner for all periods presented in
the accompanying consolidated financial statements.
The ambulatory surgery business was sold in September 1993 to the Company's
then largest shareholder. Under the terms of the sale agreement, the Company
received $600 in cash and redeemed 999 shares of its common stock held by this
shareholder.
For the years ended December 31, 1993, 1994 and 1995, the discontinued
operations generated revenue of $29,079, $21,438 and $18,767 and net income of
$1,997, $1,612 and $1,451, respectively. The 1995 divestiture of receivables
management generated an estimated net loss of $3,180, which includes net income
of $113 related to the operations of the business from the November 14, 1995
measurement date through the December 29, 1995 disposal date. The 1993
divestitures generated net income of $1,749. At December 31, 1995, the
accompanying balance sheet includes $180 of net accounts receivable, related to
discontinued operations, that were retained by the Company.
(4) PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Furniture, equipment and software.................................... $ 5,626 $ 9,509 $ 10,507
Leasehold improvements............................................... 126 78 78
--------- --------- -----------
5,752 9,587 10,585
Less -- Accumulated depreciation and amortization.................... (1,000) (2,862) (3,449)
--------- --------- -----------
$ 4,752 $ 6,725 $ 7,136
--------- --------- -----------
--------- --------- -----------
</TABLE>
(5) INTANGIBLE ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Excess of cost over net asset value of acquired businesses.......... $ 14,553 $ 33,899 $ 33,899
Customer lists...................................................... -- 3,800 3,800
Deferred financing costs............................................ 1,935 608 632
Other............................................................... 15 -- --
--------- --------- -----------
16,503 38,307 38,331
Less -- Accumulated amortization.................................... (616) (881) (1,169)
--------- --------- -----------
$ 15,887 $ 37,426 $ 37,162
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-11
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(6) LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Senior term loans payable to banks, escalating quarterly principal
installments (see below).......................................... $ 21,000 $ 9,500 $ 9,263
Revolving credit facility (see below)............................... 5,809 -- 2,308
Senior subordinated note payable to financial institution, quarterly
payments of interest at 7.0%, balloon principal payment in May
2000, net of original issue discount of $709, $578, and $545
respectively (see Note 8)......................................... 6,291 6,422 6,455
Subordinated 9.0% promissory note, due in March 1996 (see Note 2)... -- 827 --
Subordinated 9.5% promissory notes, due June 1997 through April
1999.............................................................. 467 439 432
Convertible subordinated notes, due in January 1996................. 641 175 --
Subordinated promissory notes repaid in 1995........................ 561 -- --
Capital lease obligations........................................... 459 826 933
Other notes payable................................................. 76 13 --
--------- --------- -----------
35,304 18,202 19,391
Less -- Current portion............................................. (4,889) (2,246) (3,337)
--------- --------- -----------
$ 30,415 $ 15,956 $ 16,054
--------- --------- -----------
--------- --------- -----------
</TABLE>
In connection with the Transcriptions acquisition in May 1994 (see Note 2),
the Company entered into a credit agreement (the 'Credit Agreement') with
certain banks that included $22,000 of term loans and an $8,000 revolving credit
facility. In connection with the sale of the receivables management division
(see Note 3), the Company restructured its credit facility to include $9,500 of
term loans and a $10,000 revolver. The new credit facility bears interest at
resetting rates, as selected by the Company, based on various rate alternatives
and the Company's level of compliance with certain financial covenants, as
defined. The interest rate alternatives are LIBOR plus 2% to 3% or 0.5% to 1.5%
in excess of either the bank's prime rate, federal funds plus 1.0% or the bank's
certificate of deposit rate, subject to certain restrictions, as defined. The
weighted average interest rate at December 31, 1995 and March 31, 1996, was 10%
and 8.625%, respectively.
The term loans are payable in 24 quarterly escalating installments ranging
from $275 to $475 through December 2001 and the revolving credit facility
expires in December 1998. The term loans and the revolving credit facility are
cross-collateralized and cross-defaulted. The Credit Agreement requires that any
prepayments, as defined, first be applied to the term loans. Additionally, the
Company is required to comply with various financial and nonfinancial covenants,
the most restrictive of which are specified income and debt related financial
ratios and restrictions on the payment of dividends, acquisitions and the sale
of property and equipment, among other items, as defined.
In 1995, the Company incurred interest expense of $498 on the revolving
credit facility, at a weighted average interest rate of 8.96%. The highest
outstanding borrowing during 1995 was $7,332. The revolving credit facility is
subject to a borrowing base of 85% of eligible receivables, as defined, and at
December 31, 1995, there was $7,000 available under the revolver.
In 1994, the Company incurred interest expense of $326 on the revolving
credit facility, at a weighted average interest rate of 7.72% and the highest
outstanding borrowing was $6,509.
In connection with the restructuring of the credit facility, the Company
expensed, as an extraordinary item, the related deferred financing costs of
$826, increasing the 1995 net loss by $545, or $.16 per share.
F-12
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(6) LONG-TERM DEBT: -- CONTINUED
Long-term debt maturities as of December 31, 1995, are as follows:
<TABLE>
<S> <C>
1996............................................................................... $ 2,327
1997............................................................................... 1,505
1998............................................................................... 2,168
1999............................................................................... 2,122
2000............................................................................... 1,904
2001 and thereafter................................................................ 8,900
---------
18,926
Less -- Unamortized discount and interest on capital lease obligations............. (724)
---------
$ 18,202
---------
---------
</TABLE>
(7) SUBORDINATED PAYABLE TO RELATED PARTIES:
Effective December 29, 1995, the Company and the former owners of
Transcriptions who include the Company's current Chief Executive Officer and
Chief Operating Officer, amended the Transcriptions purchase agreement to fix
the amount of the deferred purchase price (see Note 2). The amendment provides
for the Company to pay $18,375 in cash and issue 861 shares of common stock
(valued at $4,550 for financial reporting purposes) on August 31, 1996. The cash
portion of the deferred purchase price was discounted using an 8.75% rate and is
presented as a $17,337 long-term subordinated payable at December 31, 1995.
The amendment requires the company to use commercially reasonable efforts
to raise $18,375 by means of a public offering or through borrowings from the
Company's senior lenders. If the Company is unsuccessful raising sufficient
funds by August 31, 1996, the Company is required to deliver by December 31,
1996, any cash it is able to raise by the methods described above, and a
subordinated promissory note for the balance plus any accrued interest. Any such
subordinated promissory note will bear interest at the alternative base rate, as
defined in the Credit Agreement (see Note 6), plus 2.5% and as long as the
Company is not in default under the Credit Agreement, the Company may pay
regular quarterly interest payments on any such subordinated note.
If the subordinated promissory note is issued for a portion of the $18,375,
the Company is then required to use its best efforts to repay such note through
the sale of equity or subordinated debt, at terms that are satisfactory to the
Company's senior lenders. If repayment still does not occur, the entire balance
and any accrued interest thereon is due 30 days after all obligations under the
Credit Agreement are paid in full.
(8) SHAREHOLDERS' EQUITY:
In connection with the 1992 issuance of the senior subordinated note (see
Note 6), the Company sold to the holder for $1,100 warrants to purchase 577
shares of Class A and 356 shares of Class B Preferred Stock at an exercise price
of $7.50 per share. Each share of Class A and Class B Preferred Stock is
convertible into one share of Common Stock. During 1994, the holder was issued
additional warrants and all warrant exercise prices were reset at $7.28, in
accordance with the antidilution provisions of the original warrant agreement.
At December 31, 1995, warrants to purchase 595 shares of Class A Preferred Stock
and 367 shares of Class B Preferred Stock were outstanding and exercisable
through May 2002.
On September 30, 1993, in connection with the sale of its ambulatory
surgery business, the Company redeemed all 999 shares of Common Stock owned by
HCSF, Inc. and received $600 in cash. The value of the Common Stock at the time
of redemption was $6,233. In connection with this sale, the $437 receivable from
HCSF, Inc. was repaid.
In connection with the May 1994 Credit Agreement (see Note 6), the Company
issued the agent bank warrants to purchase 75 shares of Common Stock at an
exercise price of $6.74 per share. These warrants expire May 2001.
F-13
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(9) STOCK OPTION PLANS:
The Company has three stock option plans which provide the granting of
options to purchase an aggregate of 1,353 shares of Common Stock to eligible
employees (including officers) and nonemployee directors of the Company. Options
granted may be at fair market value of the Common Stock or at a price determined
by a committee of the Board. The stock options vest and are exercisable over a
period determined by the committee, but not longer than ten years. Information
with respect to the options under the plans and certain prior options follows:
<TABLE>
<CAPTION>
OPTION PRICE AGGREGATE
SHARES PER SHARE PROCEEDS
----------- ---------------- -----------
<S> <C> <C> <C>
Outstanding, December 31, 1992.................................. 572 $2.00 - $ 6.70 $ 2,041
Granted....................................................... 18 5.25 95
Exercised..................................................... (326) 2.00 - 5.80 (972)
Canceled...................................................... -- --
----- -----------
Outstanding, December 31, 1993.................................. 264 2.00 - 6.70 1,164
Granted....................................................... 300 4.69 - 6.75 1,663
Exercised..................................................... (27) 3.40 - 6.00 (154)
Canceled...................................................... (37) 4.65 - 6.75 (163)
----- -----------
Outstanding, December 31, 1994.................................. 500 2.00 - 6.75 2,510
Granted....................................................... 305 7.25 - 9.50 2,594
Exercised..................................................... (173) 2.00 - 7.25 (796)
Canceled...................................................... (45) 2.00 - 7.50 (259)
----- -----------
Outstanding, December 31, 1995.................................. 587 3.40 - 9.50 4,049
Granted....................................................... 111 8.13 - 11.50 961
Exercised..................................................... (9) 6.50 - 6.63 (56)
Canceled...................................................... -- -- --
----- -----------
Outstanding, March 31, 1996..................................... 689 $3.40 - $11.50 $ 4,954
----- -----------
----- -----------
</TABLE>
At December 31, 1995, there were 256 exercisable options at an aggregate
exercise price of $1,277 and 72 additional options to purchase Common Stock were
available for grant under the plans.
(10) INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Current:
State................................... $ 437 $ -- $ 181
Federal................................. 2,077 85 161
--------- --------- ---------
2,514 85 342
Deferred.................................. (377) 865 (355)
--------- --------- ---------
Total................................... $ 2,137 $ 950 $ (13)
--------- --------- ---------
--------- --------- ---------
Income tax provision (benefit) is included in the accompanying consolidated
financial statements as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
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)
--------- --------- ---------
--------- --------- ---------
F-14
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(10) INCOME TAXES: -- CONTINUED
A reconciliation of the statutory federal income tax rate to the effective
continuing operations income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate................................. 34.0% 34.0% 34.0%
State income taxes, net of federal benefit........................ 6.5 5.6 6.5
Other............................................................. -- -- 1.0
----- ----- -----
40.5% 39.6% 41.5%
----- ----- -----
----- ----- -----
</TABLE>
The tax effect of temporary differences that give rise to deferred income
taxes are as follows:
DECEMBER 31,
--------------------
1994 1995
--------- ---------
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)
--------- ---------
--------- ---------
(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:
1996....................................................... $ 3,373
1997....................................................... 1,080
1998....................................................... 891
1999....................................................... 485
2000....................................................... 158
---------
$ 5,987
---------
---------
The Company has employment agreements with four key executives with terms
ranging from 2 to 3 years. The agreements provide for, among other things,
compensation, benefits, termination and non-competition.
The Company has an employment agreement, as amended on January 1, 1996,
with a former Chief Executive Officer, who is currently a Director of the
Company. The agreement entitles this individual to receive retirement benefits
of $75 per year for life plus certain other benefits, as defined. Included in
other long-term liabilities is $436 and $847 at December 31, 1994 and 1995,
respectively, related to these retirement benefits. In accordance with terms of
the employment agreement, during 1993, the Company loaned this individual $300
to exercise 150 common stock options. The loan, as amended, is
noninterest-bearing and is due on March 1, 1996, and is included in other assets
in the accompanying consolidated balance sheets. The employment agreement also
requires the Company to loan the former CEO's estate the necessary funds to
exercise any options owned by the individual at the time of his death.
F-15
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(11) COMMITMENTS AND CONTINGENCIES: -- CONTINUED
The Company has adopted a severance plan for certain executive officers
that provides for one-time payments in the event of a change in control, as
defined. No liabilities are currently required to be recorded with respect to
this plan.
The Company has entered into an agreement with its long distance carrier through
October 1998 that provides for, among other things, annual minimum purchases of
$1,800 and termination penalties.
In the normal course of business, the Company is a party to various claims
and legal proceedings. Although the ultimate outcome of these matters is
presently not determinable, management of the Company, after consultation with
legal counsel, does not believe that the resolution of these matters will have a
material effect upon the Company's financial position or results of operations.
(12) UNAUDITED SUPPLEMENTAL PRO FORMA DATA:
Certain events occurred immediately prior to year-end or are expected to
occur immediately prior to or upon the closing of the offering contemplated by
this Prospectus. The unaudited supplemental pro forma data presented below
assumes that the following transactions were effected as of January 1, 1995:
o The prepayment of approximately $16,723 of the Credit Agreement with
the proceeds from the sale of the receivables management business on
December 29, 1995 reducing interest expense (see Note 3);
o The fixing of the Transcriptions deferred purchase price on December
29, 1995, causing additional amortization and interest expense (see
Note 2);
o The issuance of 963 shares of Common Stock to the senior
subordinated note holder ('Note Holder') pursuant to the exercise of
certain warrants to purchase Preferred Stock by cancelling $7,000
principal amount of a senior subordinated note and the simultaneous
conversion of such Preferred Stock into Common Stock, and the
issuance of 43 shares of Common Stock to induce the Note Holder to
so exercise and convert (collectively, the 'Note Holder
Transaction') resulting in decreased interest expense and additional
shares outstanding; and
o The repayment of the subordinated payable to related parties and a
portion of the Credit Agreement with proceeds from the offering
contemplated by this Prospectus resulting in reduced interest
expense.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
YEAR ENDED --------------------
DECEMBER 31, 1995 1995 1996
------------------- --------- ---------
<S> <C> <C> <C>
Income from continuing operations..................................... $ 2,080 $ 270 $ 984
---------- --------- ---------
---------- --------- ---------
Income from continuing operations per share........................... $ 0.32 $ 0.04 $ 0.14
---------- --------- ---------
---------- --------- ---------
Shares used in computing income per share............................. 6,542 6,462 6,810
---------- --------- ---------
---------- --------- ---------
</TABLE>
The supplemental pro forma net income from continuing operations per share
does not reflect the estimated non-recurring deduction of approximately $718
from net income available to common shareholders to be incurred in connection
with the issuance of 43 shares of Common Stock to the Note Holder to induce the
exercise of the warrant and the conversion of the Preferred Stock into Common
Stock. The actual non-recurring deduction will be based on the discounted fair
value of the Common Stock at the time of issuance.
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Transcriptions, Ltd. and Affiliates
We have audited the accompanying combined balance sheets of Transcriptions,
Ltd. and Affiliates as of December 31, 1993, 1992, and 1991 and the related
combined statements of operations, retained earnings and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Transcriptions,
Ltd. and Affiliates as of December 31, 1993, 1992, and 1991, and the combined
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in Note 1, the Company has changed its method of accounting
for income taxes during the year ended December 31, 1993.
AMPER, POLITZINER & MATTIA
Edison, New Jersey
July 15, 1994, except Note 9 which is dated March 31, 1995
F-17
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1991 1992 1993
---------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 158,534 $ 108,956 $ 39,483
U.S. Treasury Note....................................................... 49,940 49,940 49,940
Accounts receivable, less allowance for
doubtful accounts of $173,000,
$303,000, and $424,000................................................. 4,494,658 4,755,671 5,501,501
Other receivables........................................................ 91,894 80,303 300,134
Due from franchisees..................................................... 113,826 116,040 90,498
Prepaid expenses and other current assets................................ 405,056 387,937 327,669
Prepaid income taxes..................................................... 17,692 3,220 3,375
---------- ----------- -----------
5,331,600 5,502,067 6,312,600
---------- ----------- -----------
Property and equipment
Furniture and equipment.................................................. 4,962,069 6,641,389 7,221,307
Automotive equipment..................................................... 446,159 437,496 419,090
Leasehold improvements................................................... 92,142 92,142 96,934
Equipment under capital lease............................................ 1,047,493 1,047,493 1,267,481
---------- ----------- -----------
6,547,863 8,218,520 9,004,812
Less accumulated depreciation............................................ 4,597,324 5,624,654 5,289,297
---------- ----------- -----------
1,950,539 2,593,866 3,715,515
---------- ----------- -----------
Other assets
Note receivable.......................................................... 129,742 122,361 114,416
Covenant not-to-compete, net of accumulated amortization of $148,150,
$248,150 and $348,150.................................................. 351,850 251,850 151,850
Loan acquisition costs, net of accumulated amortization of $24,179,
$40,299 and $56,420.................................................... 56,420 40,299 24,178
Prepaid consulting agreement............................................. 280,000 200,000 120,000
Franchise fees, net of accumulated amortization
of $11,692, $14,799 and $17,905........................................ 67,855 64,748 61,642
Deposits................................................................. 38,822 41,742 81,705
Cash surrender value of officers' life insurance, net of policy loans of
$278,005, $420,943 and $422,562........................................ 190,403 195,161 324,429
Due from stockholders.................................................... 968,877 1,083,543 1,118,330
---------- ----------- -----------
2,083,969 1,999,704 1,996,550
---------- ----------- -----------
$9,366,108 $10,095,637 $12,024,665
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Demand notes and short-term loans........................................ $ 511,250 $ 511,250 $ 61,250
Current maturities of long-term debt..................................... 965,771 1,120,146 1,067,189
Current maturities of capital lease obligations.......................... 202,372 228,195 270,354
Accounts payable and accrued expenses.................................... 935,699 964,756 971,003
Deferred revenue......................................................... -- -- 450,405
Deferred telephone credits............................................... -- -- 246,462
Income taxes payable..................................................... 21,602 -- 37,099
Payroll taxes payable.................................................... 47,429 411,121 559,532
Deferred tax liability................................................... 111,603 101,103 157,500
---------- ----------- -----------
2,795,726 3,336,571 3,820,794
Other liabilities
Long-term debt, net of current maturities................................ 3,865,149 4,077,455 4,864,147
Capital lease obligations, net of current maturities..................... 512,866 284,680 234,316
Due to stockholders...................................................... 1,636,278 1,432,278 1,687,278
---------- ----------- -----------
8,810,019 9,130,984 10,606,535
---------- ----------- -----------
Stockholders' equity
Common stock............................................................. 44,055 44,070 47,570
Retained earnings........................................................ 2,358,439 2,766,988 3,216,965
---------- ----------- -----------
2,402,494 2,811,058 3,264,535
Less treasury stock, at cost............................................. (1,846,405) (1,846,405) (1,846,405)
---------- ----------- -----------
Total stockholders' equity............................................. 556,089 964,653 1,418,130
---------- ----------- -----------
$9,366,108 $10,095,637 $12,024,665
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1991 1992 1993
------------- ------------- -------------
<S> <C> <C> <C>
Transcribing and leasing revenue.................................... $ 20,020,863 $ 23,025,200 $ 27,103,153
Direct transcribing and leasing costs............................... 12,260,306 15,183,588 17,654,821
------------- ------------- -------------
Gross profit........................................................ 7,760,557 7,841,612 9,448,332
Selling, general and administrative expenses........................ 6,975,579 6,781,143 8,217,960
------------- ------------- -------------
Earnings from operations............................................ 784,978 1,060,469 1,230,372
------------- ------------- -------------
Other income (expense)
Interest income................................................... 58,589 38,156 14,209
Interest expense.................................................. (811,908) (477,552) (458,085)
Litigation settlement............................................. -- (310,000) --
Miscellaneous income.............................................. 130,361 102,476 122,825
------------- ------------- -------------
(622,958) (646,920) (321,051)
------------- ------------- -------------
Earnings before (provision for) benefit from state income taxes,
extraordinary item and cumulative effect of change in accounting
principle......................................................... 162,020 413,549 909,321
(Provision for) benefit from state income taxes..................... 114,796 (26,200) (64,400)
------------- ------------- -------------
Earnings before extraordinary item and cumulative effect of change
in accounting principle........................................... 276,816 387,349 844,921
Extraordinary item -- utilization of net operating loss
carryforward...................................................... 39,000 21,200 --
Cumulative effect on prior years of change in accounting
principle......................................................... -- -- (43,897)
------------- ------------- -------------
Net income........................................................ $ 315,816 $ 408,549 $ 801,024
------------- ------------- -------------
------------- ------------- -------------
Pro forma results using SFAS 109 as a C-corporation:
Earnings before provision for income taxes, as reported........... $ 162,020 $ 413,549 $ 909,321
Pro forma provision for income taxes.............................. (87,000) (165,000) (352,000)
------------- ------------- -------------
Pro forma net income.............................................. $ 75,020 $ 248,549 $ 557,321
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
COMBINED STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
Retained earnings -- beginning, as originally reported.................. $ 2,103,781 $ 2,578,488 $ 3,293,475
Accumulated deficit from Transcriptions, Ltd. of Texas, Transcriptions,
Ltd. of Northwest and EDM, Ltd., not previously combined.............. (61,158) (220,049) (526,487)
------------ ------------ ------------
Retained earnings -- beginning, as restated............................. 2,042,623 2,358,439 2,766,988
Net income.............................................................. 315,816 408,549 801,024
Less: distributions to stockholders..................................... -- -- (351,047)
------------ ------------ ------------
Retained earnings -- ending............................................. $ 2,358,439 $ 2,766,988 $ 3,216,965
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1991 1992 1993
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................................. $ 315,816 $ 408,549 $ 801,024
---------- ----------- -----------
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation......................................................... 921,752 1,084,692 1,518,126
Amortization......................................................... 119,229 119,228 119,227
Bad debt expense..................................................... 133,831 198,633 358,361
Deferred tax expense (benefit)....................................... 4,000 10,700 12,500
Cumulative effect on prior years of change in income tax accounting
principle.......................................................... -- -- 43,897
Net gain on sale of property and equipment........................... (33,151) (7,014) --
(Increase) decrease in
Accounts receivable................................................ (82,085) (459,646) (1,104,192)
Investment in direct financing leases.............................. 42,070 -- --
Other receivables.................................................. 330,666 11,606 (216,331)
Prepaid expenses and other current assets.......................... (28,375) 17,119 60,269
Prepaid income taxes............................................... 10,508 14,472 (155)
Prepaid consulting agreement....................................... 80,000 80,000 80,000
Deposits........................................................... 1,628 (2,920) (39,963)
Increase (decrease) in
Accounts payable and accrued expenses.............................. (82,901) 29,057 6,247
Deferred revenue................................................... -- -- 450,405
Deferred telephone credits......................................... -- -- 246,462
Income taxes payable............................................... 10,000 (21,602) 37,099
Payroll taxes payable.............................................. (6,102) 363,692 148,411
Due to bank........................................................ (102,601) -- --
Deferred tax liability............................................. (171,796) (21,200) --
---------- ----------- -----------
Total adjustments............................................... 1,146,673 1,416,817 1,720,363
---------- ----------- -----------
Net cash provided by operating activities..................... 1,462,489 1,825,366 2,521,387
---------- ----------- -----------
Cash flows from investing activities:
Principal payments on note receivable................................... 5,972 7,381 7,945
Payment for U.S. Treasury Note.......................................... (49,940) -- --
Decrease (increase) in due from franchisees............................. (3,399) (2,214) 25,542
Acquisition of property and equipment................................... (703,329) (1,755,050) (2,499,851)
Proceeds from sale of property and equipment............................ 100,630 34,045 80,064
(Increase) decrease in cash surrender value of officers' life
insurance............................................................ 134,786 (4,758) (129,268)
(Increase) decrease in due from stockholders............................ 8,333 (114,666) (34,787)
---------- ----------- -----------
Net cash used by investing activities......................... (506,947) (1,835,262) (2,550,355)
---------- ----------- -----------
Cash flows from financing activities:
Principal payments on demand notes and short-term loans................. (251,750) (500,000) (500,000)
Proceeds from demand notes and short-term loans......................... 500,000 500,000 50,000
Principal payments on long-term debt.................................... (874,835) (933,319) (1,266,265)
Proceeds from long-term debt............................................ -- 1,300,000 2,000,000
Principal payments on capital lease obligations......................... (173,150) (202,363) (228,193)
Distribution of retained earnings....................................... -- -- (351,047)
Increase (decrease) in due to stockholders.............................. (29,999) (204,000) 255,000
---------- ----------- -----------
Net cash used by financing activities......................... (829,734) (39,682) (40,505)
---------- ----------- -----------
Net (decrease) increase in cash and cash equivalents...................... 125,808 (49,578) (69,473)
Cash and cash equivalents -- beginning.................................... 32,726 158,534 108,956
---------- ----------- -----------
Cash and cash equivalents -- ending....................................... $ 158,534 $ 108,956 $ 39,483
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Transcriptions, Ltd. and Affiliates, (the 'Company'), provides medical
transcribing services to various hospitals and also leases transcribing
equipment under capital leases. The Company grants credit to substantially all
customers.
Affiliated Entities
Transcriptions, Ltd. has several affiliates, under common ownership, as
noted below, all of which are included in the combined financial statements.
Affiliates Included in Combined Financial Statements
Transcriptions, Ltd. (an S-Corporation), franchisee providing medical
transcribing services to various hospitals in the New Jersey and Delaware
Valley, Pennsylvania area, and leasing transcribing equipment to franchisees of
an affiliated company.
Transcriptions, Ltd. of Louisiana (an S-Corporation), franchisee providing
medical transcribing services to various hospitals in the New Orleans
metropolitan area.
Transcriptions, Ltd. of Utah (an S-Corporation), franchisee providing
medical transcribing services to various hospitals in the Salt Lake City
metropolitan area.
CA EDM (an S-Corporation), franchisee providing medical transcribing
services to various hospitals in the Los Angeles and San Francisco metropolitan
areas.
Transcriptions, Ltd. of Illinois (a Partnership), franchisee providing
medical transcribing services to various hospitals in the Chicago metropolitan
area.
EDM, Ltd. (a C-Corporation), franchisor of medical transcribing services
(not previously combined). EDM, Ltd. has an August 31 year-end for tax purposes.
Transcriptions, Ltd. of Texas (an S-Corporation), an inactive corporation
(not previously combined).
The following combined affiliates were incorporated during the years ended
December 31, 1991, 1992, and 1993 and were not included in the prior year's
combined financial statements:
1991
Transcriptions, Ltd. of Northwest, Inc. (an S-Corporation), franchisee
providing medical transcribing services to various hospitals in the Seattle
metropolitan area (not previously included in the combined financial statement
for the year ended December 31, 1991).
1992
Transcriptions, Ltd. of Colorado (an S-Corporation), franchisee providing
medical transcribing services to various hospitals in the Denver metropolitan
area.
1993
Transcriptions, Ltd. of North Carolina (an S-Corporation), franchisee
providing medical transcribing services to various hospitals in the North
Carolina area.
Transcriptions, Ltd. of Arizona (an S-Corporation), franchisee providing
medical transcribing services to various hospitals in the Arizona area.
F-22
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided on the
straight-line and declining balance methods over the estimated useful lives of
the assets.
ESTIMATED
USEFUL LIFE
--------------
Furniture and equipment..................................... 3 - 7 years
Automotive equipment........................................ 3 - 5 years
Leasehold improvements...................................... 3 - 31.5 years
Equipment under capital lease............................... 3 years
Covenant Not-to-Compete
The covenant not-to-compete is amortized on a straight-line basis over the
five year term of the agreement.
Loan Acquisition Costs
Loan acquisition costs are amortized over five years on a straight-line
basis.
Franchise Fees
Franchise fees are amortized over twenty-five years on a straight-line
basis.
Deferred Revenue
Deferred revenue represents an amount paid in advance by two customers.
Revenue is recognized upon rendering transcribing services for these two
customers.
Deferred Telephone Credits
The Company received several credits as a result of signing three and four
year contracts with a telephone company. These credits are being amortized
ratably over the term of the contracts.
Profit Sharing Plan
The Company has a defined contribution plan (the 'Plan') covering
substantially all employees. The Plan contains a profit-sharing portion, funded
by the Company, as well as a salary deferral portion 401(k), with an employer
matching contribution. The Company funds the profit sharing plan in such amounts
as determined by the discretion of management.
Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), 'Accounting for Income Taxes,' which
requires the use of the liability method of accounting for income taxes. The
liability method measures deferred income taxes by applying enacted statutory
rates in effect at the balance sheet date to the differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. The resulting deferred tax asset or liability is adjusted to reflect
changes in tax laws as they occur.
F-23
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
There was no effect of adopting SFAS 109 on earnings before provision for
income taxes for the year ended December 31, 1993.
For the years ended December 31, 1991 and 1992, the Company utilized
Accounting Principles Board Opinion No. 11, 'Accounting for Income Taxes,' to
record income taxes.
The Company reports revenue and expenses for income tax purposes on the
cash basis, and on the accrual method for financial reporting purposes. Also,
the Company records depreciation and amortization on an accelerated basis for
tax purposes and on the straight-line and declining balance basis for financial
reporting purposes. These create temporary differences which give rise to
deferred income taxes.
The Companies, (except for EDM, Ltd.), have elected to be taxed as small
business S-Corporations under the Internal Revenue Code. Under this election,
the profits, losses, credits and deductions of the Companies are passed through
to the individual stockholders. The profits and losses of the Companies remain
taxable at the state level, except for Transcriptions, Ltd. of Illinois which is
a partnership, and Transcriptions, Ltd. of Colorado and Transcriptions, Ltd.
(Pennsylvania division) where the Companies are taxed as state S-Corporations.
(2) CONCENTRATION OF CASH BALANCES
At December 31, 1993, the Company maintained cash balances in one financial
institution of approximately $1,443,000.
(3) DUE FROM FRANCHISEES
Due from franchisees represents trade receivables which are to be paid in
the ordinary course of business, without interest.
(4) PROPERTY AND EQUIPMENT
Depreciation expense, which includes amortization of assets under capital
leases, for the years ended December 31, 1991, 1992 and 1993 amounted to
$921,752, $1,084,692 and $1,518,126, respectively.
Accumulated amortization of equipment under capital leases was $231,299,
$807,528, and $944,455, for the years ended December 31, 1991, 1992, and 1993,
respectively.
(5) NOTE RECEIVABLE
Note receivable from a former stockholder, due currently in monthly
installments of $1,132 including interest at prime, based on a 12-year
amortization with a balloon payment, maturing July 2000.
F-24
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(6) DEMAND NOTES AND SHORT-TERM LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1991 1992 1993
----------- ---------- ----------
<S> <C> <C> <C>
Demand note payable to a bank, under a $500,000 line of credit due June 1994,
bearing interest at the Company's option of the LIBOR (London Interbank
Offering Rate) plus 200 basis points or prime rate minus .25%,
collateralized by substantially all assets of the Company.................. $ 500,000 $ 500,000 $ 500,000
Less: amount refinanced as a long-term debt obligation during January 1994
(see Note 7)............................................................... -- -- (450,000)
----------- ---------- ----------
Balance of demand note. This note was paid during January 1994............... 500,000 500,000 50,000
Unsecured demand note bearing interest at 15% to Anne Cohen, a relative of a
current stockholder........................................................ 8,250 8,250 8,250
Unsecured demand note bearing interest at 15% to Morris Forstein, a relative
of a current stockholder................................................... 3,000 3,000 3,000
----------- ---------- ----------
$ 511,250 $ 511,250 $ 61,250
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The prime rate as of December 31, 1991, 1992 and 1993 was 6.5%, 6% and 6%,
respectively.
The LIBOR rate as of December 31, 1991, 1992, and 1993 was 4%, 3.25%, and
3%, respectively. 200 basis points are the equivalent of 2%.
(7) LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
Installment note payable to a bank at $33,333 monthly starting July
1994, plus interest at the Company's option of the LIBOR plus 200
basis points or prime rate minus .25%, maturing June 1999,
collateralized by substantially all assets of the Company............. $ -- $ -- $ 1,550,000
Plus: Demand note refinanced during January 1994 (see Note 6)........... -- -- 450,000
------------ ------------ ------------
Balance of installment note payable..................................... -- -- 2,000,000
Installment note payable to a bank in monthly installments of $61,333
through April 1994, $15,333 during May 1994 through November 1995 and
$8,333 during December 1995 through September 1997, plus interest at
the Company's option of the LIBOR plus 200 basis points or prime rate
minus .25%, maturing September 1997, collateralized by substantially
all assets of the Company............................................. 1,623,500 1,462,500 726,500
Installment note payable to a bank at $16,667 monthly plus interest at
the Company's option of the LIBOR plus 200 basis points or prime rate
minus .25% maturing July 1998, collateralized by substantially all
assets of the Company................................................. -- 1,000,000 916,667
Installment note payable to a former stockholder, relative of a current
stockholder, currently at $17,988 monthly including interest at prime,
based on a 12 year amortization with a balloon payment due July 2000,
subordinated to the bank debt......................................... 1,651,723 1,537,052 1,413,613
</TABLE>
F-25
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(7) LONG-TERM DEBT -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
Installment note payable to a former stockholder, relative of a current
stockholder, currently at $7,117 monthly including interest at prime,
based on a 12 year amortization with a balloon payment due July 2000,
subordinated to the bank debt......................................... 654,135 608,303 558,965
Demand note payable to the stockholders of the Company at $5,833
monthly, plus interest at the Company's option of the LIBOR plus 200
basis points or prime rate minus .25%, subordinated to the bank
debt.................................................................. 700,000 490,000 280,000
Installment note payable to a former stockholder, relative of a current
stockholder, at $5,555 monthly, plus interest at prime, maturing April
1993, subordinated to the bank........................................ 88,888 22,222 --
Installment note, payable $466 monthly including interest at 9.9%,
maturing March 1995, collateralized by automotive equipment. The note
was paid in June 1993................................................. 15,401 11,145 --
Installment note, payable $771 monthly including interest at 9.5%,
maturing August 1994, collateralized by automotive equipment.......... 21,708 14,202 5,227
Installment note, payable $698 monthly including interest at 11.25%,
maturing June 1993, collateralized by automotive equipment............ 10,922 3,394 --
Installment note, payable $410 monthly including interest at 9.5%,
maturing January 1995, collateralized by automotive equipment......... 13,091 9,256 4,670
Installment note, payable $587 monthly including interest at 11.2%,
maturing September 1995, collateralized by automotive equipment....... 21,469 16,598 10,659
Installment note, payable $819 monthly including interest at 10%,
maturing August 1995, collateralized by automotive equipment.......... 30,083 22,929 15,035
------------ ------------ ------------
4,830,920 5,197,601 5,931,336
Less current maturities................................................. 965,771 1,120,146 1,067,189
------------ ------------ ------------
Long-term debt, net of current maturities............................... $ 3,865,149 $ 4,077,455 $ 4,864,147
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The approximate amount of long-term debt maturing in each of the next five
years ending December 31, is as follows:
1994........................................................ $ 1,067,000
1995........................................................ 1,198,000
1996........................................................ 911,000
1997........................................................ 906,000
1998........................................................ 754,000
Thereafter.................................................. 1,096,000
(8) CAPITAL LEASE OBLIGATIONS
The Company has entered into various capital leases for certain
transportation and other equipment expiring through 1998.
F-26
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(8) CAPITAL LEASE OBLIGATIONS -- CONTINUED
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of net minimum lease payments as
of December 31, 1993:
FOR THE YEARS ENDING
DECEMBER 31,
- --------------------------------------------------------
1994.................................................... $ 308,000
1995.................................................... 92,000
1996.................................................... 73,000
1997.................................................... 54,000
1998.................................................... 54,700
-----------
Total minimum lease payments............................ 581,700
Less interest component................................. 77,030
-----------
Present value of net minimum lease payments............. $ 504,670
-----------
-----------
Current maturities...................................... $ 270,354
Long-term maturities.................................... 234,316
-----------
Total................................................... $ 504,670
-----------
-----------
The present values of minimum future obligations shown above are calculated
on interest rates ranging from 9.18% to 13.84%.
(9) DEFERRED TELEPHONE CREDITS
During 1993 the Company received several credits as a result of signing
three and four year contracts with a telephone company. These credits are
reflected as liabilities and are being amortized ratably over the term of the
contracts.
(10) COMMON STOCK
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------------
LESS
PAR TREASURY OUT-
VALUE AUTHORIZED ISSUED STOCK STANDING AMOUNT
----------- ----------- ----------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Transcriptions, Ltd................................ 1,000 452 192 260 $ 37,040
Transcriptions, Ltd. of Louisiana.................. $ 1 1,000 100 40 60 1,000
Transcriptions, Ltd. of Northwest.................. 1,000 15 -- 15 15
Transcriptions, Ltd. of Utah....................... 1,000 100 40 60 1,000
CA EDM............................................. $ 1 1,000 60 24 36 1,000
EDM, Ltd........................................... $ 1 1,000 -- -- -- 3,000
Transcriptions, Ltd. of Texas...................... $ 1 1,000 100 40 60 1,000
----------- ----------- --- --- ---------
Balance at December 31, 1991....................... 7,000 827 336 491 44,055
Transcriptions, Ltd. of Colorado................... 1,000 15 -- 15 15
----------- ----------- --- --- ---------
Balance at December 31, 1992....................... 8,000 842 336 506 44,070
Transcriptions, Ltd. of North Carolina............. $ 1 2,500 100 -- 100 2,500
Transcriptions, Ltd. of Arizona.................... $ 1 1,000 100 -- 100 1,000
----------- ----------- --- --- ---------
Balance at December 31, 1993....................... 11,500 1,042 336 706 $ 47,570
----------- ----------- --- --- ---------
----------- ----------- --- --- ---------
</TABLE>
(11) PROFIT SHARING PLAN
Profit sharing expense was approximately $113,000, $123,000 and $133,000,
and the 401(k) matching expense was approximately $23,000, $37,000 and $38,000,
for the years ended December 31, 1991, 1992 and 1993, respectively.
F-27
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(12) RELATED PARTY TRANSACTIONS
Other receivables represent various interest-bearing loans due from
employees of the Company.
Due from stockholders represents non-interest bearing loans payable to the
stockholders of the Company of approximately $969,000, $1,084,000 and
$1,118,000, as of December 31, 1991, 1992, and 1993, respectively, with no terms
for repayment.
Due to stockholders represents non-interest bearing loans payable to the
stockholders of the Company of approximately $1,636,000, $1,432,000, and
$1,687,000 as of December 31, 1991, 1992, and 1993, respectively, which are
subordinated to the bank debt.
Interest paid to related parties other than stockholders was approximately
$21,000, $132,000, and $107,000, for the years ended December 31, 1991, 1992,
and 1993, respectively (see Notes 6 and 7).
Interest paid to stockholders for debt included in long-term debt and for
stockholder loans was approximately $131,000, $94,000, and $94,000, for the
years ended December 31, 1991, 1992 and 1993, respectively (see Note 7).
The Company leases facilities from certain stockholders of the Company.
Related rent expense was $5,280 for each of the years ended December 31, 1991,
1992 and 1993.
(13) SUPPLEMENTAL DISCLOSURES OF CASH PAID
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
1991 1992 1993
---------- ---------- ----------
Interest............................... $ 724,277 $ 495,970 $ 457,013
Income taxes........................... -- 24,264 14,956
(14) INCOME TAXES
The components of the deferred tax liability as of December 31, 1993 are as
follows:
CURRENT NONCURRENT
----------- -----------
Total deferred tax asset.......................... $ 59,200 --
Total deferred tax liability...................... (216,700) --
Valuation allowance............................... -- --
----------- -----------
Net deferred tax liability........................ $ (157,500) $ --
----------- -----------
----------- -----------
The (provision for) benefit from income taxes for the years ended December
31, consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1991 1992 1993
----------- --------- ---------
<S> <C> <C> <C>
Current tax expense...................................... $ (38,000) $ (15,500) $ (59,700)
Deferred tax expense..................................... (4,000) (10,700) (12,500)
Benefit of net operating loss carryforward............... -- -- 7,800
Effect of change in tax status........................... 156,796 -- --
----------- --------- ---------
$ 114,796 $ (26,200) $ (64,400)
----------- --------- ---------
----------- --------- ---------
</TABLE>
The provision for income taxes differs from the amount that would result
from applying statutory rates because of certain non-deductible expenses.
F-28
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(14) INCOME TAXES -- CONTINUED
As of December 31, 1993, the Company had available the following net
operating loss carryforwards for tax purposes:
Expiration Date:
FOR THE YEAR ENDING
DECEMBER 31, FEDERAL STATE
- --------------------------------------------------- ---------- ----------
1997............................................... $ -- $ 43,500
1998............................................... -- 213,800
1999............................................... -- 215,500
2005............................................... 45,100 --
2006............................................... 213,800 --
2007............................................... 215,600 --
---------- ----------
$ 474,500 $ 472,800
---------- ----------
---------- ----------
(15) COMMITMENTS AND CONTINGENCIES
Contingencies
New Jersey Department of Labor filed an action in 1985 against
Transcriptions, Ltd. seeking to declare that the Company's treatment of
independent contractors is improper. The state is seeking to treat these
individuals as employees and is charging the Company for payroll taxes,
penalties and interest.
The Company is contesting this claim and contends that the treatment of
these individuals as independent contractors is proper. If this matter results
in an unfavorable outcome the Company could be assessed taxes, penalties and
interest, up to $320,000. Management anticipates a favorable outcome.
The State of Colorado Unemployment Bureau has conducted an audit and a
hearing stating the Company's treatment of independent contractors is improper.
Management is contesting this matter and believes that any unfavorable outcome
would not have a material impact upon the Company.
A former customer has asserted a claim against the Company. Management is
contesting this claim and believes it will not have a material effect upon the
Company.
During the year ended December 31, 1992, the Company resolved a billing
dispute with a former customer and recorded a $310,000 expense in settlement of
the litigation.
Operating Leases
The Company leases various office facilities with leases expiring through
May 1998.
The following is a schedule by years of approximate future minimum rental
payments required under operating leases that have initial of remaining
noncancelable lease terms in excess of one year as of December 31, 1993:
1994.............................................................. $ 428,300
1995.............................................................. 413,500
1996.............................................................. 216,800
1997.............................................................. 125,800
1998.............................................................. 70,300
Thereafter........................................................ --
Rent expense for the years ended December 31, 1991, 1992 and 1993 was
$445,522, $514,412, and $541,152, respectively.
F-29
<PAGE>
TRANSCRIPTIONS, LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(16) NONCASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1993, the Company acquired new equipment
with a cost of $219,988. In conjunction with the acquisition, liabilities were
assumed for the same amount.
During the year ended December 31, 1993, common stock of the two new
companies (Transcriptions, Ltd. of North Carolina and Transcriptions, Ltd. of
Arizona) was issued for $3,500 in exchange for stock subscriptions receivable.
During the year ended December 31, 1991, capital lease obligations of
$105,343 were incurred when the Company entered into leases for new equipment.
During the year ended December 31, 1991, the Company purchased additional
automotive equipment and assumed liabilities for $90,986.
(17) SALE OF OPERATIONS
Effective April 30, 1994, the Company sold substantially all of its assets
at their fair market value which exceeded their net book value. In addition,
liabilities were also assumed. The operations of the Company have been continued
by the acquiring entity. Therefore, the financial statements have been prepared
on a going concern basis.
F-30
<PAGE>
(17) SALE OF OPERATIONS -- CONTINUED
<PAGE>
[GRAPHIC]
The graph is a map of the United States with stars in each state where Medquist
Inc. has offices.
<PAGE>
PART II
II-1
<PAGE>
(17) SALE OF OPERATIONS -- CONTINUED
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses,
all of which will be paid by the Company, in connection with the issuance and
distribution of the securities being registered:
NATURE OF EXPENSE AMOUNT
- ------------------------------------------------------------------- ----------
SEC Registration Fee............................................... $ 10,312
NASD Fee........................................................... 3,490
American Stock Exchange Listing Fee................................ 17,500
Printing and engraving fees........................................ 90,000
Registrant's counsel fees and expenses............................. 110,000
Accounting fees and expenses....................................... 125,000
Blue Sky expenses and counsel fees................................. 20,000
Transfer agent and registrar fees.................................. 2,000
Miscellaneous...................................................... 21,698
----------
TOTAL....................................................... $ 400,000
----------
----------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 14A:3-5 of the Corporation Law of the State of New Jersey ('NJCL')
permits each New Jersey business corporation to indemnify its directors,
officers, employees and agents against expenses and liability for each such
person's acts taken in his or her capacity as a director, officer, employee or
agent of the corporation if such actions were taken in good faith and in a
manner which he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal proceeding, if he
or she had no reasonable cause to believe his or her conduct was unlawful.
Article 10 of the Company's Bylaws provides that the Company, to the full extent
permitted by Section 14A:3-5 of the NJCL, shall indemnify all past and present
directors or officers of the Company and may indemnify all past or present
employees or other agents of the Company. To the extent that a director,
officer, employee or agent of the Company has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in such
Article 10, or in defense of any claim, issue, or matter therein, he or she
shall be indemnified by the Company against expenses in connection therewith.
Such expenses shall be paid by the Company in advance of the final disposition
of the action, suit or proceeding as authorized by the Board of Directors upon
receipt of an undertaking to repay the advance if it is ultimately determined
that such person is not entitled to indemnification.
As permitted by Section 14A:3-5(8) of the NJCL, Article Ninth of the
Company's Amended and Restated Certificate of Incorporation provides that no
director of the Company shall be personally liable to the Company or its
shareholders for monetary damages for breach of any duty in his or her capacity
as a director owed to the Company or to the Shareholders of the Company, except
for liability (i) for any breach of the director's duty of loyalty to the
Company or its shareholders as defined in Section 14A:2-7(3) of the NJCL, (ii)
for acts or omissions not in good faith or which involve a knowing violation of
law, or (iii) for any act or omission which resulted in receipt by the director
of an improper personal benefit.
The Company also has a policy insuring it and its directors and officers
against certain liabilities, including liabilities under the Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the acquisition of Stanford Financial Services, Inc.
('SFS') in June 1993, the Company issued an aggregate of $641,000 in principal
amount of convertible subordinated notes to the three owners of SFS in payment
of a portion of the purchase price. These notes were convertible into Common
Stock at a conversion price of $7.50 per share. No underwriter, placement agent
or broker dealer participated in the placement of these subordinated notes.
These notes were repaid in full, without conversion, in July 1995.
II-2
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. -- CONTINUED
In connection with the acquisition of Transcriptions, Ltd. in May 1994, the
Company entered into a $30,000,000 credit facility with Chemical and, as part of
that transaction, issued to Chemical warrants to purchase 75,351 shares of
Common Stock at an exercise price of $6.74 per share. No additional
consideration was paid by Chemical in connection with the issuance of these
warrants. No underwriter, placement agent or broker dealer participated in the
placement of the warrants to Chemical other than Bowles Hollowell Conner & Co.,
which was retained by the Company to arrange for the placement of the senior
debt to enable the Company to complete the acquisition.
As part of the Company's desire to assist its directors and executive
officers with their estate planning requirements, the Company amended the 1992
Nonstatutory Option Plan to permit the transfer of options to family members of
the grantees. Thereafter, on January 3, 1995, the Company issued to three of Mr.
Censits' children an aggregate of 9,000 shares of Common Stock pursuant to their
exercise of outstanding options at an exercise price of $4.69 per share. The
options were originally issued to Mr. Censits who made a gift of them to his
children in connection with his personal estate planning. No underwriter,
placement agent or broker dealer participated in the placement of the original
options awarded to Mr. Censits, the gift by Mr. Censits to his children, or the
exercise of the options by Mr. Censits' children.
In connection with the acquisition of Brawm in August 1995, the Company
issued 22,840 shares of Common Stock to the former owners of Brawm. No
underwriter, placement agent or broker-dealer participated in the placement of
such shares of Common Stock.
On March 29, 1996, prior to the filing of this Registration Statement, the
Company and Heller agreed that, on the closing date of the Offering, Heller
would exercise the Heller Warrants to purchase 962,675 shares of Class A and
Class B Preferred Stock by applying the $7 million outstanding principal amount
under the Heller Facility against the exercise price, and convert the shares of
Class A and Class B Preferred Stock received upon such exercise into 962,675
shares of Common Stock. As an inducement for Heller to exercise the Heller
Warrants and convert the Preferred Stock, the Company has agreed to issue Heller
42,500 additional shares of Common Stock on the closing date of this Offering.
No underwriter, placement agent or broker/dealer participated in the exercise of
the Heller Warrants or the conversion of the shares of Preferred Stock issued
upon such exercise into shares of Common Stock.
The Company believes that the foregoing described issuances of securities,
if they constitute sales, are exempt from registration under the Act by virtue
of the exemption provided by Section 4(2) thereof for transactions not involving
a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement among the Company and the Underwriters (1)
3.1 Amended and Restated Certificate of Incorporation of the Company [incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement (No. 33-95968) on Form S-1 (the 'Registration
Statement')]
3.2 By-Laws of the Company [incorporated by reference to Exhibit 3.2 of the Company's 1993 Annual Report
on Form 10-K (the '1993 10-K')]
3.3 Certificate of Designation of Terms of Preferred Stock [incorporated by reference to Exhibit 3.3 to
the Company's 1992 Annual Report on Form 10-K (the '1992 10-K')]
4.1 Specimen Stock Certificate (2)
5.1 Opinion of Pepper, Hamilton & Scheetz(1)
10.1 Agreement between the Company and Richard J. Censits, dated January 29, 1996 (2)
10.2 Incentive Stock Option Plan of the Company, dated January 1988 [incorporated by reference to Exhibit
10.2 of the Registration Statement]
</TABLE>
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. -- CONTINUED
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C>
10.3 Stock Option Plan of the Company, dated January 1992, as amended (2)
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 (2)
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 (2)
10.8 Employment Agreement between the Company and John A. Donohoe, dated May 27, 1994 (the 'Donohoe
Employment Agreement') (2)
10.9 Amendment to the Donohoe Employment Agreement, dated March 1, 1996 (2)
10.10 Employment Agreement between the Company and Ronald F. Scarpone, dated May 27, 1994, as amended March
1, 1996 (2)
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 (2)
10.14 Warrant Purchase Agreement between the Company and Heller, dated as of December 14, 1992
[incorporated by reference to Exhibit 3 of the Company's Current Report on Form 8-K filed December
24, 1992 (the '12/24/92 8-K')]
10.15 Registration Rights Agreement between the Company and Heller, dated as of December 14, 1992
[incorporated by reference to Exhibit 6 of the 12/24/92 8-K]
10.16 Warrant to Purchase Class A Convertible Preferred Stock issued to Heller, dated as of May 27, 1994
(the 'Class A Warrant') [incorporated by reference to Exhibit 10.27.7 of the 6/30/94 10-Q]
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 (2)
10.19 Amendment to Class B Warrant, dated as of December 29, 1995 (2)
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]
</TABLE>
II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. -- CONTINUED
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C>
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 (2)
10.25 Letter Agreement between the Company and Heller, dated May 27, 1994, regarding representation on the
Company's Board of Directors [incorporated by reference to Exhibit 10.35 of the 6/30/94 Form 10-Q]
10.26 Asset Purchase Agreement among the Company, MedQuist CCI, L.P., and Medaphis Hospital Services
Corporation, dated December 31, 1995 [incorporated by reference to Exhibit 2 of the Company's Current
Report on Form 8-K filed on January 12, 1996 (the '1/12/96 8-K')]
10.27 Stock Purchase Agreement among the Company, MedQuist Receivables Management Company and Medaphis
Hospital Services Corporation [incorporated by reference to Exhibit 3 of the 1/12/96 8-K]
10.28 Form of Employee Stock Purchase Plan (2)
10.29 Agreement among the Company, Heller and Heller Financial, Inc. dated March 29, 1996 (1)
10.30 Amendment and Assignment of Registration Rights Agreement among Heller Financial, Inc., Heller and
the Company, dated May 27, 1994 (1)
10.31 Second Amendment to Registration Rights Agreement between Heller and the Company, dated December 29,
1995 (1)
10.32 Registration Agreement between the Company and Chemical Bank, dated May 27, 1994
10.33 Form of Revised Employee Stock Purchase Plan (1)
11.0 Statement re: Computation of Per Share Earnings (2)
22.1 Subsidiaries (2)
23.1 Consent of Arthur Andersen LLP (included on page II-6 of this Registration Statement)
23.2 Consent of Amper Politziner & Mattia (included on page II-7 of this Registration Statement)
23.3 Consent of Pepper, Hamilton & Scheetz (included in Exhibit 5.1)
24 Powers of Attorney (included on page II-8 of this Registration Statement)
99.1 Consent of Director Nominee (2)
</TABLE>
- ------------------
(1) Filed herewith.
(2) Previously filed.
(b) Consolidated Financial Statement Schedules
SCHEDULE NO. DESCRIPTION
- --------------- -----------
II Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable, not
required, or the required information is included in the Financial Statements or
the notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling
II-5
<PAGE>
ITEM 17. UNDERTAKINGS -- CONTINUED
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-6
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
Registration Statement.
Philadelphia, Pa.,
May 10, 1996
ARTHUR ANDERSEN LLP
II-7
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation of our report dated July 15, 1994, except
Note 9 which is dated March 31, 1995, on the combined financial statements of
Transcriptions, Ltd. and Affiliates as of December 31, 1993, 1992 and 1991 and
for the years then ended, which is included in this registration statement on
Form S-1 of MedQuist Inc. and to the reference to our firm under the caption
'experts' in the prospectus.
/s/__Amper, Politziner & Mattia________
AMPER, POLITZINER & MATTIA
May 10, 1996
Edison, New Jersey
II-8
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania, on the 10th day of May, 1996.
MEDQUIST INC.
By: /s/ DAVID A. COHEN
---------------------------
David A. Cohen
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on May 10th,
1996 in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ------------------------------------------ ------------------------------------------------------------
<S> <C>
/s/ DAVID A. COHEN Director, President and Chief Executive Officer (principal
------------------ executive officer)
David A. Cohen
/s/ ROBERT F. GRAHAM VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL OFFICER
-------------------- (PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING
ROBERT F. GRAHAM OFFICER)
* CHAIRMAN OF THE BOARD OF DIRECTORS
JAMES R. EMSHOFF
* DIRECTOR
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>
II-9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MedQuist Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of MedQuist Inc. and subsidiaries included
in this Registration Statement and have issued our report thereon dated February
23, 1996. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 15(b) of the
Registration Statement is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 23, 1996
S-1
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
BALANCE, CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE,
DESCRIPTION YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
- --------------------------------------------- ------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Allowances for doubtful accounts:
1995.................................... $ 316 $ 243 $ 487 $ (496) $ 550
1994.................................... 882 18 145 (729) 316
1993.................................... 1,486 448 -- (1,052) 882
</TABLE>
- ------------------
* Includes amounts related to discontinued operations.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NUMBER NAME OF EXHIBIT PAGE NUMBER
- ----------------- ------------------------------------------------------------------ -------------------
<S> <C> <C>
1.1 Form of Underwriting Agreement
5.1 Opinion of Pepper, Hamilton & Scheetz
10.30 Amendment and Assignment of Registration Rights Agreement among
Heller Financial, Inc., Heller and the Company, dated May 27, 1994
10.31 Second Amendment to Registration Rights Agreement between Heller
and the Company, dated December 29, 1995
10.32 Registration Agreement between the Company and Chemical Bank,
dated May 27, 1994
10.33 Form of Revised Employee Stock Purchase Plan
23.1 Consent of Arthur Andersen LLP (included on page II-6 of this
Registration Statement)
23.2 Consent of Amper Politziner & Mattia (included on page II-7 of
this Registration Statement)
23.3 Consent of Pepper, Hamilton & Scheetz (included in Exhibit 5.1)
</TABLE>
DRAFT
EXHIBIT 1.1
2,200,000 Shares1
MEDQUIST INC.
Common Stock
UNDERWRITING AGREEMENT
May _____, 1996
ROBERTSON, STEPHENS & COMPANY LLC
VOLPE, WELTY & COMPANY
PENNSYLVANIA MERCHANT GROUP LTD.
As Representatives of the several Underwriters
c/o Robertson, Stephens & Company LLC
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
MEDQUIST INC., a New Jersey corporation (the "Company"), and certain
shareholders of the Company named in Schedule B hereto (hereafter called the
"Selling Shareholders") address you as the Representatives of each of the
persons, firms and corporations listed in Schedule A hereto (herein collectively
called the "Underwriters") and hereby confirm their respective agreements with
the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell 2,200,000
shares of its authorized and unissued Common Stock, no par value (the "Firm
Shares"), to the several Underwriters. The Company and the Selling Shareholders
also propose to grant, severally and not jointly, to the Underwriters an option
to purchase up to an aggregate of 330,000 additional shares of the Company's
Common Stock, no par value (the "Option Shares"), as provided in Section 7
hereof. The 307,160 shares of Common Stock, no par value, of the Company to be
sold by the Company pursuant to Section 7 hereof are hereinafter called the
"Company Option Shares" and the 22,840 shares of Common Stock, no par value, of
the Company to be sold by the Selling Shareholders pursuant to Section 7 hereof
are hereinafter called the "Selling Shareholder Option Shares." As used in this
Agreement, the term "Shares" shall include the Firm Shares and the Option
Shares. All shares of Common Stock, no par value, of the Company to be
outstanding after giving effect to the sales contemplated hereby, including the
Shares, are hereinafter referred to as "Common Stock."
- --------
1 Plus an option to purchase up to 330,000 additional shares from the
Company and certain shareholders of the Company to cover
over-allotments.
<PAGE>
2. Representations, Warranties and Agreements of the Company and the
Selling Shareholders.
I. The Company represents and warrants to and agrees with each
Underwriter that:
(a) A registration statement on Form S-1 (File No. 333-3050) with
respect to the Shares, including a prospectus subject to completion, has been
prepared by the Company in conformity in all materials respects with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
applicable rules and regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") under the Act and has been filed with
the Commission; such amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
pursuant to Rule 462(b) of the Rules and Regulations as may have been required
prior to the date hereof have been similarly prepared and filed with the
Commission; and the Company will file such additional amendments to such
registration statement, such amended prospectuses subject to completion and such
abbreviated registration statements as may hereafter be required. Copies of such
registration statement and amendments, of each related prospectus subject to
completion (the "Preliminary Prospectuses"), including all documents
incorporated by reference therein, and of any abbreviated registration statement
pursuant to Rule 462(b) of the Rules and Regulations have been delivered to you.
If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and promptly
file with the Commission the information omitted from the registration statement
pursuant to Rule 430A(a) or, if Robertson, Stephens & Company LLC, on behalf of
the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the information required to be included in any term sheet
filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if Robertson,
Stephens & Company LLC, on behalf of the several Underwriters, shall agree to
the utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or (c),
as applicable, of the Rules and Regulations. The term "Registration Statement"
as used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
amended, together with any such abbreviated registration statement. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); provided,
however, that if in reliance on Rule 434 of the Rules and Regulations and with
the consent of Robertson, Stephens & Company LLC, on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
term "Prospectus" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters
by the Company and circulated by the Underwriters to all prospective purchasers
of the Shares (including the information deemed to be a part of the Registration
Statement at the time it became effective
2
<PAGE>
pursuant to Rule 434(d) of the Rules and Regulations). Notwithstanding the
foregoing, if any revised prospectus shall be provided to the Underwriters by
the Company for use in connection with the offering of the Shares that differs
from the prospectus referred to in the immediately preceding sentence (whether
or not such revised prospectus is required to be filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations), the term "Prospectus"
shall refer to such revised prospectus from and after the time it is first
provided to the Underwriters for such use. If in reliance on Rule 434 of the
Rules and Regulations and with the consent of Robertson, Stephens & Company LLC,
on behalf of the several Underwriters, the Company shall have provided to the
Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior
to the time that a confirmation is sent or given for purposes of Section
2(10)(a) of the Act, the Prospectus and the term sheet, together, will not be
materially different from the prospectus in the Registration Statement. Any
reference to the Registration Statement or the Prospectus shall be deemed to
refer to and include the documents incorporated by reference therein pursuant to
Item 16(a) of Form S-1 under the Act, as of the date of the Registration
Statement or the Prospectus, as the case may be. As used in this Agreement, the
term "Incorporated Documents" means the documents which at the time are
incorporated by reference in the Registration Statement, the Prospectus or any
amendment or supplement thereto.
(b) The Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus or instituted proceedings for that purpose,
and each such Preliminary Prospectus has conformed in all material respects to
the requirements of the Act and the Rules and Regulations and, as of its date,
has not included any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and at the time the
Registration Statement became or becomes, as the case may be, effective and at
all times subsequent thereto up to and on the Closing Date (hereinafter defined)
and on any later date on which Option Shares are to be purchased, (i) the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that none of the representations and
warranties contained in this subparagraph (b) shall apply to information
contained in or omitted from the Registration Statement or Prospectus, or any
amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof. There are no
agreements, contracts, leases or documents of the Company or any of its
subsidiaries of a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement by the Act or the Rules and Regulations which have not
been accurately described in all material respects in the Registration Statement
or Prospectus or filed as exhibits to the Registration Statement.
The Incorporated Documents heretofore filed, when they were filed (or, if
any amendment with respect to any such document was filed, when such amendment
was filed), conformed in all material respects with the requirements of the Act
and Exchange Act and the rules and regulations of the Commission thereunder.
(c) Each of the Company and its subsidiaries has been duly incorporated and
is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation with full power and authority (corporate and
other) to own, lease and operate its properties and conduct its business as
described in the Prospectus; the Company owns all of the outstanding capital
stock of its subsidiaries free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest, with the exception
3
<PAGE>
of the pledge and security interest of Chemical Bank, as agent for the several
lenders, pursuant to a Revolving Credit Facility (the "Chemical Facility"); each
of the Company and its subsidiaries is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
ownership or leasing of its properties or the conduct of its business requires
such qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise (a "Material Adverse Effect");
no proceeding has been instituted in any such jurisdiction, revoking, limiting
or curtailing, or seeking to revoke, limit or curtail, such power and authority
or qualification; neither the Company nor any of its subsidiaries is in
violation of its respective charter or bylaws or in default in the performance
or observance of any material obligation, agreement, covenant or condition
contained in any material bond, debenture, note or other evidence of
indebtedness, or in any material lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument to which
the Company or any of its subsidiaries is a party or by which it or any of its
subsidiaries or their respective properties may be bound; and neither the
Company nor any of its subsidiaries is in violation of any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective properties of which
it has knowledge where such violation would have a Material Adverse Effect. The
Company and its subsidiaries are not aware of any existing or imminent matter
which may have a Material Adverse Effect other than as disclosed in the
Registration Statement and Prospectus. The Company does not own or control,
directly or indirectly, any corporation, association or other entity other than
Transcriptions, Ltd., a New Jersey corporation "Transcriptions Ltd."),
Transcriptions Ltd. of Michigan, a Michigan corporation ("Transcriptions Ltd. of
Michigan"), SHMC, Inc., a New Jersey corporation ("SHMC"), MedQuist CCI, L.P., a
Delaware limited partnership ("MedQuist CCI"), MLP Corporation, a Delaware
corporation ("MLP Corp."), MedQuist MPI, Inc., a Delaware corporation ("MPI
Inc."), MedQuist IP Corp., a Delaware corporation ("MedQuist IP").
(d) The Company has full legal right, power and authority to enter into
this Agreement and perform the transactions contemplated hereby. This Agreement
has been duly authorized, executed and delivered by the Company and is a valid
and binding agreement on the part of the Company, enforceable in accordance with
its terms, except as rights to indemnification and contribution hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any bond, debenture, note or other evidence of indebtedness, or under any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of its subsidiaries or their
respective properties may be bound, (ii) the charter or bylaws of the Company or
any of its subsidiaries, or (iii), to the Company's knowledge after due inquiry,
any law, order, rule, regulation, writ, injunction, judgment or decree of any
court, government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its subsidiaries or over their
respective properties. No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties is required for the execution
and delivery of this Agreement and the consummation by the Company or any of its
subsidiaries of the transactions herein contemplated, except such as may be
required under the Act, the Exchange Act (if applicable), or under state or
other securities or Blue Sky laws, all of which requirements have been satisfied
in all material respects.
(e) There is not any pending or, to the best of the Company's knowledge,
threatened, any action, suit, claim or proceeding against the Company, any of
its subsidiaries or any of their respective officers (whereby the Company's best
knowledge refers also to any pending action, suit, claim or proceeding against
such respective officers and their properties, assets and rights) or any of
their respective
4
<PAGE>
properties, assets or rights before any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective officers or properties or otherwise which
(i) might result in any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise (a "Material Adverse Change")
or have a Material Adverse Effect, (ii) might prevent consummation of the
transactions contemplated hereby or (iii) is required to be disclosed in the
Registration Statement or Prospectus and is not so disclosed.
(f) All outstanding shares of capital stock of the Company (including the
Selling Shareholder Option Shares) have been duly authorized and validly issued
and are fully paid and nonassessable, have been issued in compliance with all
federal and state securities laws, were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase securities,
and the authorized and outstanding capital stock of the Company is as set forth
in the Prospectus under the caption "Capitalization" and conforms in all
material respects to the statements relating thereto contained in the
Registration Statement and the Prospectus (and such statements correctly state
the substance of the instruments defining the capitalization of the Company);
the Firm Shares and the Option Shares to be sold by the Company have been duly
authorized for issuance and sale to the Underwriters pursuant to this Agreement
and, when issued and delivered by the Company against payment therefor in
accordance with the terms of this Agreement, will be duly and validly issued and
fully paid and nonassessable, and will be sold free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest; and no
preemptive right, co-sale right, registration right, right of first refusal or
other similar right of shareholders exists with respect to any of the Firm
Shares or the Company Option Shares or the issuance and sale thereof other than
those that have been expressly waived prior to the date hereof and those that
will automatically expire upon and will not apply to the consummation of the
transactions contemplated on the Closing Date. The Selling Shareholder Option
Shares were duly authorized for issuance and sale to the Selling Shareholders
and when originally delivered by the Company to the Selling Shareholders against
payment therefor, were duly validly issued, fully paid and nonassessable. No
further approval or authorization of any shareholder, the Board of Directors of
the Company or others is required for the issuance and sale or transfer of the
Shares except as may be required under the Act, the Exchange Act or under state
or other securities or Blue Sky laws. All issued and outstanding shares of
capital stock of each subsidiary of the Company have been duly authorized and
validly issued and are fully paid and nonassessable, and were not issued in
violation of or subject to any preemptive right, or other rights to subscribe
for or purchase shares and are owned by the Company free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest, with
the exception of interests in favor of Chemical Bank, as agent for the several
lenders, pursuant to the Chemical Facility. Except as disclosed in the
Prospectus and the financial statements of the Company, and the related notes
thereto, included in the Prospectus, neither the Company nor any subsidiary has
outstanding any options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
(g) Arthur Anderson LLP, which has audited the consolidated financial
statements of the Company, together with the related schedule and notes, as of
December 31, 1995 and for each of the years in the three (3) years ended
December 31, 1993, 1994 and 1995 filed with the Commission as a part of the
Registration Statement, which are included in the Prospectus, are independent
accountants within the meaning of the Act and the Rules and Regulations; the
audited consolidated financial statements of the Company, together with the
related schedules and notes, and the unaudited consolidated financial
information as of March 31, 1996 and the three-month periods ending March 31,
1995 and March 31, 1996, forming part of the Registration Statement and
Prospectus, fairly present in all material respects the financial position and
the results of operations of the Company and its subsidiaries at the respective
dates and for the respective
5
<PAGE>
periods to which they apply; and all audited consolidated financial statements
of the Company, together with the related schedule and notes, and the unaudited
consolidated financial information, filed with the Commission as part of the
Registration Statement, have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved
except as may be otherwise stated therein. The selected and summary financial
and statistical data included in the Registration Statement present fairly the
information shown therein and have been compiled on a basis consistent with the
audited financial statements presented therein. No other financial statements or
schedules are required to be included in the Registration Statement.
(h) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been (i) any Material
Adverse Change, (ii) any transaction that is material to the Company and its
subsidiaries considered as one enterprise, except transactions entered into in
the ordinary course of business, (iii) any obligation, direct or contingent,
that is material to the Company and its subsidiaries considered as one
enterprise, incurred by the Company or its subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock or outstanding indebtedness of the Company or any of its subsidiaries that
is material to the Company and its subsidiaries considered as one enterprise,
(v) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or any of its subsidiaries, or (vi) any loss or
damage (whether or not insured) to the property of the Company or any of its
subsidiaries which has been sustained or will have been sustained which has a
Material Adverse Effect.
(i) Except as set forth in the Registration Statement and Prospectus, (i)
each of the Company and its subsidiaries has good and marketable title to all
properties and assets described in the Registration Statement and Prospectus as
owned by it, free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest, other than such as would not have a Material
Adverse Effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise with the exception of interests in favor of Chemical Bank, as
agent for the several lenders pursuant to the Chemical Facility, (ii) the
agreements to which the Company or any of its subsidiaries is a party described
in the Registration Statement and Prospectus are valid agreements, enforceable
against the Company and its subsidiaries (as applicable), except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles and, to the best
of the Company's knowledge, the other contracting party or parties thereto are
not in material breach or material default under any of such agreements, (iii)
each of the Company and its subsidiaries has valid leases for all properties
described in the Registration Statement and Prospectus as leased by it,
enforceable against the Company and its subsidiaries (as applicable), and to the
best knowledge of the Company, against the other contracting party or parties,
in each case, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles and (iv) other than the franchises described in the Registration
Statement and Prospectus, the Company has no other franchise agreements
concerning medical transcription services that are enforceable against the
Company. Except as set forth in the Registration Statement and Prospectus, the
Company owns or leases all such properties as are necessary to its operations as
now conducted or as proposed to be conducted.
(j) The Company and its subsidiaries have timely filed all necessary
federal, state and foreign income and franchise tax returns and have paid all
taxes shown thereon as due, and there is no tax deficiency that has been or, to
the best of the Company's knowledge, might be asserted against the Company or
any of its subsidiaries that might have a Material Adverse Effect; and all tax
liabilities are adequately provided for on the books of the Company and its
subsidiaries.
(k) The Company and its subsidiaries maintain insurance with insurers of
recognized financial responsibility of the types and in the amounts generally
deemed adequate for their
6
<PAGE>
respective businesses including, but not limited to, insurance covering real and
personal property owned or leased by the Company or its subsidiaries against
theft, damage, destruction, acts of vandalism and all other risks customarily
insured against, including "tail insurance" covering medical incidents for
certain discontinued operations all of which insurance is in full force and
effect; neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for; and neither the Company nor any such
subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise.
(l) To the best of Company's knowledge, no organized labor disturbance by
the employees or independent contractors (including all medical
transcriptionists) of the Company or any of its subsidiaries exists or is
imminent that might be expected to result in a Material Adverse Change. No
collective bargaining agreement exists with any of the Company's employees or
independent contractors (including all medical transcriptionists) and, to the
best of the Company's knowledge, no such agreement is imminent.
(m) Each of the Company and its subsidiaries owns or possesses adequate
rights to use all patents, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names and copyrights which are necessary to
conduct its businesses as described in the Registration Statement and
Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not have a Material
Adverse Effect; the Company has not received any notice of, and has no knowledge
of, any infringement of or conflict with asserted rights of the Company by
others with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights; and the Company
has not received any notice of, and has no knowledge of, any infringement of or
conflict with asserted rights of others by the Company or any of its
subsidiaries with respect to any patent, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names or copyrights which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, might have a Material Adverse Effect.
(n) Each of the Company and its subsidiaries is in possession of all
authorizations, licenses, certificates, consents, orders and permits from state,
federal and other regulatory authorities which are material to the conduct of
its business, all of which are valid and in full force and effect. The Company
and its subsidiaries are operating in compliance with, all such licenses,
certificates, authorizations, approvals, permits, franchises, orders and
consents and no event has occurred which allows, or after notice or lapse of
time would allow, revocation or termination thereof or result in any impairment
of the rights of the holder thereof, except to the extent that any such
revocation, termination or impairment would not have a Material Adverse Effect.
No such licenses, certificates, authorizations, approvals, permits, franchises,
orders or consents contain any restrictions that have or may have a Material
Adverse Effect.
(o) The Common Stock is registered pursuant to Section 12(g) of the
Exchange Act and has been approved for listing on The Nasdaq National Market,
and the Company has taken no action designed to, or likely to have the effect
of, terminating the registration of the Common Stock under the Exchange Act or
delisting the Common Stock from The Nasdaq National Market nor has the Company
received any notification that the Commission or the National Association of
Securities Dealers, Inc. (the "NASD") is contemplating terminating such
registration or listing. The Common Stock has been delisted from the American
Stock Exchange.
(p) The Company has been advised concerning the Investment Company Act of
1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and
has in the past conducted, and intends in the future to conduct, its affairs in
such a manner as to ensure that it will not become an
7
<PAGE>
"investment company" or a company "controlled" by an "investment company" within
the meaning of the 1940 Act and such rules and regulations.
(q) The Company has not distributed and will not distribute prior to the
later of (i) the Closing Date, or any date on which Option Shares are to be
purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the offering and sale of the
Shares other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Act.
(r) Neither the Company nor any of its subsidiaries has at any time during
the last five (5) years (i) made any unlawful contribution to any candidate for
foreign office or failed to disclose fully any contribution in violation of law,
or (ii) made any payment to any federal or state governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof.
(s) The Company has not taken and will not take, directly or indirectly,
any action designed to or that might reasonably be expected to cause or result
in stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Shares.
(t) Each officer and director of the Company, with the exception of David
A. Cohen, has agreed in writing, for a period of 180 days from the date that the
Registration Statement is declared effective by the Commission (the "180 Day
Lock-up Period"), and David A. Cohen has agreed in writing, for a period of 270
days from the date that the Registration Statement is declared effective by the
Commission (the "270 Day Lock-up Period"), to certain restrictions on the
transfer of Common Stock as set forth in Exhibits A and B hereto. Furthermore,
such persons have also agreed and consented to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of the
Securities held by such person except in compliance with this restriction. The
Company has provided to counsel for the Underwriters a complete and accurate
list of all record securityholders of the Company and the number and type of
securities held by each securityholder. The Company has provided to counsel for
the Underwriters true, accurate and complete copies of all of the agreements
pursuant to which its officers, directors and shareholders have agreed to such
or similar restrictions (the "Lock-up Agreements") presently in effect or
effected hereby.
(u) The Company and each of its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(v) There are no outstanding loans, advances (except normal advances for
business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
(w) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or with
any person or affiliate located in Cuba.
(x) To the best of the Company's knowledge, no officer, director or
securityholder of the Company has an "association" or "affiliation" with any
member of the NASD, within the meaning of Article III, Section 44 of the Rules
of Fair Practice of the NASD. The Company does not have
8
<PAGE>
an "association" or "affiliation" with any member of the NASD, within the
meaning of Article III, Section 44 of the Rules of Fair Practice of the NASD.
II. Each Selling Shareholder, severally and not jointly, represents and
warrants to and agrees with each Underwriter and the Company that:
(a) Such Selling Shareholder now has and on the Closing Date, and on any
later date on which Option Shares are purchased, will have valid marketable
title to the Shares to be sold by such Selling Shareholder, free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable interest
other than pursuant to this Agreement; and upon delivery of such Shares
hereunder and payment of the purchase price as herein contemplated, each of the
Underwriters will obtain valid marketable title to the Shares purchased by it
from such Selling Shareholder, free and clear of any pledge, lien, security
interest pertaining to such Selling Shareholder or such Selling Shareholder's
property, encumbrance, claim or equitable interest, including any liability for
estate or inheritance taxes, or any liability to or claims of any creditor,
devisee, legatee or beneficiary of such Selling Shareholder, except for those
created pursuant to any arrangement with the Underwriters.
(b) Such Selling Shareholder has executed and delivered, in the form
heretofore furnished to the Representatives, an irrevocable Power of Attorney
(the "Power of Attorney") appointing David A. Cohen and John M. Suender as
attorneys-in-fact (collectively, the "Attorneys" and individually, an
"Attorney") and a Letter of Transmittal and Custody Agreement (the "Custody
Agreement") with American Stock Transfer & Trust Company, as custodian (the
"Custodian"); each of the Power of Attorney and the Custody Agreement
constitutes a valid and binding agreement on the part of such Selling
Shareholder, enforceable against such Selling Shareholder in accordance with its
terms, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles; and each of such Selling Shareholder's Attorneys, acting alone, is
authorized to execute and deliver this Agreement and the certificate referred to
in Section 6(h) hereof on behalf of such Selling Shareholder, to determine the
purchase price to be paid by the several Underwriters to such Selling
Shareholder as provided in Section 3 hereof, to authorize the delivery of the
Selling Shareholder Option Shares to be sold by such Selling Shareholder under
this Agreement and to duly endorse (in blank or otherwise) the certificate or
certificates representing such Shares or a stock power or powers with respect
thereto, to accept payment therefor, and otherwise to act on behalf of such
Selling Shareholder in connection with this Agreement.
(c) All consents, approvals, authorizations and orders required for the
execution and delivery by such Selling Shareholder of the Power of Attorney and
the Custody Agreement, the execution and delivery by or on behalf of such
Selling Shareholder of this Agreement and the sale and delivery of the Selling
Shareholder Option Shares under this Agreement (other than, at the time of the
execution hereof (if the Registration Statement has not yet been declared
effective by the Commission), the issuance of the order of the Commission
declaring the Registration Statement effective and such consents, approvals,
authorizations or orders as may be necessary under state or other securities or
Blue Sky laws) have been obtained and are in full force and effect; and such
Selling Shareholder has full legal right, power and authority to enter into and
perform its obligations under this Agreement and such Power of Attorney and
Custody Agreement, and to sell, assign, transfer and deliver the Shares to be
sold by such Selling Shareholder under this Agreement.
(d) Certificates in negotiable form for all Shares to be sold by such
Selling Shareholder under this Agreement, together with a stock power or powers
duly endorsed in blank by such Selling Shareholder, signature guaranteed by an
eligible guarantor institution (bank, stockbroker, savings and loan association
or credit union with membership in an approved Medallion Program) pursuant to
Rule 17Ad-15 promulgated under the Exchange Act, have been placed in custody
with the Custodian for the purpose of effecting delivery hereunder.
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(e) This Agreement has been duly executed and delivered by or on behalf
of such Selling Shareholder and is a valid and binding agreement of such Selling
Shareholder, enforceable against such Selling Shareholder in accordance with its
terms, except as rights to indemnification hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles; and the performance of this Agreement and the consummation of the
transactions herein contemplated will not result in a breach or violation of any
of the terms and provisions of or constitute a default under any bond,
debenture, note or other evidence of indebtedness, or under any lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which such Selling Shareholder is a party or by which
such Selling Shareholder, or any Selling Shareholder Option Shares hereunder,
may be bound where such breach, violation or default would materially impact the
Selling Stockholder's ability to perform his other obligations under this
Agreement and consummate the transactions herein contemplated, or, to the best
of such Selling Shareholders' knowledge, result in any violation of any law,
order, rule, regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over such Selling Shareholder or over the properties of such
Selling Shareholder.
(f) Such Selling Shareholder has not taken and will not take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(g) Such Selling Shareholder has not distributed and will not distribute
any prospectus or other offering material in connection with the offering and
sale of the Shares.
(h) All information furnished by or on behalf of such Selling
Shareholder relating to such Selling Shareholder and the Selling Shareholder
Option Shares that is contained in the representations and warranties of such
Selling Shareholder in such Selling Shareholder's Power of Attorney or set forth
in the Registration Statement or the Prospectus is, and at the time the
Registration Statement became or becomes, as the case may be, effective and at
all times subsequent thereto up to and on the Closing Date, and on any later
date on which Option Shares are to be purchased, was or will be, true, correct
and complete, and does not, and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent thereto up to
and on the Closing Date (hereinafter defined), and on any later date on which
Option Shares are to be purchased, will not, contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make such information not misleading.
(i) Such Selling Shareholder will review the Prospectus and will comply
with all agreements and satisfy all conditions on its part to be complied with
or satisfied pursuant to this Agreement on or prior to the Closing Date, or any
later date on which Option Shares are to be purchased, as the case may be, and
will advise one of its Attorneys and Robertson, Stephens & Company LLC prior to
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, if any statement to be made on behalf of such Selling
Shareholder in the certificate contemplated by Section 6(h) would be inaccurate
if made as of the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be.
(j) Such Selling Shareholder does not have, or has waived prior to the
date hereof, any preemptive right, co-sale right or right of first refusal or
other similar right to purchase any of the Shares that are to be sold by the
Company or any of the other Selling Shareholders to the Underwriters pursuant to
this Agreement; such Selling Shareholder does not have, or has waived prior to
the date hereof, any registration right or other similar right to participate in
the offering made by the Prospectus, other than such rights of participation as
have been satisfied by the participation of such Selling Shareholder in the
transactions to which this Agreement relates in accordance with the terms of
this Agreement; and such Selling Shareholder
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does not own any warrants, options or similar rights to acquire, and does not
have any right or arrangement to acquire, any capital stock, rights, warrants,
options or other securities from the Company, other than those described in the
Registration Statement and the Prospectus.
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $_____ per share, the
respective number of Firm Shares as hereinafter set forth. The obligation of
each Underwriter to the Company shall be to purchase from the Company that
number of Firm Shares which is set forth opposite the name of such Underwriter
in Schedule A hereto (subject to adjustment as provided in Section 10).
Delivery of definitive certificates for the Firm Shares to be purchased by
the Underwriters pursuant to this Section 3 shall be made against payment of the
purchase price therefor by the several Underwriters by certified or official
bank check or checks drawn in [next-day funds], payable to the order of the
Company (and the Company agrees not to deposit any such check in the bank on
which it is drawn, and not to take any other action with the purpose or effect
of receiving immediately available funds, until the business day following the
date of its delivery to the Company, and, in the event of any breach of the
foregoing, the Company shall reimburse the Underwriters for the interest lost
and any other expenses borne by them by reason of such breach), at the New York
City offices of Pepper, Hamilton & Scheetz (or at such other place as may be
agreed upon among the Representatives and the Company and the Attorneys), at
7:00 A.M., San Francisco time (a) on the third (3rd) full business day following
the first day that Shares are traded, (b) if this Agreement is executed and
delivered after 1:30 P.M., San Francisco time, the fourth (4th) full business
day following the day that this Agreement is executed and delivered or (c) at
such other time and date not later than seven (7) full business days following
the first day that Shares are traded as the Representatives and the Company and
the Attorneys may determine (or at such time and date to which payment and
delivery shall have been postponed pursuant to Section 10 hereof), such time and
date of payment and delivery being herein called the "Closing Date;" provided,
however, that if the Company has not made available to the Representatives
copies of the Prospectus within the time provided in Section 4(d) hereof, the
Representatives may, in their sole discretion, postpone the Closing Date until
no later than two (2) full business days following delivery of copies of the
Prospectus to the Representatives. The certificates for the Firm Shares to be so
delivered will be made available to you at such office or such other location
including, without limitation, in New York City, as you may reasonably request
for checking at least one (1) full business day prior to the Closing Date and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to the Closing Date. If the
Representatives so elect, delivery of the Firm Shares may be made by credit
through full fast transfer to the accounts at The Depository Trust Company
designated by the Representatives.
It is understood that you, individually, and not as the Representatives of
the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by you prior to the Closing Date for the
Firm Shares to be purchased by such Underwriter or Underwriters. Any such
payment by you shall not relieve any such Underwriter or Underwriters of any of
its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make public offering (as such term is described in
Section 11 hereof) of the Firm Shares at an initial public offering price of
$_____ per share. After the public offering, the several Underwriters may, in
their discretion, vary the public offering price.
The information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters), on the inside front
cover concerning stabilization and over-allotment
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by the Underwriters, and under the first and second paragraphs under the caption
"Underwriting" in any Preliminary Prospectus and in the Prospectus constitutes
the only information furnished by the Underwriters to the Company for inclusion
in any Preliminary Prospectus, the Prospectus or the Registration Statement, and
you, on behalf of the respective Underwriters, represent and warrant to the
Company and the Selling Shareholders that the statements made therein do not
include any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
4. Further Agreements of the Company. The Company agrees with the several
Underwriters that:
(a) The Company will use commercially reasonable efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; the Company will use commercially
reasonable efforts to cause any abbreviated registration statement pursuant to
Rule 462(b) of the Rules and Regulations as may be required subsequent to the
date the Registration Statement is declared effective to become effective as
promptly as possible; the Company will notify you, promptly after it shall
receive notice thereof, of the time when the Registration Statement, any
subsequent amendment to the Registration Statement or any abbreviated
registration statement has become effective or any supplement to the Prospectus
has been filed; if the Company omitted information from the Registration
Statement at the time it was originally declared effective in reliance upon Rule
430A(a) of the Rules and Regulations, the Company will provide evidence
satisfactory to you that the Prospectus contains such information and has been
filed, within the time period prescribed, with the Commission pursuant to
subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part
of a post-effective amendment to such Registration Statement as originally
declared effective which is declared effective by the Commission; if the Company
files a term sheet pursuant to Rule 434 of the Rules and Regulations, the
Company will provide evidence satisfactory to you that the Prospectus and term
sheet meeting the requirements of Rule 434(b) or (c), as applicable, of the
Rules and Regulations, have been filed, within the time period prescribed, with
the Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules and
Regulations; if for any reason the filing of the final form of Prospectus is
required under Rule 424(b)(3) of the Rules and Regulations, it will provide
evidence satisfactory to you that the Prospectus contains such information and
has been filed with the Commission within the time period prescribed; it will
notify you promptly of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for additional
information; promptly upon your reasonable request, it will prepare and file
with the Commission any amendments or supplements to the Registration Statement
or Prospectus which, in the opinion of counsel for the several Underwriters
("Underwriters' Counsel"), may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters; it will promptly prepare and
file with the Commission, and promptly notify you of the filing of, any
amendments or supplements to the Registration Statement or Prospectus which may
be necessary to correct any statements or omissions, if, at any time when a
prospectus relating to the Shares is required to be delivered under the Act, any
event shall have occurred as a result of which the Prospectus or any other
prospectus relating to the Shares as then in effect would include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; in case any Underwriter is required to deliver a
prospectus nine (9) months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, it will prepare promptly
upon request, but at the expense of such Underwriter, such amendment or
amendments to the Registration Statement and such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section 10(a)(3)
of the Act; and it will file no amendment or supplement to the Registration
Statement or Prospectus which shall not previously have been submitted to you a
reasonable time prior to the proposed filing thereof or to which you shall
reasonably object in writing, subject, however, to compliance with the Act and
the Rules and Regulations, and the provisions of this Agreement.
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(b) The Company will advise you, promptly after it shall receive notice
or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use
commercially reasonable efforts to prevent the issuance of any stop order or to
obtain its withdrawal at the earliest possible moment if such stop order should
be issued.
(c) The Company will use commercially reasonable efforts to qualify the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, except that the
Company shall not be required in connection therewith or as a condition thereof
to qualify as a foreign corporation or to execute a general consent to service
of process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, and, in the
case of the Prospectus and any term sheet or abbreviated term sheet under Rule
434, in no event later than the first (1st) full business day following the
first day that Shares are traded, copies of the Registration Statement (three of
which will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act all in such quantities as you may from time to time reasonably request.
Notwithstanding the foregoing, if Robertson, Stephens & Company LLC, on behalf
of the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the Company shall provide to you copies of a Preliminary
Prospectus updated in all respects through the date specified by you in such
quantities as you may from time to time reasonably request.
(e) The Company will make generally available to its securityholders as
soon as practicable, but in any event not later than the forty-fifth (45th) day
following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and covering a twelve (12) month
period beginning after the effective date of the Registration Statement.
(f) During a period of five (5) years after the date hereof, so long as
the Company is required to file periodic and other reports under the Exchange
Act or rules of any stock exchange on which the Common Stock is listed for
exchange, the Company will furnish to its shareholders as soon as practicable
after the end of each respective period, annual reports (including financial
statements audited by independent certified public accountants) and will furnish
to you and the other several Underwriters hereunder, upon request (i) as soon as
they are available, statements of operations of the Company for each of the
first three (3) quarters in the form furnished to the Company's shareholders,
(ii) as soon as they are available, a balance sheet of the Company as of the end
of such fiscal year, together with statements of operations, of shareholders'
equity, and of cash flows of the Company for such fiscal year, accompanied by a
copy of the certificate or report thereon of independent certified public
accountants, (iii) as soon as they are available, copies of all reports
(financial or other) mailed to shareholders, (iv) as soon as they are available,
copies of all reports and financial statements furnished to or filed with the
Commission, any securities exchange or the NASD, (v) every material press
release and every material news item or article in respect of the Company or its
affairs which was generally released to shareholders or prepared by the Company
or any of its subsidiaries, and (vi) any additional information of a public
nature concerning the Company or its subsidiaries, or its business which you may
reasonably request. During such period, if the Company shall have active
subsidiaries, the foregoing financial statements shall be on a consolidated
basis to the extent that the accounts of the
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Company and its subsidiaries are consolidated, and shall be accompanied by
similar financial statements for any significant subsidiary which is not so
consolidated.
(g) The Company will apply the net proceeds from the sale of the Shares
being sold by it in the manner set forth under the caption "Use of Proceeds" in
the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company or any
Selling Shareholder to perform any agreement on their respective parts to be
performed hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, or if the Company shall terminate this Agreement pursuant to Section
11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to
Section 11(b)(i), the Company will reimburse the several Underwriters for all
reasonable out-of-pocket expenses (including the reasonable fees and
disbursements of Underwriters' Counsel) incurred by the Underwriters in
investigating or preparing to market or marketing the Shares.
(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(k) During the 180 Day Lock-up Period, the Company will not, without the
prior written consent of Robertson Stephens & Company LLC, effect the
Disposition of, directly or indirectly, any Securities other than the sale of
the Firm Shares and the Company Option Shares hereunder and (i) offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for any shares of
Common Stock, or any options or warrants to purchase Common Stock, other than
shares or options issued or to be issued under the Company's stock option and
stock purchase plans, shares of Common Stock issued upon the exercise of options
or presently outstanding warrants, or shares, warrants or convertible securities
issued in connection with future acquisitions ("Acquisition Securities");
provided that any registration rights granted to the holders of Acquisition
Securities shall not be exercisable until after the expiration of the 180 Day
Lock-up Period.
5. Expenses.
(a) The Company and the Selling Shareholders agree with each Underwriter
that:
(i) The Company will pay and bear all costs and expenses in
connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus and any amendments or supplements thereto; the
printing of this Agreement, the Agreement Among Underwriters, the Selected
Dealer Agreement, the Preliminary Blue Sky Survey and any Supplemental Blue Sky
Survey, the Underwriters' Questionnaire and Power of Attorney, and any
instruments related to any of the foregoing; the issuance and delivery of the
Shares hereunder to the several Underwriters, including transfer taxes, if any,
the cost of all certificates representing the Shares and transfer agents' and
registrars' fees; the fees and disbursements of counsel for the Company;
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all fees and other charges of the Company's independent certified public
accountants; the cost of furnishing to the several Underwriters copies of the
Registration Statement (including appropriate exhibits), Preliminary Prospectus
and the Prospectus, and any amendments or supplements to any of the foregoing;
NASD filing fees and the cost of qualifying the Shares under the laws of such
jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD filings and
Blue Sky qualifications); and all other expenses directly incurred by the
Company in connection with the performance of their obligations hereunder.
Notwithstanding the foregoing, each Selling Shareholder severally shall pay and
bear all underwriting discounts and commissions and transfer taxes, if any, with
respect to such portion of the Option Shares sold by such Selling Shareholder,
and the fees and disbursements of any counsel or other third parties retained by
such Selling Shareholder and any other additional expenses incurred as a result
of the sale of the Selling Shareholder Option Shares by the Selling Shareholders
will be borne collectively by the Company and the Selling Shareholders. The
provisions of this Section 5(a)(i) are intended to relieve the Underwriters from
the payment of the expenses and costs which the Selling Shareholders and the
Company hereby agree to pay, but shall not affect any agreement which the
Selling Shareholders and the Company may make, or may have made, for the sharing
of any of such expenses and costs. Such agreements shall not impair the
obligations of the Company and the Selling Shareholders hereunder to the several
Underwriters.
(ii) In addition to its other obligations under Section 8(a) hereof,
the Company agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding described in Section 8(a)
hereof, it will reimburse the Underwriters on a monthly basis for all reasonable
legal or other expenses incurred in connection with investigating or defending
any such claim, action, investigation, inquiry or other proceeding, on the same
periodic basis that the Company is entitled to obtain reimbursement or payment
of such expenses from its insurance carrier or, if the Company's insurance
carrier denies coverage generally or its obligation to reimburse or pay for such
expenses for any reason whatsoever or if the Company does not seek reimbursement
or payment of such expenses from its insurance carrier, then on a monthly basis,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) listed from time to
time in The Wall Street Journal which represents the base rate on corporate
loans posted by a substantial majority of the nation's thirty (30) largest banks
(the "Prime Rate"). Any such interim reimbursement payments which are not made
to the Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(iii) In addition to their other obligations under Section 8(b)
hereof, each Selling Shareholder agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(b) hereof relating to such Selling Shareholder, it will
reimburse the Underwriters on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of such
Selling Shareholder's obligation to reimburse the Underwriters for such expenses
and the possibility that such payments might later be held to have been improper
by a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters shall
promptly return such payment to the Selling Shareholders, together with
interest, compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Underwriters within
thirty (30) days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request.
(b) In addition to their other obligations under Section 8(c) hereof,
the Underwriters severally and not jointly agree that, as an interim measure
during the pendency of any claim,
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action, investigation, inquiry or other proceeding described in Section 8(c)
hereof, they will reimburse the Company and each Selling Shareholder on a
monthly basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Underwriters' obligation to reimburse
the Company and each such Selling Shareholder for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company and each
such Selling Shareholder shall promptly return such payment to the Underwriters
together with interest, compounded daily, determined on the basis of the Prime
Rate. Any such interim reimbursement payments which are not made to the Company
and each such Selling Shareholder within thirty (30) days of a request for
reimbursement shall bear interest at the Prime Rate from the date of such
request.
(c) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 5(a)(ii), 5(a)(iii)
and 5(b) hereof, including the amounts of any requested reimbursement payments,
the method of determining such amounts and the basis on which such amounts shall
be apportioned among the reimbursing parties, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a)(ii), 5(a)(iii)
and 5(b) hereof and will not resolve the ultimate propriety or enforceability of
the obligation to indemnify for expenses which is created by the provisions of
Sections 8(a), 8(b) and 8(c) hereof or the obligation to contribute to expenses
which is created by the provisions of Section 8(e) hereof.
6. Conditions of Underwriters' Obligations. The obligations of the several
Underwriters to purchase and pay for the Shares as provided herein shall be
subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Selling Shareholders
herein, to the performance by the Company and the Selling Shareholders of their
respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 2:00 P.M., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company, any Selling Shareholder or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the reasonable satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection with
this Agreement, the form of Registration Statement and the Prospectus, and the
registration, authorization, issue, sale and delivery of the Shares, shall have
been reasonably satisfactory to Underwriters' Counsel, and such counsel shall
have been furnished with such papers and information as they may reasonably have
requested to enable them to pass upon the matters referred to in this Section.
(c) Subsequent to the execution and delivery of this Agreement and prior
to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
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prospects of the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, the following
opinion of John M. Suender, General Counsel for the Company and the Selling
Shareholders, dated the Closing Date or such later date on which Option Shares
are to be purchased addressed to the Underwriters and with reproduced copies or
signed counterparts thereof for each of the Underwriters, to the effect that:
(i) The Company and each of Transcriptions, Ltd., Transcriptions
Limited of Michigan, and Medquist IP (each a "Significant Subsidiary")
has been duly incorporated and is validly existing as a corporation in
good standing under the laws of the jurisdiction of its incorporation;
(ii) The Company and each Significant Subsidiary has the corporate
power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus;
(iii) The Company and each Significant Subsidiary is duly qualified
to transact business as a foreign corporation and is in good standing in
each jurisdiction, if any, in which the ownership or leasing of its
properties or the conduct of its business requires such qualification,
except where the failure to be so qualified or be in good standing would
not have a material adverse effect on the condition (financial or
otherwise), earnings, operations or business of the Company and its
subsidiaries considered as one enterprise. To such counsel's knowledge,
the Company does not own or control, directly or indirectly, any
corporation, association or other entity other than Transcriptions,
Ltd., Transcriptions Ltd. of Michigan, SHMC, MedQuist CCI, MLP Corp.,
MedQuist MPI, and MedQuist IP.
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein, the issued and
outstanding shares of capital stock of the Company (including the
Selling Shareholder Option Shares) have been duly and validly issued and
are fully paid and nonassessable, and, to such counsel's knowledge, will
not have been issued in violation of or subject to any preemptive right,
co-sale right, registration right, right of first refusal or other
similar right;
(v) All issued and outstanding shares of capital stock of each
Significant Subsidiary of the Company have been duly authorized and
validly issued and are fully paid and nonassessable, and, to such
counsel's knowledge, have not been issued in violation of or subject to
any preemptive right, co-sale right, registration right, right of first
refusal or other similar right and are owned by the Company free and
clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest with the exception of interests in favor of Chemical
Bank, as agent for the several lenders pursuant to the Chemical
Facility;
(vi) The Company has the corporate power and authority to enter into
this Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by it hereunder;
(vii) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a
character required to be described or
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referred to in the Registration Statement or Prospectus or to be filed
as an exhibit to the Registration Statement which are not described or
referred to therein or filed as required; and
(viii) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company or
any of its subsidiaries of a character required to be disclosed in the
Registration Statement or the Prospectus by the Act or the Rules and
Regulations, other than those described therein;
(ix) To such counsel's knowledge, neither the Company nor any of its
subsidiaries is (a) in violation of its respective charter or bylaws, or
(b) in breach of any applicable statute, rule or regulation known to
such counsel or, to such counsel's knowledge, any order, writ or decree
of any court or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries, or over any of their properties or
operations, in each case of clause (b) which would have a Material
Adverse Effect;
(x) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or
other securities of the Company have registration rights with respect to
securities of the Company and, except as set forth in the Registration
Statement and Prospectus, all holders of securities of the Company
having rights known to such counsel to registration of such shares of
Common Stock or other securities, because of the filing of the
Registration Statement by the Company have, with respect to the offering
contemplated thereby, waived such rights or such rights have expired by
reason of lapse of time following notification of the Company's intent
to file the Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full
satisfaction of such rights;
In addition, such counsel shall state that such counsel has participated
in conferences with officers and other representatives of the Company, the
Representatives, Company counsel, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any amendment
or supplement thereto (other than the financial statements including supporting
schedules and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or as of the
date of such opinion, or the Registration Statement, the Prospectus and any
amendment or supplement thereto (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States, the Commonwealth of Pennsylvania
and the State of New Jersey upon opinions of local counsel, and as to questions
of fact upon representations or certificates of officers of the Company and of
government officials, in which case their opinion is to state that they are so
relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Representatives of the Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, the following
opinion of Pepper, Hamilton & Scheetz,
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dated the Closing Date or such later date on which Option Shares are to be
purchased, addressed to the Underwriter and with reproduced copies or signed
counterparts to each of the Underwriters, to the effect that:
(i) The Firm Shares or the Option Shares, as the case may be, to be
issued by the Company pursuant to the terms of this Agreement have been
duly authorized and, upon issuance and delivery against payment therefor
in accordance with the terms hereof, will be duly and validly issued and
fully paid and nonassessable, and, to such counsel's knowledge, will not
have been issued in violation of or subject to any preemptive right,
co-sale right, registration right, right of first refusal or other
similar right;
(ii) The Company has the corporate power and authority to enter into
this Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by it hereunder;
(iii) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed
and delivered by the Company and, assuming due authorization, execution
and delivery by you, is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except insofar as
indemnification and contribution provisions may be limited by applicable
law and except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or
affecting creditors' rights generally or by general equitable
principles;
(iv) The Registration Statement has become effective under the Act
and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act;
(v) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements
(including supporting schedules) and other financial and statistical
data derived therefrom as to which such counsel need express no
opinion), as of the effective date of the Registration Statement,
complied as to form in all material respects with the requirements of
the Act and the applicable Rules and Regulations;
(vi) The information in the Prospectus under the caption
"Description of Capital Stock," to the extent that it constitutes
matters of law or legal conclusions, has been reviewed by such counsel
and fairly summarizes in all material respects such matters and
conclusions; and the forms of certificates evidencing the Common Stock
and filed as exhibits to the Registration Statement comply with New
Jersey law;
(vii) The description in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of statutes are
accurate and fairly present, in all material respects, the information
required to be presented by the Act and the applicable Rules and
Regulations; the descriptions in the Registration Statement and the
Prospectus of statutes, legal and governmental proceedings, contracts
and other documents, insofar as such statements constitute a summary of
documents referred to therein or matters of law, are accurate summaries
and correctly present in all material respects the information required
to be presented by the Act and the applicable Rules and Regulations;
(viii) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a
character required to be described or
19
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referred to in the Registration Statement or Prospectus or to be filed
as an exhibit to the Registration Statement which are not described or
referred to therein or filed as required;
(ix) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the
Company's indemnification and contribution obligations hereunder,
concerning which no opinion need be expressed) will not (a) result in
any material violation of the Company's charter or bylaws or (b) to such
counsel's knowledge, result in a material breach or violation of any of
the terms and provisions of, or constitute a default under, any bond,
debenture, note or other evidence of indebtedness, or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument filed as, or incorporated by
reference as, an exhibit to the Registration Statement, or any
applicable statute, rule or regulation known to such counsel or, to such
counsel's knowledge, any order, writ or decree of any court, government
or governmental agency or body having jurisdiction over the Company or
any of its subsidiaries, or over any of their properties or operations;
(x) No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of
their properties or operations is necessary in connection with the
consummation by the Company of the transactions herein contemplated,
except such as have been obtained under the Act or such as may be
required under state or other securities or Blue Sky laws in connection
with the purchase and the distribution of the Shares by the
Underwriters;
(xi) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company or any of its
subsidiaries of a character required to be disclosed in the Registration
Statement or the Prospectus by the Act or the Rules and Regulations,
other than those described therein;
(xii) To such counsel's knowledge, neither the Company nor any of
its subsidiaries is in violation of its respective charter or bylaws;
(xiii) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or
other securities of the Company have registration rights with respect to
securities of the Company and, except as set forth in the Registration
Statement and Prospectus, all holders of securities of the Company
having rights known to such counsel to registration of such shares of
Common Stock or other securities, because of the filing of the
Registration Statement by the Company have, with respect to the offering
contemplated thereby, waived such rights or such rights have expired by
reason of lapse of time following notification of the Company's intent
to file the Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full
satisfaction of such rights;
(xiv) Neither the Company nor any of its subsidiaries is, nor will
the Company or any of its subsidiaries become upon the sale of the
Shares and the application of the proceeds therefrom as described in the
Prospectus under the caption "Use of Proceeds," an "investment company"
or a person controlled by an "investment company" within the meaning of
the 1940 Act;
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of
the Company, the Representatives, Underwriters' Counsel and the
independent certified public accountants of the Company, at which such
conferences the contents of the Registration Statement and Prospectus
and related matters were discussed, and although they have not
undertaken to determine independently, and they do not assume any
responsibility for the accuracy or completeness of the statements
contained in the Registration
20
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Statement or the Prospectus, based upon those conferences and reviews
and upon such counsel's participation in the preparation of the
Registration Statement and Prospectus, no facts has come to the
attention of such counsel which causes them to believe that, at the time
the Registration Statement became effective and at all times subsequent
thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any
amendment or supplement thereto (other than the financial statements
including supporting schedules and other financial and statistical
information derived therefrom, as to which such counsel need express no
comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, or as of the date of such
opinion, or the Registration Statement, the Prospectus and any amendment
or supplement thereto (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States, the Commonwealth of Pennsylvania
and the States of New Jersey and New York upon opinions of local counsel, and as
to questions of fact upon representations or certificates of officers of the
Company and of government officials, in which case their opinion is to state
that they are so relying and that they have no knowledge of any material
misstatement or inaccuracy in any such opinion, representation or certificate.
Copies of any opinion, representation or certificate so relied upon shall be
delivered to you, as Representatives of the Underwriters, and to Underwriters'
Counsel.
(f) You shall have received on any date on which Option Shares are to be
purchased, as the case may be, the following opinion of Duffy, North, Wilson,
Thomas & Nicholson, dated such date on which Option Shares are to be purchased,
addressed to the Underwriter and with reproduced copies or signed counterparts
to each of the Underwriters, to the effect that:
(i) Each of the Selling Shareholders has the right, power and
authority to enter into and to perform its obligations under this
Agreement and to sell, transfer, assign and deliver the Shares to be
sold by such Selling Shareholder hereunder;
(ii) This Agreement has been duly executed and delivered by or on
behalf of each Selling Shareholder;
(iii) Upon the delivery of and payment for the Shares as
contemplated in this Agreement, each of the Underwriters will receive
valid marketable title to the Shares purchased by it from such Selling
Shareholder, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest except for those pursuant to an
arrangement with the Underwriters. In rendering such opinion, such
counsel may assume that the Underwriters are without notice of any
defect in the title of the Shares being purchased from the Selling
Shareholders; and
(iv) The Power of Attorney and Custody Agreement of each Selling
Shareholder constitutes the valid and binding agreement of such Selling
Shareholder, enforceable against such Selling Shareholder in accordance
with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general
equitable principles.
(g) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, an opinion of
Brobeck, Phleger & Harrison LLP, in form and substance satisfactory to you, with
respect to the sufficiency of all such corporate proceedings and other legal
matters relating to this Agreement and the transactions contemplated hereby as
you may reasonably
21
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require, and the Company shall have furnished to such counsel such documents as
they may have requested for the purpose of enabling them to pass upon such
matters.
(h) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, a letter from
Arthur Anderson LLP addressed to the Underwriters, dated the Closing Date or
such later date on which Option Shares are to be purchased, as the case may be,
confirming that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations and based upon the procedures described in such letter delivered
to you concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than five (5) business
days prior to the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus. The Original Letter from Arthur Anderson LLP
shall be addressed to or for the use of the Underwriters in form and substance
satisfactory to the Underwriters and shall (i) represent, to the extent true,
that they are independent certified public accountants with respect to the
Company within the meaning of the Act and the applicable published Rules and
Regulations, (ii) set forth their opinion with respect to their examination of
the consolidated balance sheet of the Company as of December 31, 1995 and
related consolidated statements of operations, shareholders' equity, and cash
flows for the twelve (12) months ended December 31, 1995, (iii) state that
Arthur Anderson LLP has performed the procedures set out in Statement on
Auditing Standards No. 71 ("SAS 71") for a review of interim financial
information and providing the report of Arthur Anderson LLP as described in SAS
71 on the financial statements for the first-quarter period ended March 31, 1996
and March 31, 1995 (the "Quarterly Financial Statements"), (iv) state that in
the course of such review, nothing came to their attention that leads them to
believe that any material modifications need to be made to any of the Quarterly
Financial Statements in order for them to be in compliance with generally
accepted accounting principles consistently applied across the periods
presented, and (v) address other matters agreed upon by Arthur Anderson LLP and
you. In addition, you shall have received from Arthur Anderson LLP a letter
addressed to the Company and made available to you for the use of the
Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's consolidated financial statements as
of December 31, 1995, did not disclose any weaknesses in internal controls that
they considered to be material weaknesses.
(i) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, a certificate of
the Company, dated the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be, signed by the Chief Executive Officer
and Chief Financial Officer of the Company, to the effect that, and you shall be
satisfied that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date
or any later date on which Option Shares are to be purchased, as the
case may be, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at
or prior to the Closing Date or any later date on which Option Shares
are to be purchased, as the case may be;
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(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at all
times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained all material information required to be
included therein by the Act and the Rules and Regulations and in all
material respects conformed to the requirements of the Act and the Rules
and Regulations, the Registration Statement, and any amendment or
supplement thereto, did not and does not include any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, the
Prospectus, and any amendment or supplement thereto, did not and does
not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and, since
the effective date of the Registration Statement, there has occurred no
event required to be set forth in an amended or supplemented Prospectus
which has not been so set forth;
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been
(a) any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise, (b) any
transaction that is material to the Company and its subsidiaries
considered as one enterprise, except transactions entered into in the
ordinary course of business, (c) any obligation, direct or contingent,
that is material to the Company and its subsidiaries considered as one
enterprise, incurred by the Company or its subsidiaries, except
obligations incurred in the ordinary course of business, (d) any change
in the capital stock or outstanding indebtedness of the Company or any
of its subsidiaries that is material to the Company and its subsidiaries
considered as one enterprise, (e) any dividend or distribution of any
kind declared, paid or made on the capital stock of the Company or any
of its subsidiaries, or (f) any loss or damage (whether or not insured)
to the property of the Company or any of its subsidiaries which has been
sustained or will have been sustained which has a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries
considered as one enterprise; and
(v) The Firm Shares and Option Shares, if any, have been approved
for listing on The Nasdaq National Market and the Common Stock has been
delisted from the American Stock Exchange.
(j) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date, or any later date on which Option Shares
are to be purchased, as the case may be, from the Attorneys for each Selling
Shareholder to the effect that, as of the Closing Date, or any later date on
which Option Shares are to be purchased, as the case may be, they have not been
informed that:
(i) The representations and warranties made by such Selling
Shareholder herein are not true or correct in any material respect on
the Closing Date or on any later date on which Option Shares are to be
purchased, as the case may be; or
(ii) Such Selling Shareholder has not complied with any obligation
or satisfied any condition which is required to be performed or
satisfied on the part of such Selling Shareholder at or prior to the
Closing Date or any later date on which Option Shares are to be
purchased, as the case may be.
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(k) The Company shall have obtained and delivered to you a lock-up
agreement in writing from each officer and director of the Company , David A.
Cohen, Heller Financial, Inc. and Chemical Bank in writing prior to the date
hereof in substantially the forms of Exhibits A, B, C and D, respectively,
attached hereto.
(l) The transactions contemplated by the Letter Agreement, dated as of
March 29, 1996 (the "Heller Letter Agreement"), by and between the Company and
Heller, shall occur simultaneously with the Closing including (i) delivery of
the cancelled Promissory Note (as defined in the Heller Letter Agreement), (ii)
delivery of 1,005,175 shares of Company Common Stock to Heller, legended to
refer to the restrictions of Exhibit C attached hereto and (iii) delivery by
Heller of an executed lock-up agreement to the Underwriters substantially in the
form of Exhibit A to the Heller Letter Agreement.
(m) The Company and the Selling Shareholders shall have furnished to you
such further certificates and documents as you shall reasonably request
(including certificates of officers of the Company, the Selling Shareholders) as
to the accuracy of the representations and warranties of the Company and the
Selling Shareholders herein, as to the performance by the Company and the
Selling Shareholders of their respective obligations hereunder and as to the
other conditions concurrent and precedent to the obligations of the Underwriters
hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company and the Selling Shareholders will furnish
you with such number of conformed copies of such opinions, certificates, letters
and documents as you shall reasonably request.
7. Option Shares.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company and the Selling Shareholders, hereby grant, severally and not jointly,
to the several Underwriters, for the purpose of covering over-allotments in
connection with the distribution and sale of the Firm Shares only, a
nontransferable option to purchase up to an aggregate of 330,000 Option Shares
at the purchase price per share for the Firm Shares set forth in Section 3
hereof. Such option may be exercised by the Representatives on behalf of the
several Underwriters on one (1) or more occasions in whole or in part during the
period of thirty (30) days after the date on which the Firm Shares are initially
offered to the public, by giving written notice to the Company and the Selling
Shareholders. The number of Company Option Shares and Selling Shareholder Option
Shares to be purchased by each Underwriter, as the case may be (as nearly as
practicable, as determined by you), upon the exercise of such option shall be
the same proportion of the total number of Company Option Shares and Selling
Shareholder Option Shares, as the case may be, to be purchased by the several
Underwriters pursuant to the exercise of such option as the number of Firm
Shares purchased by such Underwriter (set forth in Schedule A hereto) bears to
the total number of Firm Shares purchased by the several Underwriters (set forth
in Schedule A hereto), adjusted by the Representatives in such manner as to
avoid fractional shares. In the event that the Representatives exercise such
option for a number of shares less than the full 330,000 amount of shares, the
Representatives shall purchase all of the Selling Shareholder Option Shares
(pro-rata among the selling shareholders to the extent allocation is necessary)
before the Representatives shall purchase any Company Option Shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in [next-day funds], payable to the order of the Company with
regard to the Shares being purchased by the Company and to the order of the
Custodian for the account of the respective Selling Shareholder with regard
24
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to the Shares being purchased from the Selling Shareholders (and the Company and
such Selling Shareholders agree not to deposit and to cause the custodian not to
deposit any such check in the bank on which it is drawn, and not to take any
other action with the purpose or effect of receiving immediately available
funds, until the business day following the date of its delivery to the Company
or the custodian, as the case may be). In the event of any breach of the
foregoing, the Company or the Selling Shareholders shall reimburse the
Underwriters for the interest lost and any other expenses borne by them by
reason of such breach. Such delivery and payment shall take place at the offices
of Pepper, Hamilton & Scheetz or at such other place as may be agreed upon among
the Representatives and the Company (i) on the Closing Date, if written notice
of the exercise of such option is received by the Company at least two (2) full
business days prior to the Closing Date, or (ii) on a date which shall not be
later than the third (3rd) full business day following the date the Company
receives written notice of the exercise of such option, if such notice is
received by the Company less than two (2) full business days prior to the
Closing Date.
The certificates for the Option Shares to be so delivered will be made
available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the Representatives
of the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by you prior to the date of payment and
delivery for the Option Shares to be purchased by such Underwriter or
Underwriters. Any such payment by you shall not relieve any such Underwriter or
Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a) hereof, the
obligations of the several Underwriters to purchase such Option Shares will be
subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the representations,
warranties and agreements of the Company and the Selling Shareholders herein, to
the accuracy of the statements of the Company, the Selling Shareholders and
officers of the Company made pursuant to the provisions hereof, to the
performance by the Company and the Selling Shareholders of their respective
obligations hereunder, to the conditions set forth in Section 6 hereof, and to
the condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and you
shall have been furnished with all such documents, certificates and opinions as
you may reasonably request in order to evidence the accuracy and completeness of
any of the representations, warranties or statements, the performance of any of
the covenants or agreements of the Company and the Selling Shareholders or the
satisfaction of any of the conditions herein contained.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject (including, without limitation, in its
capacity as an Underwriter or as a "qualified independent underwriter" within
the meaning of Schedule E of the Bylaws of the NASD), under the Act, the
Exchange Act or otherwise, specifically including, but not limited to, losses,
claims, damages or liabilities (or actions in respect thereof) arising out of or
based upon (i) any breach of any representation, warranty, agreement or covenant
of the Company herein contained, (ii) any untrue statement or alleged untrue
statement of any material
25
<PAGE>
fact contained in the Registration Statement or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and agrees to reimburse each Underwriter for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement, such Preliminary Prospectus or the
Prospectus, or any such amendment or supplement thereto, in reliance upon, and
in conformity with, written information relating to any Underwriter furnished to
the Company by such Underwriter, directly or through you, specifically for use
in the preparation thereof and; provided further, that the indemnity agreement
provided in this Section 8(a) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure to send
or give such prospectus within the time required by the Act and the Rules is the
result of noncompliance by the Company with its obligations under Section 4(d)
hereof.
The indemnity agreement in this Section 8(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if any,
who controls any Underwriter within the meaning of the Act or the Exchange Act.
This indemnity agreement shall be in addition to any liabilities which the
Company may otherwise have.
(b) Each Selling Shareholder, severally and not jointly, agrees to
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject
(including, without limitation, in its capacity as an Underwriter or as a
"qualified independent underwriter" within the meaning of Schedule E or the
Bylaws of the NASD) under the Act, the Exchange Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities (or
actions in respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Selling Shareholder
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) any untrue statement or alleged untrue
statement of any material fact contained in any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(b) to
the extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company or such Underwriter
by such Selling Shareholder, directly or through such Selling Shareholder's
representatives, specifically for use in the preparation thereof, and agrees to
reimburse each Underwriter for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the indemnity agreement
provided in this Section 8(b) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of a material fact or omission or alleged omission
to state therein a material fact purchased Shares, if a copy of the Prospectus
in which such untrue statement or alleged untrue statement or omission or
alleged omission was corrected had
26
<PAGE>
not been sent or given to such person within the time required by the Act and
the Rules and Regulations, unless such failure is the result of noncompliance by
the Company with its obligations under Section 4(d) hereof.
The indemnity agreement in this Section 8(b) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if any,
who controls any Underwriter within the meaning of the Act or the Exchange Act.
This indemnity agreement shall be in addition to any liabilities which such
Selling Shareholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to indemnify and
hold harmless the Company and each Selling Shareholder against any losses,
claims, damages or liabilities, joint or several, to which the Company or such
Selling Shareholder may become subject under the Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities (or
actions in respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Underwriter herein
contained, (ii) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 8(c) to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter, directly or through
you, specifically for use in the preparation thereof, and agrees to reimburse
the Company and each such Selling Shareholder for any legal or other expenses
reasonably incurred by the Company and each such Selling Shareholder in
connection with investigating or defending any such loss, claim, damage,
liability or action.
The indemnity agreement in this Section 8(c) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each officer of the
Company who signed the Registration Statement and each director of the Company,
each Selling Shareholder and each person, if any, who controls the Company or
any Selling Shareholder within the meaning of the Act or the Exchange Act. This
indemnity agreement shall be in addition to any liabilities which each
Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section 8
of notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against any indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement thereof
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party under this Section 8
except to the extent such failure or delay to so notify the indemnifying party
prejudices the indemnifying party. In case any such action is brought against
any indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it shall elect by written notice delivered to
the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of the indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by
27
<PAGE>
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 8(a),
8(b) or 8(c) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
consent shall not be unreasonably withheld. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnification could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on all claims that are the subject
matter of such proceeding.
(e) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 8
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that, except as set forth
in Section 8(f) hereof, the Underwriters severally and not jointly are
responsible pro rata for the portion represented by the percentage that the
underwriting discount bears to the initial public offering price, and the
Company and the Selling Shareholders are responsible for the remaining portion,
provided, however, that (i) no Underwriter shall be required to contribute any
amount in excess of the amount by which the underwriting discount applicable to
the Shares purchased by such Underwriter exceeds the amount of damages which
such Underwriter has otherwise required to pay and (ii) no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this Section 8(e)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter, the Company or
any Selling Shareholder within the meaning of the Act or the Exchange Act and
each officer of the Company who signed the Registration Statement and each
director of the Company.
(f) The liability of each Selling Shareholder under the representations,
warranties and agreements contained herein and under the indemnity agreements
contained in the provisions of this Section 8 shall be limited to an amount
equal to the public offering price of the Selling Shareholder Option Shares sold
by such Selling Shareholder to the Underwriters minus the amount of the
underwriting discount paid thereon to the Underwriters by such Selling
Shareholder. The Company and such Selling Shareholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
28
<PAGE>
9. Representations, Warranties, Covenants and Agreements to Survive
Delivery. All representations, warranties, covenants and agreements of the
Company, the Selling Shareholders and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 8 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter within the meaning of the Act or the
Exchange Act, or by or on behalf of the Company or any Selling Shareholder, or
any of their officers, directors or controlling persons within the meaning of
the Act or the Exchange Act, and shall survive the delivery of the Shares to the
several Underwriters hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters shall
fail to take up and pay for the number of Firm Shares agreed by such Underwriter
or Underwriters to be purchased hereunder upon tender of such Firm Shares in
accordance with the terms hereof, and if the aggregate number of Firm Shares
which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate number
of Firm Shares which such defaulting Underwriter or Underwriters agreed but
failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four (24) hours to allow the several Underwriters the privilege of
substituting within twenty-four (24) hours (including non-business hours)
another underwriter or underwriters (which may include any nondefaulting
Underwriter) satisfactory to the Company. If no such underwriter or underwriters
shall have been substituted as aforesaid by such postponed Closing Date, the
Closing Date may, at the option of the Company, be postponed for a further
twenty-four (24) hours, if necessary, to allow the Company the privilege of
finding another underwriter or underwriters, satisfactory to you, to purchase
the Firm Shares which the defaulting Underwriter or Underwriters so agreed but
failed to purchase. If it shall be arranged for the remaining Underwriters or
substituted underwriter or underwriters to take up the Firm Shares of the
defaulting Underwriter or Underwriters as provided in this Section 10, (i) the
Company shall have the right to postpone the time of delivery for a period of
not more than seven (7) full business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other documents or arrangements, and the Company agrees promptly to
file any amendments to the Registration Statement, supplements to the Prospectus
or other such documents which may thereby be made necessary, and (ii) the
respective number of Firm Shares to be purchased by the remaining Underwriters
and substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and pay
for all such Firm Shares so agreed to be purchased by the defaulting Underwriter
or Underwriters or substitute another underwriter or underwriters as aforesaid
and the Company shall not find or shall not elect to seek another underwriter or
underwriters for such Firm Shares as aforesaid, then this Agreement shall
terminate.
In the event of any termination of this Agreement pursuant to the preceding
paragraph of this Section 10, neither the Company nor any Selling Shareholder
shall be liable to any Underwriter (except as provided in Sections 5 and 8
hereof) nor shall any Underwriter (other than an Underwriter who shall have
failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Shareholders and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or any Selling Shareholder (except to the
extent provided in Sections 5 and 8 hereof).
29
<PAGE>
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at the earlier of (i) 6:30 A.M.,
San Francisco time, on the first full business day following the effective date
of the Registration Statement, or (ii) the time of the public offering of any of
the Shares by the Underwriters after the Registration Statement becomes
effective. The time of the public offering shall mean the time of the release by
you, for publication, of the first newspaper advertisement relating to the
Shares, or the time at which the Shares are first generally offered by the
Underwriters to the public by letter, telephone, telegram or telecopy, whichever
shall first occur. By giving notice as set forth in Section 12 before the time
this Agreement becomes effective, you, as Representatives of the several
Underwriters, or the Company, may prevent this Agreement from becoming effective
without liability of any party to any other party, except as provided in
Sections 4(j), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall have the
right to terminate this Agreement by giving notice as hereinafter specified at
any time on or prior to the Closing Date or on or prior to any later date on
which Option Shares are to be purchased, as the case may be, (i) if the Company
or any Selling Shareholder shall have failed, refused or been unable to perform
any agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled is not fulfilled,
including, without limitation, any change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is material
and adverse, or (ii) if additional material governmental restrictions, not in
force and effect on the date hereof, shall have been imposed upon trading in
securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iii) if the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured, or (iv) if there shall have been a material adverse change in the
general political or economic conditions or financial markets as in your
reasonable judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (v) if there shall have been an
outbreak or escalation of hostilities or of any other insurrection or armed
conflict or the declaration by the United States of a national emergency which,
in the reasonable opinion of the Representatives, makes it impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. In the event of termination pursuant to subparagraph (i) above,
the Company shall remain obligated to pay costs and expenses pursuant to
Sections 4(j), 5 and 8 hereof. Any termination pursuant to any of subparagraphs
(ii) through (v) above shall be without liability of any party to any other
party except as provided in Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o Robertson, Stephens & Company LLC, 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel, with a copy to Brobeck,
Phleger & Harrison, LLP, 1301 Avenue of the Americas, 30th Floor, New York, New
30
<PAGE>
York 10019, Attention: Alexander D. Lynch, Esq.; if sent to the Company, such
notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to MedQuist Inc., Five Greentree Centre,
Suite 311, Marlton, New Jersey 08053, telecopier number (609) 596-3351,
Attention: John M. Suender, General Counsel, with a copy to Pepper, Hamilton &
Scheetz, 3000 Two Logan Square, Eighteenth and Arch Streets, Philadelphia,
Pennsylvania 19103, Attention: James D. Epstein, Esq.; if sent to one or more of
the Selling Shareholders, such notice shall be sent mailed, delivered,
telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to
[NAME OF ATTORNEY-IN-FACT FOR SELLING SHAREHOLDERS], as Attorney-in-Fact for the
Selling Shareholders, at MedQuist Inc., Five Greentree Centre, Suite 311,
Marlton, New Jersey 08053, telecopier number (609) 596-3351.
13. Parties. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters and the Company and the Selling Shareholders and
their respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or entity, other than the parties hereto and their respective
executors, administrators, successors and assigns, and the controlling persons
within the meaning of the Act or the Exchange Act, officers and directors
referred to in Section 8 hereof, any legal or equitable right, remedy or claim
in respect of this Agreement or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or entity. No
purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase.
In all dealings with the Company and the Selling Shareholders under this
Agreement, you shall act on behalf of each of the several Underwriters, and the
Company and the Selling Shareholders shall be entitled to act and rely upon any
statement, request, notice or agreement made or given by you jointly or by
Robertson, Stephens & Company LLC on behalf of you.
14. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of New York.
15. Counterparts. This Agreement may be signed in several counterparts,
each of which will constitute an original.
31
<PAGE>
If the foregoing correctly sets forth the understanding among the Company,
the Selling Shareholders and the several Underwriters, please so indicate in the
space provided below for that purpose, whereupon this letter shall constitute a
binding agreement among the Company, the Selling Shareholders and the several
Underwriters.
Very truly yours,
MEDQUIST INC.
By
-------------------------
ELIZABETH KOSTICK
By
-------------------------
Attorney-in-Fact for the Selling Shareholders
named in Schedule B hereto
By
SUSAN STUART
By
-------------------------
Attorney-in-Fact for the Selling Shareholders
named in Schedule B hereto
Accepted as of the date first above written:
ROBERTSON, STEPHENS & COMPANY LLC
VOLPE, WELTY & COMPANY
PENNSYLVANIA MERCHANT GROUP LTD.
On their behalf and on behalf of each of the
several Underwriters named in
Schedule A hereto.
By ROBERTSON, STEPHENS & COMPANY LLC
By ROBERTSON, STEPHENS & COMPANY GROUP, L.L.C.
By
-------------------------
Authorized Signatory
By VOLPE, WELTY & COMPANY
By
-------------------------
Authorized Signatory
By PENNSYLVANIA MERCHANT GROUP LTD.
By
-------------------------
Authorized Signatory
32
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Shares
Underwriters To Be Purchased
- ------------ ---------------
<S> <C>
Robertson, Stephens & Company LLC..................................................
Volpe, Welty & Company.............................................................
Pennsylvania Merchant Group Ltd....................................................
[NAMES OF OTHER UNDERWRITERS]......................................................
---------------
Total....................................................................
---------------
</TABLE>
1
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of
Company Option
Company Shares To Be Sold
- ------- -----------------
<S> <C>
MedQuist, Inc...................................................................... 307,160
---------------
Total.................................................................... 307,160
---------------
</TABLE>
<TABLE>
<CAPTION>
Number of
Selling Shareholder
Option Shares
Name of Selling Shareholder To Be Sold
- --------------------------- ---------------
<S> <C>
Elizabeth Kostick.................................................................. 11,420
Susan Stuart....................................................................... 11,420
---------------
Total.................................................................... 22,840
---------------
</TABLE>
1
(215) 981-4368
EXHIBIT 5.1
May 10, 1996
MedQuist Inc.
Five Greentree Centre
Suite 311
Marlton, New Jersey 08053
Gentleman:
We have acted as special counsel to MedQuist Inc., a New
Jersey corporation (the "Company"), in connection with the preparation and
filing with the Securities and Exchange Commission (the "Commission") of a
registration statement (the "Registration Statement") of the Company on Form S-1
(No. 333-3050) under the Securities Act of 1933, as amended (the "Act"). The
Registration Statement relates to the proposed issuance and sale by the Company
to the public of up to 2,200,000 shares of the Company's common stock, no par
value (the "Firm Shares"), as well as the (i) issuance and sale by the Company
of up to an additional 307,160 shares of the Company's common stock, no par
value (the "Company Option Shares") and (ii) the sale by certain selling
shareholders (the "Shareholders") of up to an additional 22,840 shares of the
Company's common stock, no par value (the "Shareholder Option Shares"), in each
case to cover over-allotments (the Company Option Shares and the Shareholder
Option Shares are, collectively, the "Option Shares").
In this connection, we have examined the originals or copies,
certified or otherwise identified to our satisfaction, of the Certificate of
Incorporation and the By-Laws of the Company as amended to date, resolutions of
the Company's Board of Directors and such other documents and corporate records
relating to the Company and the Shareholders, and the proposed issuance and sale
of the Firm Shares and Option Shares, as we have deemed appropriate. The opinion
expressed herein is based exclusively on the applicable provisions of the New
Jersey Business Corporation Act ("NJBCA") as in effect on the date hereof.
<PAGE>
MedQuist Inc.
Page 2
May 10, 1996
On the basis of the foregoing, we are of the opinion that the
Firm Shares and the Option Shares, when sold in accordance with the Underwriting
Agreement attached as an exhibit to the Registration Statement, will be legally
issued, fully paid and non-assessable under the NJBCA.
We hereby consent to the reference to our firm under the
caption "Legal Matters" in the Prospectus included in the Registration Statement
and to the filing of this opinion as an exhibit to the Registration Statement.
Such consent does not constitute a consent under Section 7 of the Act, since we
have not certified any part of such Registration Statement and we do not
otherwise come within the categories of person whose consent is required under
Section 7 of the Act or the rules and regulations of the Commission promulgated
thereunder.
Very truly yours,
PEPPER, HAMILTON & SCHEETZ
By: /s/ James D. Epstein
--------------------------------
A Partner
<PAGE>
EXHIBIT 10.30
AMENDMENT AND ASSIGNMENT OF REGISTRATION AGREEMENT
THIS AMENDMENT AND ASSIGNMENT OF REGISTRATION AGREEMENT, dated May 27, 1994
(this "Agreement"), by and among Heller Financial, Inc., a Delaware corporation
("HFI"), Heller Equity Capital Corporation, a Delaware corporation ("HECC"), and
MedQuist Inc., a New Jersey corporation ("Borrower"), is made with reference to
the following facts:
A. HFI and Borrower are the parties to that certain Registration Agreement,
dated as of December 14, 1992 (the "Registration Agreement"), pursuant to which
Borrower granted to HFI certain registration rights.
B. HFI and Borrower wish to amend the Registration Agreement in certain
respects. Immediately thereafter, HFI wishes to assign all of its right, title
and interest in, to and under the Registration Agreement, as amended, to HECC.
NOW, THEREFORE, in consideration of the mutual execution of this Agreement,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, HFI, HECC and Borrower agree as follows:
1. Amendment. The Registration Agreement is hereby amended by deleting the
phrase "the fifth anniversary of this Agreement" in the first sentence and in
the second sentence (where such phrase appears twice) of Section 1(g) of the
Registration Agreement and in each case substituting therefor the date of "May
31, 2000". Except as expressly amended in this Section 1, all of the terms of
the Registration Agreement remain unchanged and in full force and effect.
2. Assignment and Assumption. HFI hereby assigns to HECC, and HECC hereby
accepts from HFI, all of HFI's right, title and interest in, to and under the
Registration Agreement, as amended by this Agreement (the "Amended Registration
Agreement"), and all of the other documents and instruments delivered by
Borrower to HFI pursuant thereto. By its acceptance, HECC hereby also assumes
all of HFI's obligations under the Amended Registration Agreement. Borrower
hereby consents to this assignment and assumption, and agrees that HECC is
entitled to all of the rights and benefits of HFI under the Amended Warrant
Agreement as if HECC, and not HFI, had been an original signatory of the Warrant
Agreement. Without limiting the generality of the immediately preceding
sentence, Borrower agrees that the two warrants issued by Borrower to HECC
pursuant to the terms of the Amendment and Assignment of Warrant Purchase
Agreement, dated as of the date hereof, among HFI, HECC and Borrower are the
"Class A Preferred Stock Purchase Warrant" and the "Class B Preferred Stock
Purchase Warrant" referred to in the Amended Registration Agreement.
<PAGE>
3. Notice Designation. Pursuant to Section 10(k) of the Amended
Registration Agreement, HECC hereby designates the following address for all
notices directed to HECC under the Amended Registration Agreement:
Heller Equity Capital Corporation
500 West Monroe Street
Suite 1000
Chicago, Illinois 60661
Attention: Ned Jessen
John H. Underwood
Telecopier: (312) 441-7378
with copies to:
Heller International Corporation
500 West Monroe Street
Suite 1000
Chicago, Illinois 60661
Attention: Charles P. Brissman, Esq.
Telecopier: (312) 441-7208
and
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Kevin R. Evanich, Esq.
Gary R. Silverman, Esq.
Telecopier: (312) 861-2200
4. Governing Law. This Agreement for all purposes shall be governed by, and
construed and enforced in accordance with, the laws of the State of Illinois,
without giving effect to any choice of law or conflict provision or rule
(whether of the State of Illinois or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the State of
Illinois.
[remainder of this page left blank intentionally]
2
<PAGE>
THE PARTIES HERETO have duly executed this Agreement as the date first
written above.
HELLER FINANCIAL, INC.
By: __________________________________
Title: _______________________________
HELLER EQUITY CAPITAL CORPORATION
By: __________________________________
Title: _______________________________
MEDQUIST INC.
By: __________________________________
Title: _______________________________
3
EXHIBIT 10.31
SECOND AMENDMENT TO REGISTRATION AGREEMENT
THIS SECOND AMENDMENT TO REGISTRATION AGREEMENT, dated as of December 29,
1995 (this "Amendment"), by and between Heller Equity Capital Corporation, a
Delaware corporation ("HECC"), and MedQuist Inc., a New Jersey corporation
("Borrower"), is made with reference to the following facts:
A. Borrower and Heller Financial, Inc., a Delaware corporation ("HFI"), are
parties to that certain Registration Agreement, dated as of December 14, 1992
(the "Original Registration Agreement").
B. Pursuant to that certain Amendment and Assignment of Registration
Agreement, dated as of May 27, 1994, among Borrower, HFI and HECC, the Original
Registration Agreement was amended and assigned to HECC (as so amended and
assigned, the "Amended Registration Agreement").
C. HECC and Borrower wish to further amend the Amended Registration
Agreement.
NOW, THEREFORE, in consideration of the mutual execution of this Amendment,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, HECC and Borrower agree as follows:
1. Amendments. The Amended Registration Agreement is hereby amended by
deleting the date "May 31, 2000" in the first sentence and in the second
sentence (where such date appears twice) of Section 1(g) of the Amended
Registration Agreement and in each case substituting therefor the date of
"December 31, 2002".
2. No Further Amendments. Except as expressly set forth in Section 1 of
this Amendment, all of the terms and provisions of the Amended Registration
Agreement remain unchanged and in full force and effect.
3. Consent to Registration Agreement. Notwithstanding the terms of the
Amended Registration Agreement, HECC hereby consents to Borrower's execution and
delivery of that certain Registration Agreement, dated September 30, 1995, among
Borrower, David A. Cohen and Edward Forstein.
4. Governing Law. This Amendment for all purposes shall be governed by, and
construed and enforced in accordance with, the laws of the State of Illinois,
without giving effect to any choice of law or conflict provision or rule
(whether of the State of Illinois or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the State of
Illinois.
<PAGE>
THE PARTIES HERETO have duly executed this Amendment as of the date
first written above.
HELLER EQUITY CAPITAL CORPORATION
By: ____________________________________
Title: _________________________________
MEDQUIST INC.
By: ____________________________________
Title: _________________________________
2
EXHIBIT 10.32
REGISTRATION AGREEMENT
THIS AGREEMENT is made as of May 27, 1994 between MedQuist Inc., a New
Jersey corporation (the "Company"), and Chemical Bank, a New York corporation
("Chemical Bank").
The parties to this Agreement are parties to a Loan Agreement of even date
herewith (the "Loan Agreement"). In order to induce Chemical Bank to enter into
the Loan Agreement, the Company has agreed to issue to Chemical Bank a Warrant
and to provide the registration rights set forth in this Agreement. The
execution and delivery of this Agreement is a condition to the closing of the
transactions contemplated by the Loan Agreement. Unless otherwise provided in
this Agreement, capitalized terms used herein shall have the meanings set forth
in paragraph 8 hereof.
The parties hereto agree as follows:
1. Demand Registrations.
(a) Requests for Registration. Subject to the provisions of this
Agreement, the holders of at least a majority of the Registrable Securities may
at any time request registration under Section 5 of the Securities Act. Any
written request for a Demand Registration (as defined below) shall specify the
approximate number of Registrable Securities requested to be registered and the
anticipated per share price range for such offering. Within ten days after
receipt of any such request, the Company will give written notice of such
requested registration to all other holders of Registrable Securities and will
include in such registration all Registrable Securities with respect to which
the Company has received written requests for inclusion therein within 15 days
after the receipt of the Company's notice. All registrations requested pursuant
to this paragraph 1(a) are referred to herein as "Demand Registrations." A
Demand Registration initiated by the holders of Registrable Securities will
count as a Demand Registration only if (x) all of the Registrable Securities
requested to be included in such registration are sold in such registration, (y)
such registration would have been declared effective by the Securities and
Exchange Commission but for the fact that the holders of the Registrable
Securities included in such registration do not agree to the price at which such
Registrable Securities could be sold or due to some other act or omission on the
part of one or more holders of the Registrable Securities or (z) such
registration is declared effective by the Securities and Exchange Commission but
the holders of the Registrable Securities included in such registration do not
sell their shares for any reason other than either (i) the inability of the
Company to maintain the effectiveness of such registration as provided in this
Agreement, or (ii) the failure of the Company to comply with its obligations
under this Agreement; provided that in any event the Company will pay all
Registration Expenses in connection with any registration initiated as a Demand
Registration whether or not it has become effective.
(b) Priority on Demand Registrations. The Company will not include in
any Demand Registration any securities which are not Registrable Securities
without the prior written consent of the Initial Holder if the Initial Holder is
participating in such Demand Registration or, without the prior written consent
of the holders of a majority of the Registrable Securities participating in such
Demand Registration if the Initial Holder is not participating in such Demand
Registration, except that the foregoing limitation shall not apply to Heller
Equity Capital Corporation ("HECC"). If a Demand Registration is an underwritten
offering and the managing underwriters advise the Company in writing that in
their opinion the number of Registrable Securities and, if permitted hereunder,
other securities requested to be included in such offering exceeds the number of
Registrable Securities and other securities, if any, which can be sold in an
orderly manner in such offering within a price range acceptable to the holders
of a majority of the
<PAGE>
Registrable Securities initially requesting registration, the Company will
include in such registration prior to the inclusion of any securities which are
not Registrable Securities the number of Registrable Securities requested to be
included which in the opinion of such underwriters can be sold in an orderly
manner within the price range of such offering, pro rata among the respective
holders thereof on the basis of the amount of Registrable Securities requested
to be included in such registration by each such holder. Any Persons other than
holders of Registrable Securities who participate in Demand Registrations which
are not at the Company's expense must pay their share of the Registration
Expenses as provided in paragraph 5 hereof; provided that nothing in this
sentence shall be deemed to modify any expense allocation arrangement between
the Company and such Persons.
(c) Restrictions on Demand Registrations. The Company will not be
obligated to effect more than one Demand Registration.
(d) Selection of Underwriters. The holders of a majority of the
Registrable Securities requested to be included in any Demand Registration will
have the right to select the investment banker(s) and manager(s) to administer
the offering, subject to the Company's approval which shall not be unreasonably
withheld.
2. Piggyback Registrations.
(a) Right to Piggyback. Whenever the Company proposes to register any
of its securities under the Securities Act (other than pursuant to a Demand
Registration) and the registration form to be used may be used for the
registration of Registrable Securities (a "Piggyback Registration"), subject to
the Company's obligations under its agreements with HECC, (i) the Company will
give prompt written notice (in any event within three business days after its
receipt of notice of any exercise of demand registration rights other than under
this Agreement) to all holders of Registrable Securities of its intention to
effect such a registration and (ii) will include in such registration all
Registrable Securities with respect to which the Company has received written
requests for inclusion therein within 15 days after the receipt of the Company's
notice.
(b) Piggyback Expenses. The Registration Expenses of the holders of
Registrable Securities will be paid by the Company in all Piggyback
Registrations.
(c) Priority on Primary Registrations. If a Piggyback Registration is
an underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in an orderly manner in such offering within a price range
acceptable to the Company, the Company will include in such registration (i)
first, the securities the Company proposes to sell, and (ii) second, the
Registrable Securities and other securities requested to be included in such'
registration, pro rata among the holders of such Registrable Securities and
other securities on the basis of the number of shares requested to be included
in such registration by each such holder.
(d) Priority on Secondary Registrations. If a Piggyback Registration is
an underwritten secondary registration initiated on behalf of holders of the
Company's securities (other than Registrable Securities, in which case such
registration shall be a Demand Registration), and the managing underwriters
advise the Company in writing that in their opinion the number of securities
requested to be included in such registration exceeds the number which can be
sold in an orderly manner in such offering within a price range acceptable to
the holders initially requesting such registration, the Company will include in
such registration (i) first, the securities requested to be included therein by
the holders requesting such registration, and (ii) the
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<PAGE>
Registrable Securities and other securities requested to be included in such
registration (including securities proposed to be sold by the Company) pro rata
among the holders of such securities (including the Company) on the basis of the
number of securities so requested to be included therein.
(e) Selection of Underwriters. If any Piggyback Registration is an
underwritten offering, the holders of Registrable Securities shall not have the
right to approve the selection of investment banker(s) and manager(s) for the
offering.
(f) Restrictions on Piggyback Registrations. The Company will not be
obligated to effect more than two Piggyback Registrations.
3. Holdback Agreements.
(a) Each holder of Registrable Securities agrees not to effect any
public sale or distribution (including sales pursuant to Rule 144) of equity
securities of the Company, or any securities convertible into or exchangeable or
exercisable for such securities, during the Holders' Holdback Period (as defined
below) (except as part of such underwritten registration), unless the
underwriters managing the registered public offering otherwise agree. Upon the
request of any such underwriter, such holder of Registrable Securities agrees to
execute a holdback agreement with respect to such offering on terms consistent
with this paragraph 3(a). The "Holders' Holdback Period" shall mean the seven
day period prior to the effective date of an underwritten Demand Registration
and the 90-day period (or such longer holdback period, not to exceed 180 days,
imposed on officers and directors of the Company by the underwriters managing
the registered public offering) beginning on the effective date of an
underwritten Demand Registration.
(b) The Company agrees not to effect, and to cause any person receiving
demand registration rights from the Company after the date hereof not to effect,
any public sale or distribution of its equity securities, or any securities
convertible into or exchangeable or exercisable for such securities, during the
Company's Holdback Period (except as part of such underwritten registration or
pursuant to registrations on Form S-8 or S-4, or any successor forms), unless
the underwriters managing the registered public offering otherwise agree. The
"Company's Holdback Period" shall mean the seven day period prior to the
effective date of an underwritten Demand Registration or any underwritten
Piggyback Registration and the 90-day period (or such longer holdback period,
not to exceed 180 days, imposed on the holders of Registrable Securities
requested to be included in such public offering by the underwriters managing
the public offering) beginning on the effective date of an underwritten Demand
Registration or any underwritten Piggyback Registration.
4. Registration Procedures. Whenever the holders of Registrable Securities
have requested that any Registrable Securities be registered pursuant to this
Agreement, the Company will use its best efforts to effect the registration and
the sale of such Registrable Securities in accordance with the intended method
of disposition thereof, and pursuant thereto the Company will as expeditiously
as possible:
(a) prepare and file with the Securities and Exchange Commission a
registration statement on any form for which the Company qualifies with respect
to such Registrable Securities and use its best efforts to cause such
registration statement to become effective (provided that before filing a
registration statement or prospectus or any amendments or supplements thereto,
the Company will furnish to the counsel selected by Chemical, or if Chemical is
not participating in such registration, by the holders of a majority of the
Registrable Securities covered by such registration statement copies of all such
documents proposed to be filed, which documents will be subject to the review of
such counsel);
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<PAGE>
(b) prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective for a period of not less than six months and comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof set
forth in such registration statement;
(c) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
the underwriter requests (provided that the Company will not be required to (i)
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subparagraph (d), (ii) subject
itself to taxation in any such jurisdiction or (iii) consent to general service
of process in any such jurisdiction);
(e) notify each seller of such Registrable Securities, at any time when
a prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such registration statement contains an untrue statement of a material fact
or omits any fact necessary to make the statements therein not misleading, and,
at the request of any such seller, the Company will prepare a supplement or
amendment to such prospectus so that, as thereafter delivered to the purchasers
of such Registrable Securities, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make the
statements therein not misleading;
(f) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and, if not so listed, to be listed on the NASD automated quotation
system and, if listed on the NASD automated quotation system, secure designation
of all such Registrable Securities covered by such registration statement as a
NASDAQ "national market system security" within the meaning of Rule llAa2-1 of
the Securities and Exchange Commission or, failing that, to secure NASDAQ
authorization for such Registrable Securities and, without limiting the
generality of the foregoing, arrange for at least two market makers to register
as such with respect to such Registrable Securities with the NASD;
(g) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting
agreements in customary form) as the underwriters, if any, reasonably request in
order to expedite or facilitate the disposition of such Registrable Securities
(excluding, however, effecting a stock split or a combination of shares);
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors, employees and independent accountants
-4-
<PAGE>
to supply all information reasonably requested by any such seller, underwriter,
attorney, accountant or agent in connection with such registration statement;
(j) otherwise use its best efforts to comply with all applicable rules
and regulations of the Securities and Exchange Commission, and make available to
its security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months beginning with the first day of
the Company's first full calendar quarter after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder;
(k) permit any holder of Registrable Securities which holder, in its
reasonable judgment, might be deemed to be an underwriter or a controlling
person of the Company under applicable law, to participate in the preparation of
such registration or comparable statement and to require the insertion therein
of material, furnished to the Company in writing, which in the written Opinion
of Counsel to such holder should be included;
(l) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any common stock included in such registration statement for sale in any
jurisdiction, the Company will use its reasonable best efforts promptly to
obtain the withdrawal of such order;
(m) use its best efforts to cause such Registrable Securities covered
by such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the sellers
thereof to consummate the disposition of such Registrable Securities;
(n) obtain an opinion of in-house counsel to the Company, if one is
then so employed, in customary form and covering such matters customarily
covered by opinions of independent counsel to the Company in secondary
registrations of securities; and
(o) obtain a cold comfort letter from the Company's independent public
accountants in customary form and covering such matters of the type customarily
covered by cold comfort letters.
If any such registration or comparable statement refers to any holder
by name or otherwise as the holder of any securities of the Company and if in
its sole and exclusive judgment, such holder is or might be deemed to be a
controlling person of the Company, such holder shall have the right to require
(i) the insertion therein of language, in form and substance satisfactory to
such holder and reasonably satisfactory to the Company, and presented to the
Company in writing, to the effect that the holding by such holder of such
securities is not to be construed as a recommendation by such holder of the
investment quality of the Company's securities covered thereby and that such
holding does not imply that such holder will assist in meeting any future
financial requirements of the Company, or (ii) in the event that such reference
to such holder by name or otherwise is not required by the Securities Act or any
similar Federal statute then in force, the deletion of the reference to such
holder; provided that with respect to this clause (ii) such holder shall furnish
to the Company an opinion of counsel to such effect, which opinion and counsel
shall be reasonably satisfactory to the Company.
Each Holder of Registrable Securities who participates in any
registration pursuant to this Agreement shall, as a condition to such
participation, (i) execute and deliver such customary documents and agreements
(including, without limitation, underwriting agreements, custody agreements
-5-
<PAGE>
and powers of attorney) in customary form as the Company or the underwriters
shall reasonably request, and (ii) provide such customary information for
inclusion in any registration statement as the Company and the underwriters
shall reasonably request.
In addition, each holder of Registrable Securities who participates in
any registration pursuant to this Agreement hereby agrees to immediately cease
utilizing in any manner, and to cause any underwriter or other person involved
in a distribution of Registrable Securities to immediately cease utilizing in
any manner, any preliminary prospectus, prospectus or registration statement as
to which it is advised by the Company, pursuant to subsection (e) above,
contains an untrue statement of material fact or omits to state a material fact
necessary to make the statements contained therein not misleading.
5. Registration Expenses.
(a) All expenses incident to the Company's performance of or compliance
with this Agreement, including without limitation all registration and filing
fees, fees and expenses of compliance with securities or blue sky laws, printing
expenses, messenger and delivery expenses, and fees and disbursements of counsel
for the Company and all independent certified public accountants, underwriters
(excluding discounts and commissions) and other Persons retained by the Company
(all such expenses being herein called "Registration Expenses"), will be borne
as provided in this Agreement, except that the Company will, in any event, pay
its internal expenses (including, without limitation, all salaries and expenses
of its officers and employees performing legal or accounting duties), the
expense of any annual audit or quarterly review, the expense of any liability
insurance and the expenses and fees for listing the securities to be registered
on each securities exchange on which similar securities issued by the Company
are then listed or on the NASD automated quotation system.
(b) In the event Registration Expenses are required to be paid by the
Company in connection with a Demand Registration or Piggyback Registration, the
Company will reimburse the holders of Registrable Securities covered by such
registration for the reasonable fees and disbursements of one counsel chosen by
the holders of a majority of the Registrable Securities initially requesting
such registration.
(c) To the extent Registration Expenses are not required to be paid by
the Company, each holder of securities included in any registration hereunder
will pay those Registration Expenses allocable to the registration of such
holder's securities so included, and any Registration Expenses not so allocable
will be borne by all sellers of securities included in such registration in
proportion to the aggregate selling price of the securities to be so registered.
6. Indemnification.
(a) The Company agrees to indemnify to the extent permitted by law,
each holder of Registrable Securities, its officers and directors and each
Person who controls such holder (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities, expenses or any amounts paid
in settlement of any litigation or investigation or proceeding by any
governmental body, commenced or threatened ("Claims") to which each such
indemnified party may become subject under the Securities Act insofar as such
Claim arose out of (i) any untrue or alleged untrue statement of material fact
contained, on the effective date thereof, in any registration statement,
prospectus or preliminary prospectus or any amendment thereof or supplement
thereto, (ii) any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the
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<PAGE>
statements therein not misleading, (iii) any violations by the Company of any
federal, state or common law rule or regulation applicable to the Company and
relating to action required of or inaction by the Company in connection with any
such registration, except insofar as the same are caused by, contained in or
omitted from any information furnished in writing to the Company by such holder
expressly for use therein or by such holder's failure to deliver a copy of the
registration statement or prospectus or any amendments or supplements thereto
after the Company has furnished such holder with a sufficient number of copies
of the same. In connection with an underwritten offering, the Company will
indemnify such underwriters, their officers and directors and each Person who
controls such underwriters (within the meaning of the Securities Act) to the
same extent as provided above with respect to the indemnification of the holders
of Registrable Securities.
(b) In connection with any registration statement in which a holder of
Registrable Securities is participating, each such holder will furnish to the
Company in writing such information and affidavits as the Company reasonably
requests for use in connection with any such registration statement or
prospectus and, to the extent permitted by law, will indemnify the Company, its
directors and officers and each Person who controls the Company (within the
meaning of the Securities Act) against any and all Claims to which each such
indemnified party may become subject under the Securities' Act insofar as such
Claim arose out of (i) any untrue or alleged untrue statement of material fact
contained, on the effective date thereof, in any registration statement,
prospectus or preliminary prospectus or any amendment thereof or supplement
thereto, (ii) any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, (iii) any violations by such Person of any federal, state or common
law rule or regulation applicable to such Person and relating to action required
of or inaction by such Person in connection with any such registration, insofar
as the same are caused by, contained in or omitted from any information
furnished in writing to the Company by such holder expressly for use therein;
provided that the obligation to indemnify will be individual to each holder and
will be limited to the net amount of proceeds received by such holder from the
sale of Registrable Securities pursuant to such registration statement.
(c) Any Person entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification (but the failure to provide such notice shall not
release the indemnifying party of its obligation under paragraph (b), unless the
indemnifying party has been prejudiced by such failure to provide such notice)
and (ii) unless in such indemnified party's reasonable judgment a conflict of
interest between such indemnified and indemnifying parties may exist with
respect to such claim, permit such indemnifying party to assume the defense of
such claim with counsel reasonably satisfactory to the indemnified party;
provided, however, if such indemnifying party assumes the defense of such claim,
such indemnifying party will pay all of its fees and expenses incurred as a
result of assuming the defense of such claim. If such defense is assumed, the
indemnifying party will not be subject to any liability for any settlement made
by the indemnified party without its consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim. An indemnifying party who is entitled to, and elects to, assume the
defense of a claim will not be required to pay the fees and expenses of counsel
for any party indemnified by such indemnifying party with respect to such claim,
unless in the reasonable judgment of any indemnified party a conflict of
interest may exist between such indemnified party and the indemnifying party
with respect to such claim.
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<PAGE>
(d) The indemnifying party shall not be liable to indemnify any
indemnified party for any settlement of any such action effected without the
indemnifying party's consent. Furthermore, the indemnifying party shall not,
except with the approval of each indemnified party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to each indemnified party
of a release from all liability in respect to such claim or litigation without
any payment or consideration provided by each such indemnified party.
(e) If the indemnification provided for in this paragraph 6 is
unavailable to an indemnified party under subparagraphs (a) and (b) in respect
of any losses, claims, damages or liabilities referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities in such proportion as is
appropriate to reflect not only the relative benefits received by the Company,
the underwriters, the sellers of Registrable Securities and any other sellers
participating in the registration statement from the sale of shares pursuant to
the registered offering of securities as to which indemnity is sought but also
the relative fault of the Company, the underwriters, the sellers of Registrable
Securities and any other sellers participating in the registration statement in
connection with the statement or omissions which resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company, the underwriters,
the sellers of Registrable Securities and any other sellers participating in the
registration statement shall be deemed to be based on the relative relationship
of the total net proceeds from the offering (before deducting expenses) to the
Company, the total underwriting commissions and fees from the offering (before
deducting expenses) to the underwriters and the total net proceeds from the
offering (before deducting expenses) to the sellers of Registrable Securities
and any other sellers participating in the registration statement. The relative
fault of the Company, the underwriters, the sellers of Registrable Securities
and any other sellers participating in the registration statement shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or by the
underwriters or the sellers of Registrable Securities or other sellers
participating in the registration statement and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
(f) The indemnification provided for under this Agreement will remain
in full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling Person of such
indemnified party and will survive the transfer of securities.
7. Participation in Underwritten Registrations. No Person may
participate in any registration hereunder which is underwritten unless such
Person (a) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (b) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting arrangements; provided that no
holder of Registrable Securities included in any underwritten registration shall
be required to make any representations or warranties to the Company or the
underwriters other than representations and warranties regarding such holder and
such holder's intended method of distribution.
8. Definitions.
"Common Stock" means the Company's Common Stock, no par value.
-8-
<PAGE>
"Person" shall mean any individual, corporation, partnership, company,
joint venture, association, bank, trust company or trust, whether or not legal
entities, or any governmental entity or agency or political subdivision thereof.
"Registrable Securities" means (i) any Common Stock issued upon
exercise of all or part of the Stock Purchase Warrant, (ii) any Common Stock
issued or issuable with respect to the securities referred to in clause (i) by
way of a stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization, and
(iii) any other shares of common stock of the Company held by Persons holding
securities described in clauses (i) through (iii), inclusive, above so long as
such securities were acquired pursuant to the terms of the Stock Purchase
Warrant (including, without limitation, the anti-dilution provisions of the
Stock Purchase Warrant). During such times as all Registrable Securities held by
a holder of Registrable Securities are eligible for transfer pursuant to Rule
144 (or any similar rule then in force) such Registrable Securities shall not
constitute Registrable Securities for purposes of this Agreement. For purposes
of this Agreement, a Person will be deemed to be a holder of Registrable
Securities whenever such Person has the right to acquire directly or indirectly
such Registrable Securities (upon conversion or exercise in connection with a
transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right), whether or not such acquisition
has actually been effected.
"Securities Act" shall mean the Securities Act of 1933, as amended from
time to time or any similar federal law then in force, and any rules or
regulations promulgated thereunder.
"Securities Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time, or any similar federal law then in force,
and any rules or regulations promulgated thereunder.
"Securities and Exchange Commission" includes any governmental body or
agency succeeding to the functions thereof.
"Stock Purchase Warrant" means that certain stock purchase warrant to
acquire shares of the Company's Common Stock issued as of the date hereof to
Chemical, as the same may be amended, modified or replaced from time to time.
9. Cooperation of Underwriters. Without limiting in any way
the generality of any other provisions of this Agreement, if the Company
proposes to register shares of Common Stock in a registration in which the
holders of Registrable Securities would be entitled to include Registrable
Securities but for a Conversion Restriction (as defined below), then the Company
shall use its best efforts to cause the underwriters selected to manage such
registration to purchase from such holders in connection with such registration
a portion of the Warrants held by such holders which, when exercised by the
underwriters in connection with such registration, is equal the number of shares
of Common Stock which such holder would have elected (and been entitled) to
include in such registration had such holder not been subject to such Conversion
Restriction. Such securities shall be purchased on the basis (including price,
discounts and similar terms) as if such securities had been exercised and/or
converted by such holder and sold in such registration or qualification. For
purposes of this paragraph 9, "Conversion Restriction" means a limitation or
restriction contained in the Company's charter, certificate of designation, any
law or regulation, any agreement to which a holder of Registrable Securities is
a party or otherwise which limits or restricts such holder's ability to exercise
the Stock Purchase Warrant.
10. Miscellaneous.
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<PAGE>
(a) No Inconsistent Agreements. The Company will not hereafter enter
into any agreement with respect to its securities which is inconsistent with or
violates the rights granted to the holders of Registrable Securities in this
Agreement.
(b) Adjustments Affecting Registrable Securities. The Company will not
take any action, or permit any change to occur, with respect to its securities
which would adversely affect the ability of the holders of Registrable
Securities to include such Registrable Securities in a registration undertaken
pursuant to this Agreement or which would adversely affect the marketability of
such Registrable Securities in any such registration (including, without
limitation, effecting a stock split or a combination of shares).
(c) Remedies. Any Person having rights under any provision of this
Agreement will be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or other security) for specific performance and for other injunctive
relief in order to enforce or prevent violation of the provisions of this
Agreement.
(d) Amendments and Waivers. Except as otherwise provided herein, the
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company Chemical Bank or, if Chemical Bank is no longer a
holder of Registrable Securities, by the Company and holders of at least a
majority of the Registrable Securities. No failure or delay of any holder of
Registrable Securities in exercising any power or right hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such right
or power, or any abandonment or discontinuance of steps to enforce such a right
or power, preclude any other or further exercise thereof or the exercise of any
other right or power.
(e) Successors and Assigns. All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto will bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
purchasers or holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable Securities.
(f) Severability. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
this Agreement.
(g) Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, any one of which need not contain the signatures of more
than one party, but all such counterparts taken together will constitute one and
the same Agreement.
(h) Descriptive Headings. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
(i) Governing Law. The corporate laws of the State of New Jersey shall
govern all issues concerning the relative rights of the Company
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<PAGE>
and its stockholders. All other questions concerning the construction, validity
and interpretation of this Agreement shall be governed by and construed in
accordance with the domestic laws of the State of New York, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of New York or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of New York.
(j) Notices. All notices, demands or other communications to be given
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, one day after deposit with a reputable express courier service
(charges prepaid) or upon confirmation of receipt when sent by telecopier (with
hard copy to follow). Such notices, demands and other communications will be
sent to Chemical Bank or the Company at the address indicated below:
Notices to Chemical Bank:
Chemical Bank
633 Third Avenue
New York, New York 10017
Attn: Credit Deputy
Telecopy: (212) 622-5233
with a copy to:
Kaye, Scholer, Fierman, Hays & Handler
425 Park Avenue
New York, New York 10022
Attn: Jeffrey M. Epstein, Esq.
Telecopy: (212) 836-8689
Notices to the Company:
MedQuist Inc.
20 East Clementon Road
Suite 102 South
Gibbsboro, NJ 08026
Attn: Chief Executive Officer
General Counsel
Telecopy: (609) 782-0978
with a copy to Chemical Bank at the address set forth above
(unless Chemical Bank or its affiliate is the originator of
such notice);
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
(k) Consent to Jurisdiction; Consent to Service of Process. THE COMPANY
HEREBY CONSENTS TO THE JURISDICTION OF ANY FEDERAL COURT LOCATED WITHIN THE
COUNTY OF NEW YORK, STATE OF NEW YORK AND IRREVOCABLY AGREES THAT, SUBJECT TO
CHEMICAL BANK'S ELECTION, ALL ACTIONS OR PROCEEDINGS RELATING TO THIS AGREEMENT
OR THE OTHER TRANSACTION DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS. THE
COMPANY ACCEPTS FOR AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE
OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT
RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. THE COMPANY HEREBY AGREES
THAT SERVICE OF ALL PROCESS ON THE COMPANY IN ANY SUCH PROCEEDINGS IN ANY SUCH
COURT MAY BE SERVED BY CHEMICAL
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<PAGE>
BANK TO THE COMPANY BY REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS ADDRESS
PROVIDED IN SECTION 10(k) HEREOF AND THAT SUCH SERVICE SHALL BE EFFECTIVE AND
BINDING SERVICE IN EVERY RESPECT AND SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING
HEREIN SHALL AFFECT CHEMICAL BANK'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE CHEMICAL BANK TO BRING
PROCEEDINGS AGAINST THE COMPANY IN THE COURTS OF ANY OTHER JURISDICTION.
(l) Waiver of Jury Trial. EACH OF THE COMPANY AND CHEMICAL BANK HEREBY
WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE OTHER TRANSACTION
DOCUMENTS, OR ANY DEALINGS AMONG THEM RELATING TO THE SUBJECT MATTER OF THIS
LOAN TRANSACTION AND THE CHEMICAL BANK/THE COMPANY RELATIONSHIP THAT IS BEING
ESTABLISHED. EACH OF THE COMPANY AND CHEMICAL BANK ALSO WAIVES ANY BOND OR
SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED
OF CHEMICAL BANK OR THE COMPANY. THE SCOPE OF THIS WAIVER IS INTENDED TO BE
ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT
RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION,
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW
AND STATUTORY CLAIMS. EACH OF THE COMPANY AND CHEMICAL BANK ACKNOWLEDGE THAT
THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT
IT HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT IT
WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH OF
THE COMPANY AND CHEMICAL BANK FURTHER WARRANT AND REPRESENT THAT EACH HAS
REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL. THIS WAIVER MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE
WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS, OR
MODIFICATIONS TO THIS AGREEMENT, THE TRANSACTION DOCUMENTS, OR TO ANY OTHER
DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS. IN THE EVENT OF LITIGATION, THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
CHEMICAL BANK MEDQUIST INC.
By: By:
------------------------- --------------------------
Its: Its: Senior Vice President
------------------------- --------------------------
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EXHIBIT 10.33
MEDQUIST INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE.
This 1996 Employee Stock Purchase Plan (the "Plan") is intended to
encourage and facilitate the purchase of the Common Stock of MedQuist Inc. (the
"Company"), by employees of the Company, thereby providing employees with a
personal stake in the Company and a long range inducement to remain in the
employ of the Company. It is the intention of the Company to have the Plan
qualify as an "employee stock purchase plan" within the meaning of Section 423
of the Internal Revenue Code of 1986, as amended (the "Code").
2. DEFINITIONS.
2.1 Board. The "Board" is the Board of Directors of the Company.
2.2 Common Stock. The "Common Stock" is MedQuist Inc. Common Stock,
no par value.
2.3 Eligible Compensation. The "Eligible Compensation" of each
Participant is his or her regular rate of base compensation for a Grant Period
determined as of the first day of the Grant Period on which the Participant is
an Eligible Employee. "Eligible Compensation" does not include management
incentives, variable commissions, bonuses, overtime, shift differentials, COLA
adjustments, extended work-week premiums, amounts paid or accrued with respect
to any qualified or nonqualified plan of deferred compensation or other employee
welfare plan, payments for group insurance, hospitalization and similar
benefits, perquisites reported as income, reimbursement for expenses and other
forms of extraordinary pay. An employee's base pay shall be calculated by
multiplying the employee's normal rate of pay as of the first day of the Grant
Period on which the employee is an Eligible Employee by the number of pay
periods between said first day and the end of the Grant Period.
2.4 Eligible Employee. An "Eligible Employee" is an employee of the
Company or of a Designated Subsidiary; provided, however, that the term
"Eligible Employee" shall not include:
2.4.1 Employees who are scheduled to work less than twenty (20)
hours per week or less than five (5) months during the Grant Period; or
2.4.2 Any employee who, immediately after the close of a Grant
Period, owns five percent (5%) or more of the total combined voting power or
value of all classes of stock of the Company or its subsidiaries as determined
pursuant to Section 424(e) and (f) of the Code. For purposes of this Subsection
2.4.2, the attribution rules of Section 424(d) of the Code shall apply in
determining the stock ownership of an employee, and stock
<PAGE>
which the employee may purchase under outstanding options, whether or not
granted under this Plan, shall be treated as stock owned by the employee.
2.5 Exercise Dates. The "Exercise Dates" are June 30 and December 31
of each year.
2.6 Fair Market Value. The "Fair Market Value" per share on any date
shall be the last reported sale price of a Share of Common Stock on such date on
the NASDAQ National Market or other over-the-counter market, the American Stock
Exchange, or any other exchange on which the Common Stock is listed, or if no
sale took place on such day, the last date on which a sale took place or, if
none of the foregoing applies, a price determined by the Board of Directors.
2.7 Grant Period. "Grant Periods" shall begin each January 1 and
July 1, and shall end on the next June 30 and December 31, respectively.
2.8 Participant. A "Participant" is an Eligible Employee of the
Company who elects to participate in the Plan by filing an enrollment form with
the Company as provided in Section 6.
2.9 Purchase Price. The "Purchase Price" of a share of Common Stock
shall be determined on the first and last days of each Grant Period, and shall
be such amount as the Committee may determine from time to time, but in no event
less than 85% of Fair Market Value on such date. Effective on the date of
adoption of this Plan, and until such time that the Committee provides
otherwise, the Purchase Price as of any date shall be 90% of Fair Market Value.
3. ADMINISTRATION.
3.1 The Plan shall be administered by a committee (the "Committee")
selected by the Board. The Committee shall consist of not less than three (3)
members who are members of the Board of Directors. An individual will not be
eligible to serve on the Committee if the individual is a Participant. Each
member of the Committee shall serve for a term commencing on a date specified by
the Board and continuing until such member dies, resigns, becomes a Participant
or is removed from office by the Board.
3.2 From time to time the Committee may adopt such rules and
regulations for carrying out the Plan as it may deem proper and in the best
interest of the Company. All determinations of the Committee shall be made by a
majority of its members. The interpretation of any provision of the Plan by the
Committee shall be final and the Board shall adopt and place into effect the
determinations of the Committee.
4. STOCK SUBJECT TO THE PLAN.
The stock subject to options under the Plan shall be authorized but
unissued shares of the Company's Common Stock. The aggregate amount of stock for
which options may be granted under the Plan shall be 250,000 shares, subject to
adjustment in accordance
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<PAGE>
with Section 12. In the event that an option granted under the Plan to any
Participant is unexercised at the end of a Grant Period as to any shares covered
thereby, such shares thereafter shall be available for the granting of options
under the Plan.
5. GRANT OF OPTION.
Options will be granted on the first and last day of each Grant
Period. All Participants granted options under the Plan shall have the same
rights and privileges. On each such date, each Participant who is an Eligible
Employee on the first day of the Grant Period shall be granted an option by the
Board to purchase whole shares of Common Stock. The maximum number of shares of
Common Stock for which each Participant shall be granted an option on each date
shall equal ten percent (10%) of the Participant's Eligible Compensation divided
by the Purchase Price on such date. The number of shares elected to be purchased
shall be determined by the amount of compensation designated by the Participant
to be applied to such purchase. In the event that the maximum number of shares
to be granted to all Participants on any date (determined according to the
formula above) exceeds the total number of shares available for sale under the
Plan pursuant to Section 4, the Committee shall make a pro rata allocation of
the available shares among all Participants on such date based upon a uniform
relationship to the Eligible Compensation of all Participants in effect on the
date. The Committee may on the first day of each Grant Period decrease the
percentage of Eligible Compensation set forth above to calculate the number of
shares of Common Stock for which an Eligible Employee shall be granted options
to a minimum of five percent (5%) or increase it to a maximum of twenty percent
(20%). Notwithstanding the foregoing, in the event options are granted prior to
the approval of this Plan by stockholders owning a majority of the common stock
of the Company, such grant is expressly conditioned on subsequent approval of
the Plan by the stockholders. Furthermore, both the grant and the exercise of
any options under this Plan are expressly conditioned on the effective and
continuing registration of this Plan under the Securities Act of 1933 or an
available exemption from registration and effective registration or available
exemption from registration under applicable state securities laws.
6. ENROLLMENT, PAYROLL DEDUCTIONS AND CASH PAYMENTS.
6.1 An employee who is not a Participant and who will be an Eligible
Employee on the first day of a Grant Period may become a Participant pursuant to
such procedure as the Company shall prescribe.
6.2 Completion of an enrollment form in such a manner as the Company
prescribes will allow an Eligible Employee to become a Participant by
authorizing a regular payroll deduction from the Participant's Eligible
Compensation on each pay day during the Grant Period at a rate which will result
in not less than a five dollar ($5.00) deduction per pay day and which will not
exceed the percentage of the Participant's Eligible Compensation designated by
the Committee under Section 5 with respect to which an option to purchase shares
has been granted.
6.3 A participant's payroll deductions shall be retained in the
Company's general corporate account and shall be credited to the Participant's
stock purchase account
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<PAGE>
under the Plan. No interest shall accrue on the amount credited to a
Participant's stock purchase account. Except as provided in Section 6.2, a
Participant may not make any separate cash payment into his or her account. A
Participant may change the amount of the payroll deduction and thereby elect to
increase or decrease the number of shares of Common Stock the Participant has an
option to purchase during the Grant Period.
6.4 Payroll deductions for a Participant for each Grant Period shall
commence on the first pay day following the first day of the Grant Period on
which the Participant is an Eligible Employee and shall end on the last pay day
prior to the end of the Grant Period, unless sooner terminated by the
Participant as provided in Section 8.
6.5 Individual stock purchase accounts will be maintained for each
Participant in the Plan. A statement shall be provided to each Participant, at
such time and in such manner as the Company shall prescribe, which sets forth
the amount of the Participant's payroll deductions and any cash payments, the
per share Purchase Price, the number of shares purchased, and the amount of the
remaining balance, if any, credited to the Participant's stock purchase account.
7. EXERCISE OF OPTION.
7.1 On the Exercise Date in each Grant Period, each Participant
shall be deemed to have exercised an option to purchase such number of whole
shares of Common Stock as the credit to the Participant's stock purchase account
on the Exercise Date will pay for at the lesser of the Purchase Price as
determined as of the first day of the Grant Period and the Purchase Price as
determined as of the last day of the Grant Period. No fractional shares of
Common Stock shall be purchased. During the Participant's lifetime, the option
to purchase shares of Common Stock under the Plan is exercisable only by the
Participant.
7.2 Any amount remaining credited to a Participant's stock purchase
account on an Exercise Date, after the purchase of shares as provided above,
shall continue to be credited to a Participant's stock purchase account and
shall be available to be applied to the purchase of Common Stock on the next
Exercise Date.
7.3 No Participant may be granted an option under the Plan which
would permit such employee's rights to purchase stock under all such employee
stock purchase plans of the Company or its Subsidiaries to accrue at a rate
which exceeds $25,000 in Fair Market Value of such stock (determined at the time
such option is granted) for each calendar year in which such option is
outstanding at any time.
7.4 Shares of Common Stock purchased by a Participant under the Plan
will be issued only in the name of the Participant, or if the Participant so
indicates on his or her enrollment form or in writing, in the name of the
Participant and any other person as joint tenants with rights of survivorship.
7.5 As promptly as practicable after each Exercise Date of the Grant
Period, the Company shall cause the number of shares purchased by each
Participant to be registered on the stock transfer records of the Company in the
name of the Participant.
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<PAGE>
8. WITHDRAWAL.
A Participant, at any time and for any reason, may terminate
participation in the Plan by delivering written notice of withdrawal to the
Participant's appropriate payroll office. If a Participant withdraws from the
Plan, the Participant shall not be eligible to again participate in the Plan for
six (6) months thereafter, and the balance in the Participant's stock purchase
account will be promptly refunded after receipt by the Company of the
Participant's notice of withdrawal.
9. TERMINATION OF EMPLOYMENT OR ELIGIBILITY.
9.1 If the employment of a Participant terminates, such
Participant's participation in the Plan automatically and without any act on his
or her part shall terminate as of the date of the termination of his or her
employment. The Company promptly will pay to the Participant the amount credited
to his or her stock purchase account under the Plan (without interest), and
thereupon the Participant's interest in the Plan and any options under the Plan
shall terminate.
9.2 In the event a Participant fails to meet the requirements of an
Eligible Employee under the Plan on the Exercise Date in the Grant Period, as
set forth in Section 2.4, the Participant will be deemed to have withdrawn from
the Plan and the payroll deductions credited to such Participant's account will
be promptly refunded to the Participant and no option to purchase shares of
Common Stock shall be granted to such Participant.
9.3 A Participant's withdrawal from participation in the Plan during
a Grant Period shall preclude (i) such Participant's eligibility to participate
in the Plan, and (ii) such Participant's eligibility to participate in any
similar plan which has been or may be adopted by the Company, for a period of
six (6) months thereafter.
10. TRANSFERABILITY.
Neither payroll deductions or cash payments credited to a
Participant's stock purchase account nor any rights with regard to the exercise
of an option or to receive shares under the Plan may be assigned, transferred,
pledged or otherwise disposed of in any way by the Participant. Any such attempt
at assignment, transfer, pledge or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw funds in
accordance with Section 8.
11. RIGHTS OF A STOCKHOLDER.
Each Participant shall have the rights or privileges of a
stockholder of the Company with respect to shares purchased under the Plan when
the shares have been registered in the name of the Participant on the stock
transfer records of the Company.
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<PAGE>
12. CAPITAL ADJUSTMENT AFFECTING COMMON STOCK.
In the event of a capital adjustment resulting from a
recapitalization, stock dividend, stock split, reorganization, merger,
consolidation or other change in capitalization affecting the present Common
Stock, the Board may, at its option, terminate the Plan or make appropriate
adjustments in the number of shares which may be issued and sold under the Plan
and may make such other adjustments as it may deem equitable.
13. TERMINATION AND AMENDMENTS TO PLAN.
The Board, at any time, may terminate the Plan or from time to time,
may amend the Plan without the approval of the stockholders of the Company
subject to Section 21 hereof; provided, however, that no such amendment shall be
made without the stockholders' approval which would (i) cause the Plan to fail
to meet the requirements of an "employee stock purchase plan" as defined in
Section 423 of the Code, or (ii) permit a Participant to be a member of the
Committee.
14. TERMINATION OF THE PLAN.
Upon termination of the Plan, the amount credited to the stock
purchase accounts for all Participants shall be refunded promptly. The Exercise
Dates may be accelerated by the Company in the event of a termination of the
Plan.
15. NON-GUARANTEE OF EMPLOYMENT.
Nothing in the Plan or in any option granted pursuant to the Plan
shall be construed as a contract of employment between the Company and its
employees, or as a contractual right to continue in the employ of the Company,
or as a limitation of the right of the Company to discharge its employees at any
time.
16. EXCLUSION FROM RETIREMENT AND FRINGE BENEFIT COMPUTATION.
No portion of the award of options under this Plan shall be taken
into account as "wages," "salary" or "compensation" for any purpose, whether in
determining eligibility, benefits or otherwise, under (i) any pension,
retirement, profit sharing or other qualified or non-qualified plan of deferred
compensation, (ii) any employee welfare or fringe benefit plan including, but
not limited to, group insurance, hospitalization, medical, and disability, or
(iii) any form of extraordinary pay including but not limited to bonuses, sick
pay and vacation pay.
17. LIABILITY LIMITED; INDEMNIFICATION.
17.1 To the maximum extent permitted by New Jersey law, neither the
Company, Board or Committee nor any of its members, shall be liable for any
action or determination made with respect to this Plan.
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<PAGE>
17.2 In addition to such other rights of indemnification that they
may have, the members of the Board and Committee shall be indemnified by the
Company to the maximum extent permitted by New Jersey law against any and all
liabilities and expenses incurred in connection with their service in such
capacity.
18. GOVERNMENTAL REGULATIONS.
The Company's obligation to sell and deliver the Common Stock under
the plan is subject to the approval of any governmental authority required in
connection with the authorization, issuance or sale of such stock.
19. STOCKHOLDER APPROVAL.
The Plan shall be subject to the approval of the stockholders owning
a majority of the outstanding shares of the Common Stock, which approval must
occur within the period beginning twelve (12) months before and ending twelve
(12) months after the date the Plan is adopted by the Board.
20. OTHER TERMS AND CONDITIONS.
The Committee may impose such other terms and conditions not
inconsistent with the terms of the Plan, as it deems advisable, including,
without limitation, restrictions and requirements relating to (i) the
registration, listing or qualification of the Common Stock, (ii) the grant or
exercise of options, or (iii) the shares of Common Stock acquired under the
Plan. The Committee may require that a Participant notify the Company of any
disposition of shares of Common Stock purchased under the Plan within a period
of two (2) years subsequent to the Grant Date of the options exercised to
purchase those shares.
21. SECTION 16 COMPLIANCE.
Any person who is an officer or director of the Company for purposes
of Section 16 of the Securities Exchange Act of 1934, as amended, is required to
comply with the requirements of Rule 16b-3 of such act, as it may be amended
from time to time.
22. MISCELLANEOUS.
22.1 The headings in this Plan are for reference purposes only and
shall not affect the meaning or interpretation of the Plan.
22.2 Any provision in this Plan which adversely affects the validity
or qualification of this Plan under Section 423 of the Code shall be deemed null
and void without affecting the remaining provisions of this Plan.
22.3 This Plan shall be governed by, and construed in accordance
with, the laws of New Jersey, without regard to principles of conflict of laws.
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22.4 All notices and other communications made or given pursuant to
this Plan shall be in writing and shall be sufficiently made or given if
delivered or mailed, addressed to the employee at the address contained in the
records of the Company or to the Company at the Company's principal office.
MedQuist Inc.
By: __________________________________
[Corporate Seal] Dated: __________________________________
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