SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
--------------------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
--------------------
For the quarterly period Commission file number
ended September 30, 1998 0-19941
MedQuist Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2531298
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Greentree Centre, Suite 311, Marlton, NJ 08053
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(609) 596-8877
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 23,784,313 shares
of common stock, no par value, as of November 11, 1998.
<PAGE>
MedQuist Inc.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 1998 (Unaudited) and
December 31, 1997 1
Consolidated Statements of Income for the nine months ended September 30, 1998 and
1997 (Unaudited) 2
Consolidated Statements of Income for the three months ended September 30, 1998
and 1997 (Unaudited) 3
Consolidated Statements of Cash Flows for the nine months ended September 30, 1998
and 1997 (Unaudited) 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Special Note Concerning Forward Looking Statements 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURE 14
</TABLE>
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $19,211 $13,169
Accounts receivable, net of allowance of $765 and $479 26,497 22,901
Prepaid expenses and other current assets 1,082 953
-------- -------
Total current assets 46,790 37,023
Property and equipment - net 13,167 11,790
Other assets 697 587
Marketable security 900 --
Deferred income taxes 1,629 --
Intangible assets - net 47,243 47,489
-------- -------
$110,426 $96,889
======== =======
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 216 $ 3,935
Accounts payable 1,871 1,457
Accrued payroll 5,745 3,481
Accrued expenses 5,927 3,029
-------- -------
Total current liabilities 13,759 11,902
Long-term debt 21 1,405
Other liabilities 476 544
Deferred income taxes -- 2,710
Shareholders' equity:
Common stock, no par value, 60,000 shares authorized,
23,781 and 22,953 issued and outstanding -- --
Additional paid-in capital 66,391 59,834
Retained earnings 29,194 20,494
Unrealized gain on marketable security 585 --
-------- -------
Total shareholders' equity 96,170 80,328
-------- -------
$110,426 $96,889
======== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues $104,360 $74,580
-------- --------
Costs and expenses:
Cost of revenues 79,096 56,526
Selling, general and administrative 4,202 3,376
Depreciation 4,130 2,932
Amortization of intangible assets 1,331 1,106
Nonrecurring merger costs 1,500 --
-------- --------
Total operating expenses 90,259 63,940
-------- --------
Operating income 14,101 10,640
Other income (expense):
Interest income 367 --
Interest expense (60) (137)
-------- --------
Total other income (expense) 307 (137)
-------- --------
Income before income taxes 14,408 10,503
Income tax provision 5,354 3,677
-------- --------
Net income $ 9,054 $ 6,826
======== ========
Basic net income per common share $ 0.39 $ 0.31
======== ========
Diluted net income per common share $ 0.36 $ 0.29
======== ========
Pro forma amounts (Note 2):
Income before income taxes, as reported $ 14,408 $ 10,503
Income tax provision 5,648 4,072
-------- --------
Net income $ 8,760 $ 6,431
======== ========
Basic net income per share $ 0.38 $ 0.29
======== ========
Diluted net income per share $ 0.35 $ 0.27
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Amounts in thousands, except per share amounts)
THREE MONTHS ENDED
SEPTEMBER 30, 1998
-----------------------
1998 1997
------- -------
Revenues $36,159 $26,962
------- -------
Costs and expenses:
Cost of revenues 27,355 20,415
Selling, general and administrative 1,427 1,188
Depreciation 1,494 1,104
Amortization of intangible assets 446 396
Nonrecurring merger costs 750 --
------- -------
Total operating expenses 31,472 23,103
------- -------
Operating income 4,687 3,859
Other income (expense):
Interest income 231 --
Interest expense (29) (25)
------- -------
Total other income (expense) 202 (25)
------- -------
Income before income taxes 4,889 3,834
Income tax provision 1,912 1,348
------- -------
Net income $ 2,977 $ 2,486
======= =======
Basic net income per common share $ 0.13 $ 0.11
======= =======
Diluted net income per common share $ 0.12 $ 0.10
======= =======
Pro forma amounts (Note 2):
Income before income taxes, as reported $ 4,889 $ 3,834
Income tax provision 1,930 1,486
-------- --------
Net income $ 2,959 $ 2,348
======== ========
Basic net income, per share $ 0.13 $ 0.10
======== ========
Diluted net income per share $ 0.12 $ 0.10
======== ========
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
----------------------
1998 1997
------- --------
<S> <C> <C>
Operating activities:
Net income $ 9,054 $ 6,826
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,461 4,038
Changes in assets and liabilities:
Accounts receivable, net (3,554) (2,263)
Prepaid expenses and other current assets (128) (17)
Other assets (110) 8
Accounts payable 414 (16)
Accrued payroll 2,533 1,807
Accrued expenses 2,947 2,084
Other liabilities (68) (69)
------- -------
Net cash provided by operating activities 16,549 12,398
------- -------
Investing activities:
Purchases of property and equipment, net (5,420) (4,305)
Acquisitions, net of cash acquired (2,581) (3,232)
------- -------
Net cash used in investing activities (8,001) (7,537)
------- -------
Financing activities:
Net borrowings on revolving line of credit -- (329)
Repayments of long-term debt (3,465) (135)
Repayments of obligations under capital leases (350) (229)
Net proceeds from issuance of common stock -- 1,485
Proceeds from the exercise of common stock options 1,668 --
Dividends to former shareholders (359) (476)
Repurchase of common stock -- (467)
------- -------
Net cash used in financing activities (2,506) (151)
------- -------
Net increase in cash and cash equivalents 6,042 4,710
Cash and cash equivalents, beginning of period 13,169 9,620
------- -------
Cash and cash equivalents, end of period $19,211 $14,330
======= =======
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest $ 32 $ 136
======= =======
Income taxes $ 3,340 $ 1,820
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Nine Month Period Ended September 30, 1998
(Unaudited - dollars in thousands, except per share amounts)
Note 1. Basis of Presentation
The information set forth in these statements is unaudited. The
information reflects all adjustments, consisting only of normal recurring
adjustments, that, in the opinion of management, are necessary to present a fair
statement of operations of MedQuist Inc. (the "Company"), and its consolidated
subsidiaries for the periods indicated. Results of operations for the interim
periods ended September 30, 1998 are not necessarily indicative of the results
of operations for the full year. Certain information in footnote disclosures
normally included in financial statements have been condensed or omitted in
accordance with the rules and regulations of the Securities and Exchange
Commission.
On September 9, 1997, the Company effected a three for two stock split
and on June 15, 1998, the Company effected a two for one stock split. All share
data presented herein has been adjusted to reflect the stock splits.
Note 2. Acquisitions
During 1997, the Company completed five acquisitions. The acquisitions
were accounted for using the purchase method. During 1998, the Company completed
one acquisition accounted for using the purchase method and one immaterial
acquisition accounted for using the pooling-of-interest method. Pro forma
information is not presented as the acquisitions are not material to the
Company.
On May 28, 1998, the Company completed the acquisition of approximately
94% of the outstanding stock of Digital Dictation, Inc. ("DDI") and on July 31,
1998, acquired the remaining 6%. The Company issued approximately 912,000 shares
of its common stock in exchange for all DDI capital stock and each outstanding
option to purchase DDI common stock was converted into an option to purchase
Company common stock at an exchange rate of .1440899. The Company's financial
statements have been restated to reflect the pooling of DDI.
On August 18, 1998 the Company completed the acquisition of Signal
Transcription Network, Inc. ("Signal") accounted for using the
pooling-of-interest method. The Company issued approximately 619,000 shares of
its common stock and $1.5 million in cash for all Signal capital stock. The
Company's financial statements have been restated to reflect the pooling of
Signal.
5
<PAGE>
Prior to its merger with the Company, Signal was an "S" corporation. The
consolidated statements of income include a pro forma presentation to reflect
Signal as a "C" corporation for the periods presented. In addition, Signal and
the Company have elected to treat their merger as an asset purchase for income
tax purposes. Accordingly, the Company recorded a deferred tax asset and an
increase in additional paid-in capital of approximately $4.6 million in the
quarter ended September 30, 1998, to reflect the tax effect of goodwill that
will be recorded for income tax purposes.
Revenues and net income as restated for both the DDI and Signal pooling
of interests is as follows:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1998
-------------------- ----------------------
Net Net
Revenues Income Revenues Income
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Medquist Inc. $60,707 $5,422 $ 92,914(a) $8,258(a)
Digital Dictation, Inc. 7,039 425 6,165(b) 253(b)
Signal Transcription Network Inc. 6,834 979 5,281(b) 543(b)
------- ------ -------- ------
Restated $74,580 $6,826 $104,360 $9,054
======= ====== ======== ======
</TABLE>
- ----------
(a) Includes DDI and Signal amounts from July 1, 1998.
(b) Reflects amounts from January 1, 1998 to June 30, 1998.
Prior to its merger with the Company, Signal was taxed as an "S"
corporation. The above net income amounts do not include a "C" corporation
income tax for Signal of approximately $395 and $294 for the nine months ended
September 30, 1997 and 1998, respectively.
On September 18, 1998, the Company signed an Agreement and Plan of
Merger (the "Agreement") with The MRC Group, Inc. ("MRC"). For the year ended
December 31, 1997, MRC had revenues of approximately $108 million. Pursuant to
the Agreement, each share of MRC stock is to be exchanged for a share of
MedQuist Inc. common stock as defined in the Agreement. It is anticipated that
the merger will be accounted for using the pooling-of-interest method of
accounting. The merger is subject to the approval of the shareholders of both
companies and other customary conditions to closing.
Note 3. Net Income Per Common Share
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share." This statement establishes new standards for computing and
presenting earnings per share and requires the restatement of prior year
amounts. The Company adopted SFAS No. 128 effective December 31, 1997.
6
<PAGE>
Basic net income per share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding for the period.
Diluted net income per share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding for the period,
adjusted for the dilutive effective of common stock equivalents, which consist
of stock options, using the treasury stock method.
The table below sets forth the reconciliation of the numerators and
denominators of the basic and diluted net income per share computations:
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------------------------------------------
1998 1997
------------------------------- --------------------------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic $2,977 23,728 $0.13 $2,486 22,713 $ 0.11
Effect of dilutive
Securities -- 1,318 (0.01) -- 1,416 (0.01)
------ ------ ----- ------ ------ ------
Diluted $2,977 25,046 $0.12 $2,486 24,129 $ 0.10
====== ====== ===== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------------------------------
1998 1997
------------------------------- --------------------------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic $9,054 23,132 $0.39 $6,826 22,415 $0.31
Effect of dilutive
Securities -- 1,725 (0.03) -- 1,531 (0.02)
------ ------ ----- ------ ------ -----
Diluted $9,054 24,857 $0.36 $6,826 23,946 $0.29
====== ====== ===== ====== ====== =====
</TABLE>
Note 4. New Accounting Pronouncement
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." This statement establishes new
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. Management believes that SFAS
No. 131 will have no effect on the Company's financial statements.
Note 5. Shareholders' Equity
On September 9, 1997, the Company effected a three for two stock split
for all shares of common stock. On June 15, 1998, the Company effected a two for
one stock split for all shares of common stock. All share and per share amounts
have been restated for the stock splits.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company is a leading national provider of electronic transcription
and information management solutions to the healthcare industry.
Fees for transcription related services are based primarily on
contracted rates, and revenue is recognized upon the rendering of services and
delivery of reports. Cost of revenues consists of all direct costs associated
with providing transcription related services, including payroll,
telecommunications, software customization, repairs and maintenance, rent and
other direct costs. Selling, general and administrative expenses include costs
associated with the Company's senior executive management, 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 Unaudited Consolidated Statements of Operations as a percentage
of net revenues:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues 75.8 75.8 75.6 75.7
Selling, general and administrative 4.0 4.5 4.0 4.4
Depreciation 4.0 3.9 4.1 4.1
Amortization of intangible assets 1.3 1.5 1.2 1.5
Nonrecurring charge 1.4 -- 2.1 --
----- ----- ----- -----
Operating income 13.5 14.3 13.0 14.3
Other income (expense) 0.3 (0.2) 0.5 (0.1)
----- ----- ----- -----
Income before income taxes 13.8 14.1 13.5 14.2
Income tax provision 5.1 4.9 5.3 5.0
----- ----- ----- -----
Net income 8.7% 9.2% 8.2% 9.2%
===== ===== ===== =====
</TABLE>
Nine Months Ended September 30, 1998 and 1997
Revenues. Revenues increased 40.0% to $104.4 million for the nine months ended
September 30, 1998 from $74.6 million for the comparable 1997 period. The $29.8
million increase reflects approximately $21.7 million of additional revenues
generated from new and existing clients, and $8.1 million of revenues from the
Company's 1997 and 1998 medical transcription acquisitions that were accounted
for using the purchase method.
8
<PAGE>
Cost of Revenues. Cost of revenues increased from $56.5 million for the nine
months ended September 30, 1997 to $79.1 million for the comparable 1998 period.
As a percentage of revenues, cost of revenues remained unchanged at 75.8% for
the nine months ended September 30, 1997 and September 30, 1998.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $4.2 million for the nine months ended September 30, 1998
from $3.4 million for the comparable 1997 period. As a percentage of revenues,
selling, general and administrative expenses decreased from 4.5% for the nine
months ended September 30, 1997 to 4.0% in the comparable 1998 period. The
percentage decrease is primarily due to the Company's ability to leverage its
overhead expenses.
Depreciation. Depreciation expense increased from $2.9 million for the nine
months ended September 30, 1997 to $4.1 million for the comparable 1998 period.
As a percentage of revenue, depreciation remained relatively consistent at 4.0%
for the nine months ended September 30, 1998 as compared to 3.9% for the
comparable 1997 period.
Amortization. Amortization of intangible assets was $1.3 million for the nine
months ended September 30, 1998 as compared to $1.1 million for the comparable
1997 period. The increase is attributable to the amortization of intangible
assets associated with the Company's acquisitions which were accounted for using
purchase accounting in 1997 and 1998.
Non-Recurring Merger Costs. The non-recurring merger costs of approximately $1.5
million relate to transaction costs associated with the two acquisitions
consummated in May 1998 and the acquisition in August 1998 that were accounted
for under the pooling of interests method.
Three Months Ended September 30, 1998 and 1997
Revenues. Revenues increased 34.1% to $36.2 million for the three months ended
September 30, 1998 from $27.0 million for the comparable 1997 period. The $9.2
million increase reflected approximately $7.0 million of additional revenues
generated from new and existing clients, and $2.2 million of revenues from the
Company's 1997 and 1998 acquisitions accounted for using the purchase method.
Cost of Revenues. Cost of revenues increased from $20.4 million for the three
months ended September 30, 1997 to $27.4 million for the comparable 1998 period.
As a percentage of revenues, cost of revenues decreased from 75.7% in the second
quarter of 1997 to 75.6% for the comparable 1998 period. The percentage decrease
in cost of revenues primarily resulted from a decrease in telecommunication
costs.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $1.4 million for the three months ended September 30, 1998
from $1.2 million for the comparable 1997 period. As a percentage of revenues,
selling, general and administrative expenses decreased from 4.4% in the second
quarter of 1997 to 4.0% for the comparable 1998 period. The decrease in selling,
general and administrative expenses as a percentage of revenue is due to the
ability of the Company to leverage its overhead expenses.
9
<PAGE>
Depreciation. Depreciation expense increased from $1.1 million for the three
months ended September 30, 1997 to $1.5 million for the comparable 1998 period.
As a percentage of revenues, depreciation remained consistent at 4.1%.
Amortization. Amortization of intangible assets was $396,000 for the three
months ended September 30, 1997 as compared to $446,000 for the comparable 1998
period. The increase is attributable to the amortization of intangible assets
associated with the Company's acquisitions which were accounted for using the
purchase method in 1997 and 1998.
Non-Recurring Merger Costs. The non-recurring merger costs of approximately
$750,000 relate to transaction costs associated with the acquisition consummated
in August 1998 which is being accounted for under the pooling of interests
method.
Liquidity and Capital Resources
At September 30, 1998, the Company had working capital of $33.0 million,
including $19.2 million of cash and cash equivalents. During the nine months
ended September 30, 1998, the Company's operating activities provided cash of
$16.5 million as compared to $12.4 million during the comparative prior year
nine month period. The increase in cash provided by operating activities was
primarily related to increased income before depreciation and amortization.
During the nine months ended September 30, 1998, the Company purchased
$5.4 million of capital equipment and completed one acquisition, under the
purchase method of accounting.
In January 1998, the Company repaid $3.3 million in subordinated
promissory notes issued in connection with certain 1997 acquisitions.
For the nine months ended September 30, 1998 option holders exercised
625,000 options to purchase common stock. The exercises generated $1.7 million
in cash proceeds.
The Company has a $10 million senior unsecured revolving credit facility
expiring April 23, 2000 (the "Chase Facility"). The revolver bears interest at
resetting rates selected by the Company from various alternatives. The interest
rate alternatives are either (i) the greater of (x) prime rate, (y) the federal
funds rate plus 0.5% (z) the bank's certificate of deposit rate plus 1%, or (ii)
LIBOR plus 0.75%. The Chase Facility also allows for the Company to finance up
to 100% of any acquisitions of companies that are in the business of providing
transcriptions-related services. The financing of these acquisitions may be
carved out of the revolving credit facility and amortized over five year periods
(20 consecutive quarters). Each acquisition term loan that is created would
permanently reduce the remaining revolving credit commitment by a like amount.
10
<PAGE>
In addition to acquisitions, the revolver can be used for working
capital and general corporate purposes. To the extent any amounts under the
revolver are repaid, other than acquisition term loans, the Company may reborrow
such amounts. The Chase Facility includes certain financial and other covenants
applicable to the Company, including limitations on capital expenditures and
dividends.
Subject to certain customary conditions including the approval of the
shareholders of the Company and MRC, the Company expects to complete the
proposed merger with MRC in December 1998. It is anticipated that the cash
requirements of the merger of approximately $18 million will substantially
reduce the cash position of the Company. The Company believes that its current
cash position and cash flow from the merged companies along with the borrowing
capacity under the Chase Facility should be sufficient to meet its working
capital, capital expenditure and merger related requirements.
Year 2000 Compliance
The Company is aware of the issues associated with the programming code
in existing computer systems as the Year 2000 approaches. The "Year 2000
problem" is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two-digit year value to 00. The
issue is whether computer systems will properly recognize data sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Company relies on its systems in operating and monitoring all aspects
of its business. The Company also relies on the external systems of its
customers, suppliers and other organizations with which it does business.
The Company is performing a comprehensive review to identify the systems
affected by the Year 2000 issue. The Company is assessing its information
technology systems, business computing systems, technical infrastructure, as
well as embedded systems commonly found in the operations equipment.
Additionally the Company has initiated formal communications with third party
vendors and customers to assess the Year 2000 readiness of their systems. From
the assessment of the external and internal systems, the Company will refine and
implement a Year 2000 readiness plan.
To date, no material issue has been identified as it relates to the
Company's efforts to identify Year 2000 issues. The Company expects to complete
its assessment of the Year 2000 readiness by January 1, 1999. The implementation
phase of the Year 2000 readiness plan has begun on systems already evaluated and
should be completed by June 30, 1999.
The Company believes the Year 2000 issue will pose minimal risk to the
operations of the Company as the Company's proprietary software makes no
internal calculations regarding dates. Additionally, the Company is in the
process of developing contingency plans for critical systems in the event that
one or more of those systems fail.
11
<PAGE>
Despite the Company's efforts thus far to address Year 2000 compliance,
the Company cannot guarantee that all internal or external systems will be
compliant, or that its business will not be materially affected by any such
non-compliance.
Special Note Concerning Forward Looking Statements
This Report, including, without limitation, Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
forward-looking statements which involve risks and uncertainties. Such
statements can be identified by the use of forward-looking language such as
"will likely result", "may", "are expected to", "is anticipated", "estimate",
"believes", "projected" or other similar words. The Company's actual results
could differ materially from those anticipated in any such forward-looking
statements as a result of various risks, including, without limitation, the
dependence on a single line of business; the failure to close the proposed
acquisition of MRC; rapid technological change; inability to expand into new
markets; inability to make and successfully integrate acquisitions; inability to
attract and retain key personnel and transcriptionists; the effects of
regulatory changes in the healthcare industry; Year 2000 compliance issues; the
potential for significant fluctuations in operating results; and the potential
volatility of the Company's common stock.
12
<PAGE>
Part II - Other Information
Item 1. - Legal Proceedings - Not Applicable
Item 2. - Changes in Securities and Use of Proceeds - Not Applicable
Item 3. - Default upon Senior Securities - Not Applicable
Item 4. - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. - Other Information
a) On August 18, 1998, MedQuist Inc. completed the acquisition
of Signal Transcription Network Inc. The transaction has
been accounted for as a pooling-of- interests. Set forth on
pages F-1 through F-20 is the Company's 1997 audited
financial statements restated for the pooling-of-interests
transaction.
b) Selected Consolidated Financial Data, restated for the
pooling-of-interests discussed above, is attached as
Attachment 5.
Item 6. - Exhibits and Reports on Form 8-K
a) Exhibits:
Consent of Arthur Andersen LLP 23.0
Financial Data Schedule 27.0
b) Reports on Form 8-K were filed on the following dates during
the quarter for which this report is filed:
File Date Item Reported
--------- -------------
September 29, 1998 Signing of Merger Agreement with
The MRC Group, Inc.
13
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................................. F-2
CONSOLIDATED BALANCE SHEETS............................................... F-3
CONSOLIDATED STATEMENTS OF OPERATIONS..................................... F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY........................... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS..................................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-7
FINANCIAL STATEMENT SCHEDULE:
II. Valuation and Qualifying Accounts................................... F-20
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, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MedQuist Inc. and its
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements 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.,
September 18, 1998
F-2
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31
-----------------
1996 1997
------- -------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 9,620 $13,169
Accounts receivable, net of allowance of $318 and $479.... 16,518 22,901
Deferred income taxes..................................... 334 741
Prepaid expenses and other................................ 215 212
------- -------
Total current assets................................... 26,687 37,023
Property and equipment, net............................... 9,249 11,790
Intangible assets, net.................................... 42,436 47,489
Other..................................................... 388 587
------- -------
$78,760 $96,889
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 682 $ 3,935
Accounts payable.......................................... 1,302 1,457
Accrued payroll........................................... 2,352 3,481
Accrued expenses.......................................... 1,925 3,029
------- -------
Total current liabilities.............................. 6,261 11,902
------- -------
Long-term debt.............................................. 1,750 1,405
------- -------
Other long-term liabilities................................. 631 544
------- -------
Deferred income taxes....................................... 1,691 2,710
------- -------
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock, no par value, 60,000 shares authorized,
22,243 and 22,953 shares issued and outstanding........ -- --
Additional paid-in capital................................ 56,804 59,834
Retained earnings......................................... 11,623 20,494
------- -------
Total shareholders' equity............................. 68,427 80,328
------- -------
$78,760 $96,889
======= =======
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Revenues................................................ $57,305 $76,475 $103,910
------- ------- --------
Costs and expenses:
Cost of revenues...................................... 44,062 58,631 78,955
Selling, general and administrative................... 4,325 3,579 4,620
Depreciation.......................................... 2,236 2,872 4,121
Amortization of intangible assets..................... 496 1,176 1,517
------- ------- --------
Total operating expenses........................... 51,119 66,258 89,213
------- ------- --------
Operating income........................................ 6,186 10,217 14,697
Interest expense, net................................... 3,707 1,665 158
------- ------- --------
Income from continuing operations before income taxes... 2,479 8,552 14,539
Income tax provision.................................... 633 3,086 5,192
------- ------- --------
Income from continuing operations....................... 1,846 5,466 9,347
Discontinued operations, net of income taxes:
Income from operations................................ 1,451 -- --
Loss on disposal...................................... (3,180) -- --
------- ------- --------
Income before extraordinary item........................ 117 5,466 9,347
Loss on early extinguishment of debt, net of income
tax benefit........................................... (545) -- --
------- ------- --------
Net income (loss)....................................... (428) 5,466 9,347
Inducement of warrant exercise.......................... -- (707) --
------- ------- --------
Net income (loss) available to common shareholders...... $ (428) $ 4,759 $ 9,347
======= ======= ========
Basic income (loss) per common share (Note 1):
Income from continuing operations..................... $ 0.22 $ 0.31 $ 0.41
Discontinued operations............................... (0.20) -- --
Extraordinary item.................................... (0.07) -- --
Inducement of warrant exercise........................ -- (0.04) --
------- ------- --------
$ (0.05) $ 0.27 $ 0.41
======= ======= ========
Diluted income (loss) per common share (Note 1):
Income from continuing operations..................... $ 0.20 $ 0.28 $ 0.39
Discontinued operations............................... (0.19) -- --
Extraordinary item.................................... (0.06) -- --
Inducement of warrant exercise........................ -- (0.04) --
------- ------- --------
$ (0.05) $ 0.24 $ 0.39
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994.............. 8,341 $ -- $ 3,662 $ 8,729 $12,391
Net loss.............................. -- -- -- (428) (428)
Exercise of Common stock options,
including tax benefit.............. 520 -- 1,210 -- 1,210
Merger costs.......................... -- -- (51) -- (51)
Distributions......................... -- -- -- (937) (937)
Issuance of Common stock in connection
with business acquisition.......... 70 -- 185 -- 185
------- ------- ------- ------- -------
Balance, December 31, 1995.............. 8,931 -- 5,006 7,364 12,370
Net income............................ -- -- -- 5,466 5,466
Exercise of Common stock options,
including tax benefit.............. 98 -- 336 -- 336
Issuance of Common stock in connection
with business acquisitions......... 2,668 -- 5,040 -- 5,040
Sale of Common stock, net of
expenses........................... 7,530 -- 39,442 -- 39,442
Distributions......................... -- -- -- (500) (500)
Exercise of warrants, including
inducement charge.................. 3,016 -- 6,980 (707) 6,273
------- ------- ------- ------- -------
Balance, December 31, 1996.............. 22,243 -- 56,804 11,623 68,427
Net income............................ -- -- -- 9,347 9,347
Exercise of Common stock options,
including tax benefit.............. 533 -- 2,377 -- 2,377
Sale of Common stock, net of
expenses........................... 33 -- 251 -- 251
Distributions......................... -- -- -- (476) (476)
Purchase and retirement of Common
stock, at cost..................... (82) -- (676) -- (676)
Exercise of warrant, including tax
benefit............................ 226 -- 1,078 -- 1,078
------- ------- ------- ------- -------
Balance, December 31, 1997.............. 22,953 $ -- $59,834 $20,494 $80,328
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
Operating Activities:
Net income (loss)..................................... $ (428) $ 5,466 $ 9,347
Adjustments to reconcile net income (loss) to net cash
provided by operating activities --
Depreciation and amortization................... 4,379 4,048 5,638
Amortization of debt discounts.................. 131 704 --
Loss on disposal of discontinued operations..... 4,286 -- --
Loss on early extinguishment of debt............ 545 -- --
Deferred income tax provision (benefit)......... (153) 1,512 270
Changes in assets and liabilities, excluding
effects of acquisitions and divestitures --
Accounts receivable, net..................... (2,324) (4,833) (4,750)
Prepaid expenses and other................... 669 707 227
Other assets................................. (130) 112 (183)
Accounts payable............................. 745 (1,277) (3)
Accrued payroll.............................. (244) 773 817
Accrued expenses............................. 797 (979) 2,206
Other long-term liabilities.................. (91) (79) (87)
-------- -------- -------
Net cash provided by operating activities.... 8,182 6,154 13,482
-------- -------- -------
Investing Activities:
Purchases of property and equipment................... (3,931) (3,702) (6,049)
Acquisitions, net of cash acquired.................... (7) (4,810) (3,707)
Proceeds from divestiture............................. 16,723 -- --
-------- -------- -------
Net cash provided by (used in) investing
activities................................. 12,785 (8,512) (9,756)
-------- -------- -------
Financing Activities:
Repayments of long-term debt and subordinated
payable............................................ (19,373) (29,843) (1,061)
Proceeds for issuance of long-term debt............... -- 18 --
Borrowing under line of credit........................ 265 64 --
Merger costs.......................................... (52) -- --
Dividend to former stockholders....................... (892) (545) (476)
Proceeds from exercise of Common stock options........ -- 226 1,277
Net proceeds from issuance of Common stock............ 796 39,442 251
Purchase and retirement of Common stock, at cost...... -- -- (676)
Deferred financing costs.............................. (178) -- --
Proceeds from exercise of warrants.................... -- -- 508
-------- -------- -------
Net cash provided by (used in) financing
activities................................. (19,434) 9,362 (177)
-------- -------- -------
Net increase in cash and cash equivalents............... 1,533 7,004 3,549
Cash and cash equivalents, beginning of year............ 1,083 2,616 9,620
-------- -------- -------
Cash and cash equivalents, end of year.................. $ 2,616 $ 9,620 $13,169
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background
MedQuist Inc. (the "Company") is a leading national provider of electronic
transcription and document management services to the health care industry in
the United States. MedQuist Inc. was incorporated in New Jersey in 1987 as a
group of outpatient health care businesses affiliated with a nonprofit health
care provider. In May 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).
On May 28, 1998, the Company consummated the acquisition of Digital
Dictation, Inc. ("DDI") and on August 18, 1998, the Company consummated the
acquisition of Signal Transcription Network, Inc. ("Signal"). The acquisitions
were accounted for using the pooling-of-interests method of accounting and the
accompanying financial statements have been retroactively restated to reflect
the combinations.
On September 18, 1998, the Company executed a definitive merger agreement
with The MRC Group, Inc. (see Note 11).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
MedQuist Inc. and its subsidiaries. All material intercompany balances and
transactions have been eliminated.
Pro Forma Presentation for Signal Income Taxes
Prior to its merger with the Company, Signal was taxed as an "S"
Corporation. Accordingly, no tax provision is included in the accompanying
financial statements related to Signal's income. The following pro forma
presentation sets forth the Company's income tax provision, income from
continuing operations and income from continuing operations per share as if
Signal had been taxed as a "C" Corporation for all periods presented.
YEAR ENDED DECEMBER 31
-------------------------
1995 1996 1997
------ ------ -------
Income from continuing operations before income
taxes, as reported............................... $2,479 $8,552 $14,539
Pro forma income tax provision..................... 1,087 3,423 5,632
------ ------ -------
Pro forma income from continuing operations........ $1,392 $5,129 $ 8,907
====== ====== =======
Pro forma income per share from continuing
operations:
Basic............................................ $ 0.16 $ 0.29 $ 0.40
Diluted.......................................... $ 0.15 $ 0.26 $ 0.37
F-7
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Common Stock Splits
On September 9, 1997, the Company effected a three-for-two stock split for
all shares of Common stock. Further, on June 15, 1998, the Company effected a
two-for-one stock split for all shares of Common stock. All share data in the
accompanying financial statements has been retroactively adjusted to reflect
both stock splits.
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 amounts of
revenues and expenses 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 $317, $239 and $121 for the
years ended December 31, 1995, 1996 and 1997, 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, consisting
primarily of cash on deposit with banks. At December 31, 1997, cash and cash
equivalents included a restricted certificate of deposit of $1,339 which was
used to repay a note payable in January 1998.
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 charged to expense as incurred. Additions and
betterments are capitalized. Gains or losses on disposals are charged to
operations. Certain internally developed software costs totaling $171, incurred
have been capitalized in 1997 in accordance with the AICPA's Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which was early adopted by DDI prior to its merger
with the Company. These costs include $142 of salaries and fringe benefits for
software developers and $29 of telecommunications and outside consultant costs.
Such costs will be amortized, beginning in 1998, using the straight-line method
over the estimated useful life of five years.
Intangible Assets
Intangible assets consist primarily of the excess of cost over the net
asset value of acquired businesses and customer lists. The excess of cost over
the net asset value related to the May 1994 acquisition of Transcriptions, Ltd.
(see Note 2) is being amortized over 40 years. The excess of cost over the net
asset value related to subsequent acquisitions and customer lists are being
amortized over 20 years. Subsequent to its acquisitions, the Company continually
evaluates whether later events and circumstances have occurred that indicate
that 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
F-8
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
related undiscounted cash flows in measuring whether the intangible asset should
be written down to fair value. Measurement of the amount of the impairment will
be based on appraisal, market value of similar assets or estimated discounted
future cash flows resulting from the use and ultimate disposition of the assets.
As of December 31, 1997, management believes that no revision to the remaining
useful lives or write-down of intangible assets is required.
Accrued Expenses
Accrued expenses consist primarily of customer deposits, accrued interest,
and accrued professional fees. At December 31, 1996 and 1997, customer deposits
totaled $492 and $496, respectively.
Advertising Costs
The Company charges advertising costs to expense as incurred. Advertising
expense was $191, $166 and $205 for the years ended December 31, 1995, 1996 and
1997, respectively.
Statements of Cash Flow Information
For the years ended December 31, 1995, 1996 and 1997, the Company paid
interest of $3,191, $716 and $197, respectively, and income taxes of $478,
$1,700 and $2,530, respectively. Capital lease obligations of $612, $191 and
$174 were incurred on equipment leases entered into in 1995, 1996 and 1997,
respectively.
The following table displays the net noncash assets and liabilities that
were consolidated as a result of the Company's business acquisitions accounted
for under the purchase method (see Note 2):
YEAR ENDED DECEMBER 31
-------------------------
1995 1996 1997
------- ------ ------
Noncash assets (liabilities):
Accounts receivable.............................. $ 169 $ 364 $1,633
Prepaid expenses and other....................... 19 59 243
Property and equipment........................... 213 446 613
Intangible assets................................ 23,183 6,389 6,588
Accounts payable and accrued expenses............ (299) (335) (1,781)
Long-term debt................................... (379) (305) (252)
------- ------ ------
Net noncash assets acquired................ 22,906 6,618 7,044
Less- Seller notes and payables.................. (22,714) (1,318) (3,337)
Common stock issued.............................. (185) (490) --
------- ------ ------
Net cash paid for business acquisitions.... $ 7 $4,810 $3,707
======= ====== ======
Income Taxes
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. 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.
F-9
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Income (Loss) Per Common Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This statement establishes new standards for computing and presenting
earnings per share and requires the restatement of prior year amounts. The
Company adopted SFAS No. 128 effective December 31, 1997.
Basic income per share is calculated by dividing net income by the weighted
average number of shares of Common stock outstanding for the period. Diluted
income per share is calculated by dividing net income by the weighted average
number of shares of Common stock outstanding for the period, adjusted for the
dilutive effect of Common stock equivalents, which consist of stock options,
using the treasury stock method.
The table below sets forth the reconciliation of the numerators and
denominators of the basic and diluted income per share computations for income
from continuing operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------
1995 1996 1997
--------------------------- --------------------------- ---------------------------
PER SHARE PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ --------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic income from
continuing
operations.......... $1,846 8,505 $0.22 $5,466 17,649 $0.31 $9,347 22,541 $0.41
Effect of dilutive
securities.......... -- 552 (0.02) -- 1,906 (0.03) -- 1,632 (0.02)
------ ----- ----- ------ ------ ----- ------ ------ -----
Diluted income from
continuing
operations.......... $1,846 9,057 $0.20 $5,466 19,555 $0.28 $9,347 24,173 $0.39
====== ===== ===== ====== ====== ===== ====== ====== =====
</TABLE>
In 1997, 540 Common stock options were excluded from the diluted
computation because their effect would be anti-dilutive.
New Accounting Pronouncement
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. Management believes that SFAS
No. 131 will have no effect on the Company's financial statements.
2. ACQUISITIONS
Effective May 1, 1994, the Company purchased substantially all of the
assets of Transcriptions, Ltd. and affiliates ("Transcriptions"), as well as
assumed 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. 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 issue 2,584 shares of Common stock (valued at $4,550 for financial
reporting purposes) on August 31, 1996.
The total purchase price for the Transcriptions acquisition was $44,797.
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.
F-10
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
2. ACQUISITIONS -- (CONTINUED)
The following unaudited pro forma summary presents the results of
operations of the Company as if the payment of the deferred purchase price,
which causes additional amortization and interest expense, had occurred on
January 1, 1995.
YEAR ENDED
DECEMBER 31,
1995
------------
Revenues................................................. $57,305
Income from continuing operations........................ 538
Basic and diluted income per share from continuing
operations............................................. 0.06
From 1995 through 1997, the Company completed twelve acquisitions. The
acquisitions have been accounted for using the purchase method. Pro forma
information is not presented as these acquisitions are not material to the
Company.
In May 1998 and August 1998, the Company completed acquisitions accounted
for under the pooling-of-interests method (see Note 11).
3. DISCONTINUED OPERATIONS
In December 1995, the Company sold its receivables management business for
total consideration of $17,330. The accompanying financial statements reflect
the receivables management business as discontinued operations. For the year
ended December 31, 1995, the discontinued operation generated revenue of $18,767
and net income of $1,451. The 1995 divestiture generated an after-tax loss of
$3,180, which includes net income of $113 related to operations from the
November 14, 1995 measurement date through the December 29, 1995 disposal date.
4. PROPERTY AND EQUIPMENT
DECEMBER 31
-----------------
1996 1997
------- -------
Furniture, equipment and software......................... $15,166 $21,477
Leasehold improvements.................................... 156 335
------- -------
15,322 21,812
Less- Accumulated depreciation and amortization........... (6,073) (10,022)
------- -------
$ 9,249 $11,790
======= =======
5. INTANGIBLE ASSETS
DECEMBER 31
-----------------
1996 1997
------- -------
Excess of cost over net asset value of acquired
businesses.............................................. $34,162 $34,187
Customer lists............................................ 9,972 16,519
Deferred financing costs.................................. 84 100
------- -------
44,218 50,806
Less- Accumulated amortization............................ (1,782) (3,317)
------- -------
$42,436 $47,489
======= =======
F-11
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
6. LONG-TERM DEBT
DECEMBER 31
-----------------
1996 1997
------- -------
Line of credit............................................ $ 329 $ 132
Subordinated convertible 6% promissory note, due September
2003, converted in January 1998......................... 1,288 1,288
Subordinated 5.25% promissory notes, due January 1998..... -- 1,357
Subordinated 4.5% promissory notes, due January 1998...... -- 1,940
Subordinated 6.75% promissory notes, due March 1998....... -- 20
Subordinated 6.75% promissory note, due March 1999........ -- 20
Automobile loan, interest at 10%, due December 1998....... 13 7
Subordinated 5% promissory note, repaid in 1997........... 30 --
Capital lease obligations................................. 772 576
------- -------
2,432 5,340
Less- Current portion..................................... (682) (3,935)
------- -------
$ 1,750 $ 1,405
======= =======
On April 23, 1997, the Company amended its credit facility to provide for a
$10 million unsecured senior revolving line of credit through April 23, 2000.
The revolver bears interest at resetting rates selected by the Company from
various alternatives. The interest rate alternatives are either (i) the greater
of (x) prime rate, (y) the federal funds rate plus 0.5% (z) the bank's
certificate of deposit rate plus 1%, or (ii) LIBOR plus 0.75%. The credit
facility also allows for the Company to finance up to 100% of any acquisitions
of companies that are in the business of providing transcriptions-related
services. The financing of these acquisitions may be carved out of the revolver
and amortized over 20 consecutive quarters. Each acquisition term loan that is
created would permanently reduce the remaining borrowings under the revolver.
In addition to acquisitions, the revolver can be used for working capital
and general corporate purposes. To the extent any amounts under the revolver are
repaid, other than acquisition term loans, the Company may reborrow such
amounts. The credit facility requires the Company to maintain certain financial
and non-financial covenants, including limitations on capital expenditures and
dividends.
For the year ended December 31, 1997, the Company did not incur any
interest expense on the revolving credit facility as there were no borrowings on
this credit facility during the year. For the years ended December 31, 1995 and
1996, the Company incurred interest expense of $498 and $49 on the revolving
credit facility, at a weighted average interest rate of 8.96% and 9.78%. The
highest outstanding borrowings under the revolver during 1995 and 1996 were
$7,332 and $2,534, respectively.
In December 1995, the Company restructured its prior credit facility. In
connection with the restructuring, the Company charged to expense, as an
extraordinary item, the related deferred financing costs of $826, increasing the
1995 net loss by $545.
In January 1998, the subordinated convertible 6% promissory note was
converted into 172 shares of Common stock at a conversion price of $7.48 per
share.
F-12
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
6. LONG-TERM DEBT -- (CONTINUED)
Long-term debt maturities as of December 31, 1997, are as follows:
1998........................................................ $3,970
1999........................................................ 127
2000........................................................ 8
2001........................................................ 8
2002........................................................ 1
2003 and thereafter......................................... 1,288
------
5,402
Less- Interest on capital lease obligations................. (62)
------
$5,340
======
7. SHAREHOLDERS' EQUITY
On September 9, 1997, the Company effected a three-for-two stock split for
all shares of Common stock. Further, on June 15, 1998, the Company effected a
two-for-one stock split for all shares of Common stock.
In May 1996, the Company consummated a secondary public offering of its
Common stock, selling 6,600 shares at a price of $5.67 per share. In June 1996,
the underwriters exercised their overallotment option for an additional 922
shares. After deducting the underwriters' discount and offering expenses, the
net proceeds to the Company were $39,442.
In connection with the 1992 issuance of a senior subordinated note, the
Company sold to the holder for $1,100 warrants to purchase 1,732 shares of Class
A and 1,068 shares of Class B Preferred Stock at an exercise price of $2.50 per
share. Each share of Class A and Class B Preferred Stock was convertible into
one share of Common stock. During 1994, the holder was issued additional
warrants and all warrant exercise prices were reset at $2.43, in accordance with
the antidilution provisions of the original warrant agreement. Simultaneous with
the closing of the secondary stock offering, the Company and the holder agreed
that the holder would exercise the warrants by tendering the $7,000 principal
amount of the senior subordinated notes and simultaneously converting the shares
of Preferred stock received upon such exercise into 2,888 shares of Common
stock. As an inducement for the holder to exercise the warrants and convert the
Preferred stock, the Company issued the holder 128 additional shares of Common
stock. This inducement, valued at $707 or $0.04 per diluted share, has been
recorded as a deduction from the net income available to common shareholders in
1996.
In connection with the Company's May 1994 credit agreement, the Company
issued the agent bank warrants to purchase 226 shares of Common stock at an
exercise price of $2.25 per share. These warrants were exercised on June 12,
1997 by the agent bank for proceeds to the Company of $508.
8. STOCK OPTION PLANS
The Company has three stock option plans that provide for the granting of
options to purchase an aggregate of 5,860 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 Company's board of directors. The stock options vest and
are exercisable over periods determined by the committee.
F-13
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
8. STOCK OPTION PLANS -- (CONTINUED)
Information with respect to the Company's options are as follows:
<TABLE>
<CAPTION>
OPTION PRICE AGGREGATE
SHARES PER SHARE PROCEEDS
------ -------------- ---------
<S> <C> <C> <C>
Outstanding, December 31, 1994................ 1,500 $0.67 - $ 2.25 $ 2,510
Granted..................................... 918 2.42 - 3.17 2,594
Exercised................................... (520) 0.67 - 2.42 (796)
Canceled.................................... (136) 0.67 - 2.50 (259)
----- -------------- -------
Outstanding, December 31, 1995................ 1,762 0.67 - 3.17 4,049
Granted..................................... 961 2.80 - 6.94 4,509
Exercised................................... (98) 1.14 - 5.13 (226)
Canceled.................................... (90) 3.17 (285)
----- -------------- -------
Outstanding, December 31, 1996................ 2,535 1.14 - 6.94 8,047
Granted..................................... 918 5.21 - 16.52 10,988
Exercised................................... (533) 1.14 - 10.41 (1,277)
Canceled.................................... (94) 4.37 - 16.52 (481)
----- -------------- -------
Outstanding, December 31, 1997................ 2,826 $1.14 - $16.52 $17,277
===== ============== =======
</TABLE>
At December 31, 1997, there were 1,255 exercisable options at an aggregate
exercise price of $3,664 and 624 additional options were available for grant
under the plans.
The options outstanding and exercisable by exercise price at December 31,
1997 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.14 - $ 3.83....................... 1,365 6.15 $ 2.40 1,135 $ 2.33
5.13 - 11.31....................... 894 8.72 6.54 90 6.68
13.82 - 16.52....................... 567 9.96 14.41 30 13.81
----- ---- ------ ----- ------
2,826 7.73 $ 6.11 1,255 $ 2.92
===== ==== ====== ===== ======
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and the related interpretations in accounting
for its stock option plans. Had compensation cost for the Company's Common stock
options been determined based upon the fair value of the options at the date of
grant, as prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income (loss) available to common shareholders
would have been the following pro forma amounts:
F-14
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
8. STOCK OPTION PLANS -- (CONTINUED)
YEAR ENDED DECEMBER 31
-----------------------
1995 1996 1997
----- ------ ------
Net income (loss):
As reported........................................ $(428) $4,759 $9,347
Pro forma.......................................... (752) 3,778 7,893
Basic net income (loss) per share:
As reported........................................ (.05) .27 .42
Pro forma.......................................... (.09) .21 .35
Diluted net income (loss) per share:
As reported........................................ (.05) .24 .39
Pro forma.......................................... (.08) .19 .33
The fair value of the options granted is estimated using the Black-Scholes
option pricing model with the following assumptions: dividend yield of 0.0%,
volatility of 50.0%-55.0%, risk-free interest rates of 5.3% to 8.0%, and an
expected life of five years. The above pro forma amounts may not be indicative
of future amounts because option grants prior to January 1, 1995 have not been
included and because future option grants are expected.
9. INCOME TAXES
The income tax provision consists of the following:
YEAR ENDED DECEMBER 31
-----------------------
1995 1996 1997
----- ------ ------
Current:
State.............................................. $ 181 $ 79 $ 721
Federal............................................ 161 1,495 4,201
----- ------ ------
342 1,574 4,922
Deferred........................................... (153) 1,512 270
----- ------ ------
$ 189 $3,086 $5,192
===== ====== ======
YEAR ENDED DECEMBER 31
-----------------------
1995 1996 1997
----- ------ ------
Continuing operations................................ $ 633 $3,086 $5,192
Discontinued operations:
Income from operations............................. 796 -- --
Loss on disposal................................... (959) -- --
Extraordinary item................................... (281) -- --
----- ------ ------
$ 189 $3,086 $5,192
===== ====== ======
F-15
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
9. 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
---------------------------
1995 1996 1997
----- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate.................... 34.0% 34.0% 35.0%
State income taxes, net of federal benefit........... 6.5% 3.0% 3.0%
Impact of Signal's "S" Corporation status............ (21.5)% (3.9)% (2.9)%
Other................................................ 6.5% 3.0% 0.6%
----- ---- ----
25.5% 36.1% 35.7%
===== ==== ====
</TABLE>
Prior to the August 1998 merger (see Note 11), Signal was taxed as an "S"
Corporation. Accordingly, the former Signal shareholders were taxed individually
on their portion of Signal's taxable income. Therefore, no tax provision is
included in the accompanying financial statements related to Signal's net income
(see Note 1).
The tax effected temporary differences that give rise to deferred income
taxes are as follows:
DECEMBER 31
-----------------
1996 1997
------- -------
Deferred tax asset:
Allowance for doubtful accounts.......................... $ 113 $ 177
Vacation accrual......................................... -- 125
Other.................................................... 221 439
------- -------
$ 334 $ 741
======= =======
Deferred tax liability:
Accumulated depreciation................................. $(1,022) $(1,160)
Accumulated amortization................................. (546) (1,220)
Deferred compensation.................................... 224 210
Other.................................................... (347) (540)
------- -------
$(1,691) $(2,710)
======= =======
At December 31, 1997, the tax bases of Signal's net assets approximated
their reported amount for financial statement purposes. However, Signal and the
Company have elected to treat their merger as an asset purchase for income tax
purposes. Accordingly, the Company has recorded a deferred tax asset and an
increase in additional paid-in capital of approximately $4,600 in the quarter
ended September 30, 1998, which represents the tax effect of goodwill that will
be recorded for income tax purposes.
F-16
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
10. COMMITMENTS AND CONTINGENCIES
Rent expense for operating leases was $891, $1,441 and $1,831 for the years
ended December 31, 1995, 1996 and 1997, respectively. Minimum annual rental
commitments for noncancelable operating leases having terms in excess of one
year as of December 31, 1997, are as follows:
1998........................................................ $1,930
1999........................................................ 1,313
2000........................................................ 781
2001........................................................ 484
2002........................................................ 247
2003 and thereafter......................................... 220
------
$4,975
======
The Company has an employment agreement, as amended, 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 $631 and $544 at December 31, 1996 and 1997, respectively, related to these
retirement benefits. The employment agreement also requires the Company to loan
the former Chief Executive Officer's estate the necessary funds to exercise any
options owned by the individual at the time of his death.
The Company has 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.
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.
11. ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1997
On May 28, 1998, the Company completed the acquisition of approximately 94%
of the outstanding capital stock of DDI and on July 31, 1998 acquired the
remaining shares. The Company issued 912 shares in exchange for all DDI shares.
On August 18, 1998, the Company completed the acquisition of Signal, and in
connection therewith issued 619 shares of its Common stock and $l.5 million in
cash in exchange for all Signal capital stock. The acquisitions were accounted
for using the pooling-of-interests method of accounting. Accordingly, the
Company's financial statements have been retroactively restated to reflect the
combinations.
F-17
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
11. ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1997 -- (CONTINUED)
Revenue and net income as previously reported for the years ended December
31, 1997, 1996 and 1995, and as restated for both the DDI and Signal pooling of
interests is as follows:
YEAR ENDED
DECEMBER 31, 1997
---------------------
REVENUES NET INCOME
-------- ----------
Medquist................................................ $ 84,590 $ 7,631
DDI..................................................... 10,026 616
Signal.................................................. 9,294 1,100
-------- --------
Restated................................................ $103,910 $ 9,347
======== ========
YEAR ENDED
DECEMBER 31, 1996
---------------------
REVENUES NET INCOME
-------- ----------
Medquist................................................ $ 61,480 $ 4,184
DDI..................................................... 6,937 440
Signal.................................................. 8,058 842
-------- --------
Restated................................................ $ 76,475 $ 5,466
======== ========
YEAR ENDED
DECEMBER 31, 1995
---------------------
NET INCOME
REVENUES (LOSS)
-------- ----------
Medquist, as reported................................... $ 45,127 $ (1,667)
DDI..................................................... 5,058 104
Signal.................................................. 7,120 1,135
-------- --------
Restated................................................ $ 57,305 $ (428)
======== ========
Prior to its merger with the Company, Signal was taxed as an "S"
Corporation. The above net income amounts do not include a "C" Corporation
income tax provision for Signal of approximately $440, $337 and $454 for the
years ended December 31, 1997, 1996 and 1995, respectively.
On September 18, 1998 the Company signed a definitive merger agreement with
The MRC Group, Inc. ("MRC"). Pursuant to the agreement, the Company will
exchange each share of MRC Common stock and each share of MRC Preferred stock on
an as-converted basis for 0.5163 shares of its Common stock, subject to
adjustment, as defined in the agreement. It is anticipated that the merger will
be accounted for as a pooling-of-interests. The merger is subject to the
approval of the shareholders of both MRC and the Company and is anticipated to
close in December 1998.
F-18
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Year Ended December 31, 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues..................................... $22,784 $24,834 $26,962 $29,330
Income before income taxes................... 3,158 3,511 3,834 4,036
Net income................................... 2,040 2,300 2,486 2,521
Basic net income per share................... 0.09 0.10 0.11 0.11
Diluted net income per share................. 0.09 0.10 0.10 0.10
</TABLE>
Year Ended December 31, 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues..................................... $17,421 $18,049 $19,396 $21,609
Income before income taxes................... 1,400 1,778 2,593 2,781
Net income................................... 968 1,130 1,632 1,736
Basic net income per share................... 0.08 0.08 0.08 0.08
Diluted net income per share................. 0.07 0.07 0.07 0.08
</TABLE>
F-19
<PAGE>
SCHEDULE II
MEDQUIST INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance, Charged to Charged to
Beginning Costs and Other Balance
Description of Year Expenses Accounts Deductions End of Year
----------- ------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowances for doubtful accounts:
1997 $ 318 $ 313 $ 20 $(172) $479
1996 550(a) 44 (272)(a) (4) 318
1995 316 243 487 (496) 550(a)
</TABLE>
- ------------
(a) Includes amounts related to discontinued operations.
F-20
<PAGE>
Attachment 5
MEDQUIST INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operation Data (1):
Revenues $ 6,177 $ 33,738 $ 57,305 $ 76,475 $103,910
Costs and expenses:
Cost of revenues 5,288 26,110 44,062 58,631 78,955
Selling, general and
administrative 1,688 2,798 4,325 3,579 4,620
Depreciation 444 988 2,236 2,872 4,121
Amortization 12 264 496 1,176 1,517
------- -------- -------- -------- --------
Total operating expenses 7,432 30,160 51,119 66,258 89,213
------- -------- -------- -------- --------
Operating income (loss) (1,255) 3,578 6,186 10,217 14,697
Interest expense (income), net 1,457 2,782 3,707 1,665 158
------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes (2,712) 796 2,479 8,552 14,539
Income tax provision (benefit) (2) (1,290) 3 633 3,086 5,192
------- -------- -------- -------- --------
Income (loss) from continuing
operations (2) (1,422) 793 1,846 5,466 9,347
Discontinued operations (3) 3,746 1,612 (1,729) -- --
Extraordinary item (4) -- -- (545) -- --
------- -------- -------- -------- --------
Net income (loss) 2,324 2,405 (428) 5,466 9,347
Inducement deduction (5) -- -- -- (707) --
------- -------- -------- -------- --------
Net income (loss) available to common
shareholders $ 2,324 $ 2,405 $(428) $ 4,759 $ 9,347
======= ======== ======== ======== ========
Basic income (loss) per common share:
Continuing operations (2) $ (0.14) $ 0.10 $0.22 $ 0.31 $ 0.41
Discontinued operations (3) 0.37 0.19 (0.20) -- --
Extraordinary item (4) -- -- (0.07) -- --
Inducement deduction (5) -- -- -- (0.04) --
------- -------- -------- -------- --------
$ 0.23 $ 0.29 $ (0.05) $ 0.27 $ 0.41
======= ======== ======== ======== ========
Diluted income (loss) per common share:
Continuing operations (2) $ (0.14) $ 0.10 $ 0.20 $ 0.28 $ 0.39
Discontinued operations (3) 0.37 0.19 (0.19) -- --
Extraordinary item (4) -- -- (0.06) -- --
Inducement deduction (5) -- -- -- (0.04) --
------- -------- -------- -------- --------
$ 0.23 $ 0.29 $ (0.05) $ 0.24 $ 0.39
======= ======== ======== ======== ========
Balance Sheet Data:
Working capital $ 2,898 $ 2,097 $ 6,078 $ 20,426 $ 25,121
Total assets 31,320 54,192 61,610 78,760 96,889
Long-term debt, net of current portion 13,245 30,891 16,178 1,750 1,405
Shareholders' equity 9,905 12,391 12,369 68,427 80,328
</TABLE>
(1) Transcriptions, Ltd. was acquired effective May 1, 1994. All
prior businesses have been treated as discontinued operations.
(2) Signal Transcription Network, Inc. ("Signal") was an "S" Corporation
prior to its merger with MedQuist, and accordingly, the statement of
operations data does not include a provision for income taxes on Signal's
income. The following information sets forth a pro forma presentation of
the income tax provision (benefit), income (loss) from continuing
operations and income (loss) from continuing operations per share assuming
Signal was a "C" corporation for all periods presented.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1993 1994 1995 1996 1997
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing operations before
income taxes, as reported $(2,712) $ 796 $2,479 $8,552 $14,539
Pro forma income tax provision (benefit) (1,134) 309 1,087 3,423 5,632
----------------------------------------------------
Pro forma income (loss) from continuing
operations $(1,578) $ 487 $1,392 $5,129 $ 8,907
====================================================
Pro forma income (loss) from continuing
operations per share:
Basic $ (0.16) $0.06 $ 0.16 $ 0.29 $ 0.40
====================================================
Diluted $ (0.16) $0.06 $ 0.15 $ 0.26 $ 0.37
====================================================
</TABLE>
(3) On November 14, 1995, the Company executed a letter of intent to sell its
receivables management business. The operations and net assets of its
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.
(4) Represents the loss on early extinguishment of debt, net of income taxes.
(5) Represents issuance of 128 shares of Common Stock to induce a warrant
holder to exercise. The Company recorded a $707 non-recurring deduction
from net income available to common shareholders. See Note 7 of Notes to
Consolidated Financial Statements.
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in Item 5 of this Form 10-Q into the Company's previously filed
Form S-8 Registration Statements File Nos. 333-09541, 333-09543 and 033-51508,
Form S-3 Registration Statement File No. 333-58113 and Form S-4 Registration
Statements File Nos. 333-57265 and 333-66447.
ARTHUR ANDERSEN LLP
Philadelphia, PA
November 12, 1998
F-23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MedQuist Inc.
Registrant
Date: November 12, 1998
By /s/ John R. Emery
-----------------------
John R. Emery
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> $19,211
<SECURITIES> 0
<RECEIVABLES> 27,262
<ALLOWANCES> 765
<INVENTORY> 0
<CURRENT-ASSETS> 46,790
<PP&E> 27,279
<DEPRECIATION> 14,112
<TOTAL-ASSETS> 110,426
<CURRENT-LIABILITIES> 13,759
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 66,391
<TOTAL-LIABILITY-AND-EQUITY> 110,426
<SALES> 0
<TOTAL-REVENUES> 104,360
<CGS> 0
<TOTAL-COSTS> 79,096
<OTHER-EXPENSES> 11,163
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60
<INCOME-PRETAX> 14,408
<INCOME-TAX> 5,354
<INCOME-CONTINUING> 9,054
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,054
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.36
</TABLE>
