SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 28, 1998
MedQuist Inc.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 0-19941 22-253 1298
- ----------------- ----------- ------------------
(State or other (Commission (IRS Employer
jurisdiction File Number) Identification No.)
of incorporation)
5 Greentree Centre, Suite 311, Marlton, NJ 08053
------------------------------------------------------
(address of principal executive offices) (Zip Code)
Registrants's telephone number, including area code: (609) 596-8877
(Former name or former address, if changed since last report)
<PAGE>
EXPLANATORY NOTE
This Amendment No. 1 on Form 8-K/A amends Item 7 of the May 28, 1998
Current Report on Form 8-K of the Registrant relating to the
combination of a wholly owned subsidiary of the Registrant and Digital
Dictation, Inc. by including the financial statements and pro forma
financial information required pursuant to Item 7(a) and 7(b).
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Information that is required to be filed pursuant to
instruction (a) of Item 7 is attached hereto beginning on page
F-2.
(b) Pro Forma financial information that is required to be filed
pursuant to instruction (b) of Item 7 is attached hereto
beginning on page F-22.
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 hereunto duly authorized.
MedQuist Inc.
---------------
(Registrant)
Date: June 29, 1998
/s/ John R. Emery
----------------------------
John R. Emery, Vice President &
Chief Financial Officer
<PAGE>
INDEX TO DDI FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
1. DDI unaudited condensed financial statements as of March 31, 1998. F-2
2. DDI Audited Financial Statements for the years ended December 31, 1997 and 1996. F-22
</TABLE>
F-1
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
---------- -----------
<S> <C> <C>
Current Assets
Cash and equivalents $ 171,140 $ 2,530
Accounts receivable 1,481,326 1,709,503
Employee receivables 13,626 7,605
Prepaid expenses and other 41,998 22,898
---------- ----------
Total current assets 1,708,090 1,742,536
---------- ----------
Property and equipment, net 1,863,093 1,546,079
---------- ----------
Total assets $3,571,183 $3,288,615
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Borrowings under line of credit $ 214,000 $ 132,318
Accounts payable 398,830 313,113
Accrued payroll and payroll taxes 418,784 325,894
Current portion of long-term debt 5,543 6,547
Current potion of capital lease obligations 15,395 24,314
Current income taxes payable 228,050 405,575
Current deferred income taxes 41,000 41,000
---------- ----------
Total current liabilities 1,321,602 1,248,761
---------- ----------
Long-term debt, non-current portion -- 576
Non-current deferred income taxes 290,000 339,000
Stockholders' equity
Common stock, par value $0.01 per share, 20,000,000
Authorized, 6,325,503 shares issued and outstanding
at March 31, 1998 63,255 62,816
Additional paid-in capital 672,915 610,900
Retained earnings 1,223,411 1,026,562
---------- ----------
Total stockholders' equity 1,959,581 1,700,278
---------- ----------
Commitments - Note 8 -- --
---------- ----------
Total liabilities and stockholders' equity $3,571,183 $3,288,615
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Revenues $ 2,996,787 $ 1,994,391
Cost of services 1,960,296 1,275,589
----------- -----------
Gross profit 1,036,491 718,802
General and administrative expenses 716,019 524,128
----------- -----------
Operating income 320,472 194,674
Other income (expense)
Interest and other income 3,415 958
Interest expense (4,038) (4,507)
----------- -----------
Income before income taxes 319,849 191,125
Provision for income taxes 123,000 72,000
----------- -----------
Net income $ 196,849 $ 119,125
=========== ===========
Basic net income per share $ .03 $ .02
=========== ===========
Weighted average shares outstanding 6,289,401 6,257,480
=========== ===========
Diluted net income per share $ .03 $ .02
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income $ 196,849 $ 119,125
Changes to operations not affecting cash
Depreciation and amortization 126,466 74,210
Deferred income tax provision (49,000) --
Changes in operating assets and liabilities
Accounts receivable 228,177 148,631
Employee receivables (6,021) 1,372
Prepaid expenses and other (19,100) (11,762)
Accounts payable 85,719 127,494
Accrued payroll and payroll taxes 92,890 189,707
Current income taxes payable (177,525) (10,000)
--------- ---------
Net cash provided by operating activities 478,455 638,777
--------- ---------
Cash flows from investing activities
Additions to property and equipment (443,480) (156,953)
--------- ---------
Net cash from investing activities (443,480) (156,953)
--------- ---------
Cash flows from financing activities
Net (decrease) in borrowing under line of credit 81,682 (329,029)
Issue of common stock - Employee Stock Purchase Plan 39,932 --
Issue of common stock - exercise of stock options 22,522 --
Increase (reduction) of long-term debt (1,582) 31,905
Reduction of capital lease obligations (8,919) (3,649)
--------- ---------
Net cash used by financing activities 133,635 (300,773)
--------- ---------
Increase in cash 168,610 181,051
Cash and cash equivalents at beginning of period 2,530 88,815
--------- ---------
Cash and cash equivalents at end of period
$ 171,140 $ 269,866
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
DIGITAL DICTATION, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - The Company
- --------------------
Digital Dictation, Inc. (the "Company" or "DDI") provides transcription
services for various medical facilities. The Company is incorporated in the
State of Delaware and commenced operations during 1989.
Note 2 - Presentation of Financial Statements
- ---------------------------------------------
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, these financial statements do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. For further information,
reference is made to the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997.
Note 3 - Property and Equipment
- -------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1997 1997
----------- -----------
<S> <C> <C>
Dictation and other equipment $ 2,798,267 $ 2,480,673
Furniture and fixtures 96,280 94,157
Leasehold improvements 67,146 64,671
Automobile 23,400 23,400
Software 377,269 255,981
----------- -----------
Total Property Assets 3,362,362 2,918,882
Accumulated depreciation and amortization (1,499,269) (1,372,803)
----------- -----------
$ 1,863,093 $ 1,546,079
=========== ===========
</TABLE>
Note 4 - Borrowings under Line of Credit
- ----------------------------------------
The Company has a $700,000 line of credit available from Crestar Bank
subject to annual reviews and expires December 3, 2002. Interest is payable at
prime plus one per cent per annum (9.5% at March 31, 1998). The line of credit
is secured by all assets of the Company. There were borrowings of $214,000 under
this line of credit at March 31, 1998.
Borrowings under this line of credit are solely for working capital
purposes. The related loan and security agreement requires the Company to submit
annual reviewed financial statements within 120 days after the end of each
fiscal year, and unaudited interim financial statements within 20 days after the
end of each fiscal quarter. The Company is in compliance with these reporting
covenants.
F-5
<PAGE>
Note 5 - Long-term Debt
- -----------------------
March 31, December 31,
1998 1997
------- -------
Automobile installment loan, 10% interest,
due December 1998 $ 5,543 $ 7,123
------- -------
5,543 7,123
Less current portion (5,543) (6,547)
------- -------
$ -- $ 576
======= =======
Note 6 - Capital Leases
The Company leases various equipment under long-term contracts. Property
and equipment includes the following amounts for leases that have been
capitalized:
March 31, December 31,
1998 1997
--------- ---------
Dictation and other equipment $ 104,515 $ 104,515
Allowance for depreciation (63,430) (58,204)
--------- ---------
$ 41,085 $ 46,311
========= =========
Note 7 - Stock Option Plans
- ---------------------------
In March 1996 the Board of Directors authorized the establishment of a
non-qualified stock option plan for its directors, full-time employees and
consultants (the "Plan") and reserved 1,300,000 shares of the Company's common
stock for issuance upon the exercise of options granted under this plan. In
September, 1997, the Board of Directors approved reserving an additional 300,000
shares of the Company's common stock for issuance upon the exercise of options
granted under this Plan. All options granted to date under the Plan are granted
at fair market value as of the date of the grant, and have a maximum term of ten
years.
Note 8 - Commitments
- --------------------
The Company rents office space under two agreements which expire August 31, 1999
F-6
<PAGE>
and October 31, 1999.
Future minimum lease payments under capital leases for equipment and
non-cancelable operating leases for office space, equipment and an automobile as
of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending Capital Operating
March 31, Leases Leases Total
--------- ------------- ------------ -------------
<S> <C> <C> <C>
1999 $ 15,995 $ 97,479 $ 113,474
2000 42,967 42,967
------------- ------------ -------------
Total minimum lease payments 15,995 $ 140,446 $ 156,441
============ =============
Amount representing interest (600)
-------------
Present value of net minimum lease payments $ 15,395
=============
</TABLE>
Rent expense under operating leases for the three months ended March 31,
1998 and 1997 totaled $24,967 and $23,921, respectively.
F-7
<PAGE>
DIGITAL DICTATION, INC.
AUDITED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Digital Dictation, Inc.
Vienna, Virginia
We have audited the accompanying balance sheets of Digital Dictation, Inc.
as of December 31, 1997 and 1996, and the related statements of income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Digital Dictation, Inc. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
McLean, Virginia
January 26, 1998
F-9
<PAGE>
DIGITAL DICTATION, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
ASSETS - Note 5 1997 1996
---------- ----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,530 $ 88,815
Accounts receivable (net of $40,000 allowance for doubtful
accounts at December 31, 1997) - Note 3 1,709,503 1,156,841
Employee receivables 7,605 2,762
Prepaid expenses and other 22,898 28,702
---------- ----------
Total current assets 1,742,536 1,277,120
Property and equipment, net - Notes 4 and 8 1,546,079 879,983
---------- ----------
Total assets $3,288,615 $2,157,103
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Borrowings under line of credit - Note 5 $ 132,318 $ 329,029
Accounts payable 313,113 151,485
Accrued payroll and payroll taxes 325,894 115,060
Current income taxes payable - Note 6 405,575 27,000
Current portion of long-term debt - Note 7 6,547 5,931
Current portion of capital lease obligations - Notes 8 and 14 24,314 33,218
Current deferred income taxes - Note 6 41,000 351,000
---------- ----------
Total current liabilities 1,248,761 1,012,723
Long-term debt, non current portion - Note 7 576 7,127
Capital lease obligations, non current portion - Notes 8 and 14 23,846
Non current deferred income taxes - Note 6 339,000 69,000
Commitments - Note 14
Stockholders' equity
Common stock, par value $.01 per share, 20,000,000 shares authorized,
6,281,612 and 6,257,480 shares issued and
outstanding at December 31, 1997 and 1996, respectively 62,816 62,575
Additional paid-in capital 610,900 571,496
Retained earnings 1,026,562 410,336
---------- ----------
Total stockholders' equity 1,700,278 1,044,407
---------- ----------
Total liabilities and stockholders' equity $3,288,615 $2,157,103
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
DIGITAL DICTATION, INC.
STATEMENTS OF INCOME
Years ended December 31,
-------------------------------
1997 1996
------------ ------------
Revenues $ 10,025,895 $ 6,936,730
Cost of services 6,398,276 4,490,239
------------ ------------
Gross profit 3,627,619 2,446,491
General and administrative expenses 2,598,116 1,716,691
------------ ------------
Operating income 1,029,503 729,800
Other income (expense)
Interest and other income 2,892 2,054
Interest expense (23,169) (39,187)
------------ ------------
(20,277) (37,133)
------------ ------------
Income before income taxes 1,009,226 692,667
Income taxes - Note 6 393,000 253,000
------------ ------------
Net income $ 616,226 $ 439,667
============ ============
Basic earnings per share - Note 13 $ .10 $ .07
============ ============
Diluted earnings per share - Note 13 $ .09 $ .07
============ ============
See accompanying notes to financial statements.
F-11
<PAGE>
DIGITAL DICTATION, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996 and 1997
<TABLE>
<CAPTION>
Additional Retained Total
Common Paid-in Earnings Stockholders'
Stock Capital (deficit) Equity
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $ 62,575 $ 571,496 $ (29,331) $ 604,740
Net income 439,667 439,667
----------- ----------- ----------- -----------
Balance at December 31, 1996 62,575 571,496 410,336 1,044,407
Issue of Common Stock - Employee
Stock Purchase Plan (18,733 shares) 187 31,659 31,846
Issue of Common Stock upon
exercise of Stock Options
(5,399 shares) 54 7,745 7,799
Net income 616,226 616,226
----------- ----------- ----------- -----------
Balance at December 31, 1997 $ 62,816 $ 610,900 $ 1,026,562 $ 1,700,278
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
DIGITAL DICTATION, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 616,226 $ 439,667
Charges to operations not affecting cash:
Depreciation and amortization 371,209 282,132
Provision for doubtful accounts 40,000
Net deferred income tax provision (40,000) 218,000
Changes in operating assets and liabilities:
Accounts receivable (592,662) (442,635)
Employee receivables (4,843) 20,262
Prepaid expenses and other 5,804 (4,122)
Accounts payable 161,628 (60,858)
Accrued payroll and payroll taxes 210,834 (14,040)
Current income taxes payable 378,575 27,000
----------- -----------
Net cash provided by operating activities 1,146,771 465,406
----------- -----------
Cash flows from investing activities
Additions to property and equipment (1,037,305) (316,486)
----------- -----------
Net cash used by investing activities (1,037,305) (316,486)
----------- -----------
Cash flows from financing activities
Borrowings under line of credit (196,711) 64,282
Proceeds from long-term debt 18,000
Issue of Common Stock - Employee Stock Purchase Plan 31,846
Issue of Common Stock -- Stock Option Plan 7,799
Dividends paid to former stockholder (44,791)
Principal payments on long-term debt (5,935) (61,332)
Principal payments on capital lease obligations (32,750) (68,798)
----------- -----------
Net cash used by financing activities (195,751) (92,639)
----------- -----------
Increase (decrease) in cash and cash equivalents (86,285) 56,281
Cash and cash equivalents at beginning of year 88,815 32,534
----------- -----------
Cash and cash equivalents at end of year $ 2,530 $ 88,815
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE>
DIGITAL DICTATION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - ORGANIZATION
Digital Dictation, Inc. (the "Company" or "DDI") provides transcription
services for various medical facilities. The Company is incorporated in the
state of Delaware and commenced operations during 1989.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Revenue Recognition: Revenue for transcription services is recognized when
the services are provided.
Property and Equipment: Property and equipment is stated at cost or, in the
case of equipment acquired under capital leases, at the present value of future
lease payments, less accumulated depreciation and amortization. Internally
developed software costs of $170,596 incurred in 1997 have been capitalized in
accordance with an AICPA exposure draft dated December 17, 1996 of a Statement
of Position, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." These costs include $141,989 of salaries and fringe
benefits for software developers and $28,607 of telecommunications and outside
consultant costs. Repair and maintenance expenditures are charged to operations
in the period incurred. Depreciation is computed under the straight line method
for financial reporting purposes and accelerated methods for income tax
purposes. Equipment, furniture, fixtures, automobile, and leasehold improvements
are depreciated over five to seven years. Purchased software is amortized using
the straight line method over five years. Internally developed software will be
amortized over five years when the system is placed in operation.
Income Taxes: The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Cash and Cash Equivalents: The Company considers all highly liquid
securities purchased with a maturity of three months or less to be cash
equivalents.
Net Income Per Share: The Company has adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share" as of December 31,
1997 and restated 1996 earnings per share. Earnings per common share is based on
the weighted average shares outstanding during the year. Diluted earnings per
common share gives effect to all dilutive potential common shares outstanding
during the year.
F-14
<PAGE>
Stock Options: The Company applies APB Opinion 25 and related Interpretations
in accounting for its stock option plans.
NOTE 3 - CONCENTRATION OF CREDIT RISK
The Company provides services on credit to its clients, which are medical
facilities located throughout the United States. The Company performs ongoing
credit evaluation of its clients and requires no collateral. The Company has had
minimal credit losses on its accounts receivable and the allowance for doubtful
accounts is considered adequate at December 31, 1997. No allowance was
considered necessary at December 31, 1996.
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
December 31,
-----------------------------
1997 1996
----------- -----------
Dictation and other equipment $ 2,480,673 $ 1,706,294
Furniture and fixtures 94,157 84,069
Leasehold improvements 64,671 55,083
Automobile 23,400 23,400
Software 255,981 44,850
----------- -----------
2,918,882 1,913,696
Accumulated depreciation and amortization (1,372,803) (1,033,713)
----------- -----------
$ 1,546,079 $ 879,983
=========== ===========
NOTE 5 - BORROWINGS UNDER LINE OF CREDIT
The Company has a $500,000 revolving line of credit with Crestar Bank
subject to annual reviews and expires December 3, 2002. This replaces a $450,000
line of credit with Merrill Lynch Business Financial Services, Inc as of June
30, 1997. Borrowings under these lines of credit at December 31, 1997 and 1996
amounted to $132,318 and $329,029, respectively. Interest is payable at prime
plus one per cent per annum (9.5% at December 31, 1997). The line of credit is
secured by all assets of the Company.
Borrowings under this line of credit are solely for working capital purposes.
The related loan and security agreement requires the Company to, among
other things, submit annual reviewed financial statements within 120 days after
the end of each fiscal year, and unaudited interim financial statements within
20 days after the end of each month. The Company is in compliance with these
reporting covenants.
NOTE 6 - INCOME TAXES
The Company is taxed as a C corporation. Effective January 1, 1997 the
Company converted from the cash method to the accrual method of reporting for
Federal income tax purposes. The cumulative difference between cash and accrual
basis tax reporting as of December 31, 1996 is $935,961. One quarter of this
amount is required to be included in the Company's taxable income during each of
the four years 1997 to 2000.
F-15
<PAGE>
NOTE 6 - INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes for the year ended December 31,
1997 and December 31, 1996 consists of the following:
1997 1996
--------- ---------
Current tax expense
Federal $ 364,000 $ 27,000
State 69,000 8,000
--------- ---------
433,000 35,000
--------- ---------
Deferred tax expense (benefit)
Federal (34,000) 183,000
State (6,000) 35,000
--------- ---------
(40,000) 218,000
--------- ---------
Total $ 393,000 $ 253,000
========= =========
Components of net deferred tax assets and liabilities as of December 31,
1997 and 1996 are as follows:
1997 1996
-------- --------
Deferred tax liabilities:
Accounts receivable $ $440,000
Prepaid expenses 2,000
Prepaid income taxes 6,000
Property and equipment 161,000 69,000
Cash to accrual adjustment 267,000
-------- --------
Total deferred tax liabilities 428,000 517,000
Deferred tax assets:
Accounts receivable allowance 15,000
Moving reserve 19,000
Accounts payable 53,000
Accrued payroll 14,000 44,000
-------- --------
Total deferred tax assets 48,000 97,000
-------- --------
Less valuation allowance -- --
-------- --------
Net deferred tax assets 48,000 97,000
-------- --------
Net deferred tax liabilities as of December 31, 1997
and 1996 (including $41,000 and $351,000,
respectively, classified as current) $380,000 $420,000
======== ========
F-16
<PAGE>
NOTE 6 - INCOME TAXES (CONTINUED)
Income tax expense for the years ended December 31, 1997 and 1996, respectively,
differ from the Federal statutory rate as follows:
Years ended December 31,
------------------------
1997 1996
---- ----
Statutory Federal income tax rate 34.0% 34.0%
Effect of graduated rates (1.5)
State income taxes, net of Federal tax benefit 4.0 4.0
Other 0.6 0.0
---- ----
38.6% 36.5%
==== ====
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
-------------------------
1997 1996
-------- --------
Automobile installment loan, 10% interest
due December 1998 $ 7,123 $ 13,058
Less current portion (6,547) (5,931)
-------- --------
$ 576 $ 7,127
======== ========
NOTE 8 - CAPITAL LEASES
The Company leases various equipment under long-term contracts. Property and
equipment includes the following amounts for leases that have been capitalized:
December 31,
-----------------------------
1997 1996
--------- ---------
Dictation and other equipment $ 104,515 $ 104,515
Allowance for depreciation (58,204) (37,301)
--------- ---------
$ 46,311 $ 67,214
========= =========
Depreciation of these assets, computed by the straight line method over
five years, is included in depreciation expense.
F-17
<PAGE>
NOTE 9 - FIXED STOCK OPTION PLANS
At December 31, 1997 and 1996, the Company has a stock-based compensation
plan, which is described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized for its fixed option plan. Had compensation cost for the
Company's stock-based compensation plan been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
SFAS No. 123, Accounting for Stock Based Compensation, the Company's net income
and earnings per share (EPS) for 1997 and 1996 would have been reduced to the
pro forma amounts indicated below:
1997 1996
--------- ---------
Net income as reported $ 616,226 $ 439,667
Pro forma $ 563,226 $ 408,667
Basic EPS as reported $ .10 $ .07
Pro forma $ .09 $ .07
Diluted EPS as reported $ .09 $ .07
Pro forma $ .08 $ .07
The effect of applying SFAS No.123 is not likely to be representative of
the effects on reported net income for future years due, among other things, to
the effects of vesting.
In March 1996, the Board of Directors authorized the establishment of a
non-qualified stock option plan for its directors, full-time employees and
consultants (the Plan) and reserved 1,300,000 shares of the Company's common
stock for issuance upon the exercise of options granted under this Plan. In
September, 1997, the Board of Directors approved reserving an additional 300,000
shares of the Company's common stock for issuance upon the exercise of options
granted under this Plan. All options granted to date under the Plan are granted
at fair market value as of the date of the grant, and have a maximum term of ten
years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
1997 1996
-------- ------
Expected volatility 60% 60%
Risk-free interest rate 5.4% 6.3%
Expected lives 4 years 5 years
Dividend yield - -
F-18
<PAGE>
NOTE 9 - FIXED STOCK OPTION PLANS (CONTINUED)
A summary of the status of the Company's stock option plans as of December 31,
1997 and 1996, and changes during the year, is presented below:
<TABLE>
<CAPTION>
1997 1996
---------------------------- -------------------------
Weighted Weighted
Fixed options Shares Average Price Shares Average Price
------------- ---------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 936,346 $ 0.76 -- --
Granted 549,925 1.50 936,796 $ 0.76
Exercised (5,399) 1.44 -- --
Forfeited (110,423) .79 (450) .75
---------- --------
Outstanding at end of year 1,370,449 1.06 936,346 $ 0.76
========== ========
Options exercisable at end of year 352,421 --
Weighted-average fair value of
options granted during the year $ 0.48 $ 0.23
========== ========
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------------
Number Weighted- Weighted- Number Weighted-
Range of Outstanding at Average Average Exercisable at Average
Exercise December 31, Remaining Exercise December 31, Exercise
Price 1997 Contractual Life Price 1997 Price
----------- ------------------ ---------------- ----------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$ .75 - $1.00 1,020,975 8.45 years $ .77 257,421 $ .77
$1.01 - $1.75 166,122 4.33 years 1.50 95,000 1.50
$1.76 - $2.50 183,352 9.83 years 2.27
--------- -------
1,370,449 8.13 years 1.06 352,421 .97
========= =======
</TABLE>
NOTE 10 - EMPLOYEE BENEFITS
During 1996, the Company established a 401(k) plan for its employees. This
plan is funded jointly by employee and employer contributions. Employees are
allowed to contribute up to 15% of their salary subject to an overall
limitation. The Company contributes 20% of the amount contributed by employees,
limited to 5% of the employee's salary. Employer contributions to this plan for
the year ended December 31, 1997 and 1996 totaled $7,801 and $3,314
respectively.
In December 1996, the Board of Directors approved an Employee Stock
Purchase Plan and reserved 150,000 shares of the Company's common stock. The
Company has issued 18,733 shares under the Plan as of December 31, 1997.
In March 1997, the Board of Directors authorized establishing a Section 125
Cafeteria Plan for the Company's employees.
F-19
<PAGE>
NOTE 11 - CASH FLOW INFORMATION
Non cash investing and financing activities excluded from the statements of
cash flows consist of property and equipment acquired under capital leases
totaling $104,390 for the year ended December 31, 1996. Net cash provided by
operating activities includes interest payments of $23,169 and $39,187 for the
years ended December 31, 1997 and 1996, respectively. The Company made income
tax payments of $35,425 and $25,000 during 1997 and 1996 respectively.
NOTE 12 - MAJOR CUSTOMERS
The Company has no customer exceeding 10% of total revenues for the year
ended December 31, 1997. Revenues from several contracts with the U.S. Naval and
two Veterans Administration hospitals aggregated approximately $928,000 for the
year ended December 31, 1996. Revenues exceeding 10% of total revenues from one
nonprofit hospital group aggregated approximately $867,000 for the year ended
December 31, 1996. Revenues exceeding 10% of total revenues from one for-profit
hospital group aggregated approximately $750,000 for the year ended December 31,
1996.
NOTE 13 - EARNINGS PER SHARE DISCLOSURE
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- --------- -------
<S> <C> <C> <C>
For Year Ended December 31, 1997
Basic earnings per share
Income available to common stockholders $ 616,266 6,259,765 $ .10
Effect of Dilutive Securities
Stock options 568,018
--------- --------- -------
Diluted earnings per share
Income available to common stockholders, including
assumed conversions $ 616,266 6,827,783 $ .09
========= ========= =======
For Year Ended December 31, 1996
Basic earnings per share
Income available to common stockholder $ 439,667 6,257,480 $ .07
Effect of Dilutive Securities
Stock options 95,188
--------- --------- -------
Diluted earnings per share
Income available to common stockholders, including
assumed conversions $ 439,667 6,352,668 $ .07
========= ========= =======
</TABLE>
Options to purchase 183,550 shares of common stock at $2.25 to $2.38 per
share were outstanding during October to December, 1997 but were not included in
the computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares. The options, which expire
from October to December, 2007, were still outstanding at the end of 1997.
F-20
<PAGE>
NOTE 14 - COMMITMENTS
The Company rents office space under two agreements that expire August 31,
1999 and October 31, 1999. DDI leases an automobile under a three year operating
lease through July 1998 at a cost of $461 per month. The Company also leases a
copier under a three year operating lease through March 18, 2000 at a cost of
$554 per month.
The future minimum lease payments under capital leases (see Note 8) and
non-cancelable operating leases for office space, equipment, and automobile as
of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases Total
--------- --------- ---------
<S> <C> <C> <C>
Year Ending December 31,
1998 $ 25,448 $ 101,693 $ 127,141
1999 -- 72,845 72,845
2000 -- 1,661 1,661
--------- --------- ---------
Total minimum lease payments 25,448 $ 176,199 $ 201,647
========= =========
Amount representing interest (1,134)
---------
Present value of net minimum
lease payments $ 24,314
=========
</TABLE>
Rent expense under operating leases for the years ended December 31, 1997
and 1996 totaled $96,356 and
F-21
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information combines the
historical statements of operations of MedQuist and DDI (the "Combined Company")
after giving effect to the Merger, as if the Merger had occurred on January 1,
1995, and the historical balance sheets of the Combined Company as if the
Merger had occurred on March 31, 1998, in each case using the "pooling of
interests" method of accounting. The following unaudited pro forma information
should be read in conjunction with the historical financial statements of each
of MedQuist and DDI.
The pro forma amounts are presented for informational purposes only and are not
necessarily indicative of the results of operations of the combined company that
would have actually occurred had the Merger been consummated as of January 1,
1995 or of the financial condition of the combined company had the Merger been
consummated as of March 31, 1998 or of the future results of operations or
financial condition of the combined company. The pro forma information does not
reflect any synergies anticipated as a result of the Merger, in particular the
elimination of costs associated with DDI's status as a public company and other
administrative savings. There can be no assurances that such synergies will be
realized. In addition, the pro forma statement of operations data does not
reflect transaction costs related to the Merger and the pro forma information
does not reflect other costs associated with combining the companies, if any,
which cannot currently be estimated.
The Combined Company
Unaudited Pro Forma Combined Statement of Operations
For The Three Months Ended March 31, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
--------------------------
MedQuist DDI Adjustments Combined
------- ------- ----------- --------
<S> <C> <C> <C> <C>
Revenues $27,396 $ 2,997 $ -- $30,393
Cost and expenses:
Cost of revenues 20,211 1,961 590 (a) 22,762
Selling, general and administrative 1,357 716 (716)(a) 1,357
Depreciation 1,075 -- 126 (a) 1,201
Amortization 440 -- -- 440
------- ------- ----------- -------
Total operating expenses 23,083 2,677 -- 25,760
------- ------- ----------- -------
Operating income 4,313 320 -- 4,633
Interest expense 14 -- -- 14
------- ------- ----------- -------
Income before income taxes 4,299 320 -- 4,619
Income tax provision 1,655 123 -- 1,778
------- ------- ----------- -------
Net income $ 2,644 $ 197 $ -- $ 2,841
======= ======= =========== =======
Net income per share:
Basic $ 0.12 $ 0.13
Diluted
0.12 0.12
Weighted average shares outstanding:
Basic 21,742 906 (b) 22,648
Diluted 22,970 986 (b) 23,956
</TABLE>
- ----------
(a) Represents reclassifications to conform DDI's selling, general and
administrative expenses to MedQuist's financial reporting presentation.
F-22
<PAGE>
(b) Represents the DDI weighted average shares outstanding for the period
adjusted for the Exchange Ratio of 0.1440899
F-23
<PAGE>
The Combined Company
Unaudited Pro Forma Combined Statement of Operations
For The Three Months Ended March 31, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
--------------------------
MedQuist DDI Adjustments Combined
------- ------- ----------- --------
<S> <C> <C> <C> <C>
Revenues $18,621 $ 1,994 $ -- $20,615
Cost and expenses:
Cost of revenues 13,714 1,275 450 (a) 15,439
Selling, general and administrative 1,059 524 (524)(a) 1,059
Depreciation 754 -- 74 (a) 828
Amortization 350 -- -- 350
------- ------- ----------- --------
Total operating expenses 15,877 1,799 -- 17,676
------- ------- ----------- --------
Operating income 2,744 195 -- 2,939
Interest expense 63 4 -- 67
------- ------- ----------- --------
Income taxes 2,681 191 -- 2,872
Income tax provision 1,046 72 -- 1,118
------- ------- ----------- --------
Net Income $ 1,635 $ 119 $ -- $ 1,754
======= ======= =========== ========
Net income per share:
Basic $ 0.08 $ 0.08
Diluted
0.07 0.08
Weighted average shares outstanding:
Basic 20,680 902 (b) 21,582
Diluted 22,262 902 (b) 23,164
</TABLE>
- ----------
(a) Represents reclassifications to conform DDI's selling, general and
administrative expenses to MedQuist's financial reporting presentation.
(b) Represents the DDI weighted average shares outstanding for the period
adjusted for the Exchange Ratio of 0.1440899
F-24
<PAGE>
The Combined Company
Unaudited Pro Forma Combined Statement of Operations
For The Year Ended December 31, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
----------------------
MedQuist DDI Adjustments Combined
------- ------- ----------- --------
<S> <C> <C> <C> <C>
Revenues $84,590 $10,026 $ -- $94,616
Cost and expenses:
Cost of revenues 62,282 6,398 2,226 (a) 70,906
Selling, general and administrative 4,620 2,598 (2,598)(a) 4,620
Depreciation 3,568 -- 372 (a) 3,940
Amortization 1,517 -- -- 1,517
------- ------- ----------- -------
Total operating expenses 71,987 8,996 -- 80,983
------- ------- ----------- -------
Operating income 12,603 1,030 -- 13,633
Interest expense 173 21 -- 194
------- ------- ----------- -------
Income before income taxes 12,430 1,009 -- 13,439
Income tax provision 4,799 393 -- 5,192
------- ------- ----------- -------
Net income $7,631 $ 616 $ -- $ 8,247
======= ======= =========== =======
Net income per share:
Basic $ 0.36 -- -- $ 0.38
Diluted
0.34 -- -- 0.35
Weighted average shares outstanding:
Basic 21,680 -- 902 (b) 21,908
Diluted 22,556 -- 984 (b) 23,540
</TABLE>
- ----------
(a) Represents reclassifications to conform DDI's selling, general and
administrative expenses to MedQuist's financial reporting presentation.
(b) Represents the DDI weighted average shares outstanding for the period
adjusted for the Exchange Ratio of 0.1440899
F-25
<PAGE>
The Combined Company
Unaudited Pro Forma Combined Statement of Operations
For The Year Ended December 31, 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
--------------------------------
MedQuist DDI Adjustments Combined
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenues $ 61,480 $ 6,937 $ -- $ 68,417
Cost and expenses:
Cost of revenues 45,591 4,490 1,435 (a) 51,516
Selling, general and administrative 3,579 1,717 (1,717)(a) 3,579
Depreciation 2,468 -- 282 (a) 2,750
Amortization 1,176 -- -- 1,176
-------- -------- -------- --------
Total operating expenses 52,814 6,207 -- 59,021
-------- -------- -------- --------
Operating income 8,666 730 -- 9,396
-------- -------- -------- --------
Interest expense 1,649 37 -- 1,686
-------- -------- -------- --------
Income before income taxes 7,017 693 -- 7,710
Income tax provision 2,833 253 -- 3,086
-------- -------- -------- --------
Net income (c) $ 4,184 $ 440 $ -- $ 4,624
======== ======== ======== ========
Net income per share (c):
Basic $ 0.26 $ 0.27
Diluted 0.23 0.24
Weighted average shares outstanding:
Basic 16,114 902 (b) 17,016
Diluted 18,006 902 (b) 18,908
</TABLE>
- -----------------------------------------------------------------
(a) Represents reclassifications to conform DDI's selling, general and
administrative expenses to MedQuist's financial reporting presentation.
(b) Represents the DDI weighted average shares outstanding for the period
adjusted for the Exchange Ratio of 0.1440899
(c) Net income and net income per share does not include a $707 non-recurring
deduction from net income available to common shareholders related to the
issuance of 128 shares of MedQuist common stock to induce a warrant holder
to exercise. See Note 8 of Notes to Consolidated Financial Statements of
MedQuist.
F-26
<PAGE>
The Combined Company
Unaudited Pro Forma Combined Statement of Operations
For The Year Ended December 31, 1995
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
----------------------------
MedQuist DDI Adjustments Combined
-------- ------- ----------- -------
<S> <C> <C> <C> <C>
Revenues $45,127 $ 5,058 $ -- $50,185
Cost and expenses:
Cost of revenues 33,711 3,443 1,036 (a) 38,190
Selling, general and administrative 4,325 1,284 (1,284)(a) 4,325
Depreciation 1,862 -- 248 (a) 2,110
Amortization 496 -- -- 496
------- ------- ------- -------
Total operating expenses
40,394 4,727 -- 45,121
------- ------- ------- -------
Operating income 4,733 331 -- 5,064
Interest expense
3,695 25 -- 3,720
------- ------- ------- -------
Income before income taxes 1,038 306 -- 1,344
Income tax provision 431 202 -- 633
------- ------- ------- -------
Income from continuing operations (c) $ 607 $ 104 $ -- $ 711
======= ======= ======= =======
Income from continuing operations per share (c):
Basic $ 0.09 $ 0.09
Diluted
0.08 0.08
Weighted average shares outstanding:
Basic 6,970 902 (b) 7,872
Diluted 7,522 902 (b) 8,424
</TABLE>
- -------------------------------------------
(a) Represents reclassifications to conform DDI's selling, general and
administrative expenses to MedQuist's financial reporting presentation.
(b) Represents the DDI weighted average shares outstanding for the period
adjusted for the Exchange Ratio of 0.1440899.
(c) On November 14, 1995, MedQuist executed a letter of intent to sell its
receivables management business, which was accounted for as a discontinued
operation. Income from continuing operations excludes a net loss from
discontinued operations of $1,729. See Note 3 of Notes to Consolidated
Financial Statements of MedQuist.
F-27
<PAGE>
The Combined Company
Unaudited Pro Forma Combined Balance Sheet
March 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Pro Forma
---------------------------
MedQuist DDI Adjustments Combined
-------- -------- ----------- --------
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 13,609 $ 171 $ -- $ 13,780
Accounts receivable, net 19,770 1,481 -- 21,251
Prepaid expenses and other 839 56 -- 895
-------- -------- -------- --------
Total current assets 34,218 1,708 -- 35,926
Property and equipment, net 10,024 1,863 -- 11,887
Intangible assets, net 48,132 -- -- 48,132
Other assets 545 -- -- 545
-------- -------- -------- --------
92,919 3,571 -- 96,490
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 429 $ 235 $ -- $ 664
Accounts payable 1,073 399 -- 1,472
Accrued payroll 3,813 419 -- 4,232
Accrued expenses ` 3,427 269 750(a) 4,446
-------- -------- -------- --------
Total current liabilities 8,742 1,322 750 10,814
Long-term debt 52 -- -- 52
Other liabilities 520 -- -- 520
Deferred income taxes 2,282 290 -- 2,572
Shareholders' equity:
Common stock -- 63 (63)(b) --
Additional paid-in capital 61,790 673 63 (b) 62,526
Retained earnings 19,533 1,223 (750)(a) 20,006
-------- -------- -------- --------
Total shareholders' equity 81,323 1,959 (750) 82,532
-------- -------- -------- --------
$ 92,919 $ 3,571 $ -- $ 96,490
======== ======== ======== ========
</TABLE>
- -----------------------------------------------------------------
(a) To record accrued expenses associated with the Merger relating to the
estimated merger and transaction costs.
(b) Represents the exchange of DDI common stock for MedQuist no par common stock
and the elimination of the DDI common stock.
F-28
