As filed with the Securities and Exchange Commission on October 30, 1998
Registration No. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
MEDQUIST INC.
-----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 7374 22-2531298
- ------------------------------- --------------------------- ----------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.
Five Greentree Centre
Suite 311
Marlton, New Jersey 08053
(609) 596-8877
------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
John M. Suender
Vice President, General Counsel and Secretary
MedQuist Inc.
Five Greentree Centre
Suite 311
Marlton, New Jersey 08053
(609) 596-8877
Facsimile (609) 797-5949
--------------------------------------------------------
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
COPIES TO:
Francis E. Dehel John M. Gherlein
Blank Rome Comisky & McCauley LLP Baker & Hostetler LLP
One Logan Square 3200 National City Center
Philadelphia, Pennsylvania 19103 1900 East Ninth Street
(215) 569-5500 Cleveland, Ohio 44114
Facsimile (215) 569-5555 (216) 621-0200
Facsimile (216) 696-0740
----------------
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after the Registration Statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
<PAGE>
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box, and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================================================================================================
Title Of Each Class Of Amount To Be Proposed Maximum Proposed Maximum Amount of
Securities To Be Registered Registered Offering Price Per Unit Offering Price Registration Fee
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value 10,206,103 (1) See footnote 2 $5,649,616 (2) $1,571 (3)
=======================================================================================================================
</TABLE>
(1) This Registration Statement covers the maximum number of shares issuable
by the Registrant in connection with a proposed merger transaction,
assuming all options to purchase MRC's shares have been exercised and the
exchange ratios will not be adjusted to effect a "floor price" for MRC's
shares. It does not include additional shares that may be issued by reason
of potential adjustments for recapitalizations or to effect a "floor price"
for MRC's shares. Pursuant to Rule 416, this Registration Statement covers
such additional shares, the number of which is indeterminable as of the
date hereof. Because such additional shares, if issued, will be issued for
no additional consideration, no additional registration fee is required.
(2) Pursuant to Rule 457(f)(2) under the Securities Act of 1933, as amended,
the proposed maximum offering price is based upon the book value of MRC's
shares being acquired in the Merger as of June 30, 1998.
(3) Pursuant to Rule 0-11, $1,130 of such fee was paid on September 25, 1998 in
connection with the filing of MedQuist's preliminary proxy statement on
Schedule 14A in connection with the Merger.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
================================================================================
<PAGE>
[MEDQUIST INC. LETTERHEAD]
November 5, 1998
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders
(the "MedQuist Meeting") of MedQuist Inc., a New Jersey corporation
("MedQuist"), to be held on December 10, 1998, at 10:00 a.m. (eastern standard
time) at The Mansion at Main Street, Plaza 1000, Vorhees, New Jersey, 08043.
At the MedQuist Meeting you will be asked to consider and vote upon a
proposal (the "MedQuist Merger Proposal") to approve (i) the Agreement and Plan
of Merger dated September 18, 1998 (the "Merger Agreement"), pursuant to which
Mercury Acquisition Corporation, a Missouri corporation and a wholly owned
subsidiary of MedQuist, will be merged (the "Merger") with and into The MRC
Group, Inc., a Missouri corporation ("MRC"), and (ii) the Merger. Upon
consummation of the Merger, MRC will become a wholly owned subsidiary of
MedQuist and holders of MRC Common Stock, Series IV Preferred Stock, Series V
Preferred Stock and Series VI Preferred Stock will be entitled to receive a
number of shares of MedQuist common stock, no par value ("MedQuist Common
Stock"), as determined pursuant to the share exchange formulas set forth in the
Merger Agreement.
The Board of Directors of MedQuist has carefully reviewed and
considered the terms and conditions of the proposed Merger. In addition, the
Board of Directors, in connection with its determination that the terms of the
Merger Agreement and the Merger are in the best interests of MedQuist and its
shareholders, has received a written opinion from Volpe Brown Whelan & Company,
LLC to the effect that based upon and subject to certain matters stated therein,
the exchange ratio is fair to MedQuist from a financial point of view.
The MedQuist Board of Directors has approved the Merger Agreement and
the Merger and recommends that you vote for the approval of the MedQuist Merger
Proposal.
I urge you to carefully review and consider the accompanying Notice of
Special Meeting of Shareholders, Joint Proxy Statement/Prospectus, including the
Annexes thereto, and Proxy, which contain information about MedQuist and MRC and
describe the proposed Merger and certain related matters. Please give this
material your careful attention.
All shareholders are invited to attend the MedQuist Meeting in person.
Under New Jersey law, the affirmative vote of a majority of the votes cast by
the holders of MedQuist Common Stock will be necessary for the approval and
adoption of the MedQuist Merger Proposal. Holders of shares of MedQuist Common
Stock will be entitled to one vote for each share of MedQuist Common Stock they
hold.
Whether or not you plan to attend the MedQuist Meeting, holders of
MedQuist Common Stock are asked to please complete, date and sign the enclosed
proxy, which is solicited by the Board of Directors of
<PAGE>
MedQuist, and return it promptly in the accompanying envelope. If you later find
that you may be present at the MedQuist Meeting or for any reason desire to
revoke your proxy, you may do so at any time prior to its exercise in the manner
provided in the accompanying Joint Proxy Statement/Prospectus.
Sincerely,
David A. Cohen
Chairman and Chief Executive Officer
<PAGE>
MEDQUIST INC.
FIVE GREENTREE CENTRE - SUITE 311
MARLTON, NEW JERSEY 08053
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 10, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"MedQuist Meeting") of MedQuist Inc., a New Jersey corporation ("MedQuist"),
will be held on December 10, 1998, at 10:00 a.m. (eastern standard time), at The
Mansion at Main Street, Plaza 1000, Vorhees, New Jersey 08043, for the following
purpose:
To consider and vote upon a proposal (the "MedQuist Merger Proposal")
to approve (i) the Agreement and Plan of Merger dated September 18,
1998 (the "Merger Agreement") by and among MedQuist, Mercury
Acquisition Corporation, a Missouri corporation and a wholly owned
subsidiary of MedQuist ("Sub"), and The MRC Group, Inc., a Missouri
corporation ("MRC"), pursuant to which, among other things, Sub will be
merged with and into MRC (the "Merger"), MRC will become a wholly owned
subsidiary of MedQuist and each outstanding share of MRC Common Stock,
Series IV Preferred Stock, Series V Preferred Stock and Series VI
Preferred Stock will be converted into the right to receive a number of
shares of MedQuist Common Stock, no par value (the "MedQuist Common
Stock"), determined pursuant to the exchange formulas in the Merger
Agreement, all on and subject to the terms and conditions contained in
the Merger Agreement, and (ii) the Merger.
A copy of the Merger Agreement is set forth as Annex A to the
accompanying Joint Proxy Statement/Prospectus.
Only holders of record of MedQuist Common Stock as of the close of
business on October 29, 1998, are entitled to notice of, and to vote at, the
MedQuist Meeting and any adjournments or postponements thereof.
If you object to the Merger, you can demand to be paid the fair value
of your MedQuist shares if you file a written objection with MedQuist before the
MedQuist Meeting and comply with other applicable provisions of New Jersey law.
Those provisions are set forth in Annex C-1.
The Board of Directors of MedQuist has approved the Merger Agreement
and the Merger and recommends that you vote "FOR" approval of the MedQuist
Merger Proposal.
By Order of the Board of
Directors of MEDQUIST INC.
John M. Suender
Vice President, General
Counsel and Secretary
November 5, 1998
Whether or not you plan to attend the MedQuist meeting in person,
please complete, date, sign and return promptly the enclosed proxy in the
accompanying envelope. You may revoke your proxy at any time prior to its
exercise in the manner provided in the accompanying Joint Proxy
Statement/Prospectus.
<PAGE>
[THE MRC GROUP, INC. LETTERHEAD]
November 5, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders
(the "MRC Meeting") of The MRC Group, Inc., a Missouri corporation ("MRC"), to
be held at 23240 Chagrin Boulevard, Suite 400, Cleveland, Ohio, 44122 on
December 9, 1998, at 10:00 a.m., eastern standard time.
At the MRC Meeting, you will be asked to consider and vote upon a
proposal (the "MRC Merger Proposal") to approve the Agreement and Plan of
Merger, dated September 18, 1998 (the "Merger Agreement"), pursuant to which
Mercury Acquisition Corporation, a Missouri corporation and a wholly owned
subsidiary of MedQuist Inc. ("MedQuist"), will be merged with and into MRC (the
"Merger"). Upon consummation of the Merger, MRC will become a wholly owned
subsidiary of MedQuist and holders of MRC Common Stock, Series IV Preferred
Stock, Series V Preferred Stock and Series VI Preferred Stock will be entitled
to receive a number of shares of MedQuist common stock, as determined pursuant
to the share exchange formulas set forth in the Merger Agreement. You may recall
from our earlier communications with respect to MRC's proposed initial public
offering that MRC planned to reincorporate into a Delaware corporation. As part
of that proposed transaction, you were told that you would receive .7 shares of
a new Delaware corporation for each share of MRC Common Stock you held. However,
that reincorporation transaction and related adjustment to your stock ownership
never occurred. Accordingly, all exchange formulas set forth in the Merger
Agreement and described in the accompanying Joint Proxy Statement/Prospectus
reflect exchange ratios in relation to the capital stock of MRC, without regard
to any effects of the proposed reincorporation of MRC.
The Board of Directors of MRC has carefully reviewed and considered the
terms and conditions of the proposed Merger. In addition, the Board of
Directors, in connection with its determination that the terms of the Merger
Agreement are in the best interests of MRC and its shareholders, has received a
written opinion from BT Alex. Brown Incorporated, to the effect that, based upon
and subject to certain matters stated therein, the merger consideration is fair,
from a financial point of view, to the holders of MRC Common Stock and MRC
Preferred Stock.
The MRC Board of Directors has unanimously approved the Merger
Agreement and recommends that you vote for approval of the MRC Merger Proposal.
I urge you to carefully review and consider the accompanying Notice of
Special Meeting of Shareholders, Notice of Redemption of Preferred Stock, Joint
Proxy Statement/Prospectus, including the Annexes thereto, and Proxy, which
contain information about MRC and MedQuist and describe the proposed Merger and
certain related matters. Please give this material your careful attention.
All shareholders are invited to attend the MRC Meeting in person. Under
Missouri law, the affirmative vote of the holders of at least two-thirds of the
outstanding shares of MRC entitled to vote at the MRC Meeting is necessary for
approval of the MRC Merger Proposal. Holders of shares of MRC Common Stock will
be entitled to one vote for each share of MRC Common Stock held on the record
date. Holders of shares of MRC Preferred Stock will be entitled to one vote for
each share of MRC Common Stock which would be issuable to such holders upon
conversion of all of the shares of MRC Preferred Stock held by such holders on
the record date. In addition, pursuant to the terms of the Articles of
Incorporation of MRC, the affirmative vote of at least (a) a majority of the
outstanding shares of Series IV Preferred Stock, (b) two-
<PAGE>
thirds of the outstanding shares of Series V Preferred Stock, and (c)
seventy-five percent of the outstanding shares of Series VI Preferred Stock,
each voting as a separate class, is necessary for approval of the MRC Merger
Proposal.
As explained in the attached Notice of Special Meeting of Shareholders
and Notice of Redemption of Preferred Stock and Joint Proxy
Statement/Prospectus, under MRC's Articles of Incorporation, in connection with
the proposed Merger, all holders of MRC Preferred Stock have the right to have
MRC redeem their MRC Preferred Stock.
Whether or not you plan to attend the MRC Meeting, please complete,
date and sign the enclosed proxy which is solicited by the Board of Directors of
MRC, and return it promptly in the accompanying envelope. The failure to either
return your proxy or attend the MRC Meeting in person and vote in favor of the
MRC Merger Proposal will have the same effect as a vote against the MRC Merger
Proposal. If you later find that you may be present at the MRC Meeting or for
any reason desire to revoke your proxy, you may do so at any time prior to its
exercise in the manner provided in the accompanying Joint Proxy
Statement/Prospectus.
Sincerely,
Edward L. Samek
Chairman and Chief Executive Officer
<PAGE>
THE MRC GROUP, INC.
23240 CHAGRIN BOULEVARD - SUITE 400
CLEVELAND, OHIO 44122
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 9, 1998 AND
NOTICE OF REDEMPTION OF PREFERRED STOCK
NOTICE OF SPECIAL MEETING
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "MRC
Meeting") of The MRC Group, Inc., a Missouri corporation ("MRC"), will be held
on December 9, 1998, at 10:00 a.m. (eastern standard time), at 23240 Chagrin
Boulevard, Suite 400, Cleveland, Ohio, 44122, for the following purpose:
To consider and vote upon a proposal (the "MRC Merger Proposal") to
approve the Agreement and Plan of Merger dated September 18, 1998 (the
"Merger Agreement"), by and among MedQuist Inc., a New Jersey
corporation ("MedQuist"), Mercury Acquisition Corporation, a Missouri
corporation and a wholly owned subsidiary of MedQuist ("Sub"), and MRC,
pursuant to which, among other things, Sub will be merged with and into
MRC (the "Merger"), MRC will become a wholly owned subsidiary of
MedQuist and each outstanding share of MRC Common Stock, Series IV
Preferred Stock, Series V Preferred Stock and Series VI Preferred Stock
will be converted into the right to receive a number of shares of
MedQuist common stock, no par value (the "MedQuist Common Stock"),
determined pursuant to the exchange formulas set forth in the Merger
Agreement, all on and subject to the terms and conditions contained in
the Merger Agreement.
In addition to voting on the Merger Agreement, holders of Series IV
Preferred Stock, Series V Preferred Stock and Series VI Preferred Stock have the
right under the Articles of Incorporation of MRC, each voting as a series, to
vote on (i) the Merger itself and (ii) the elimination in the Merger of the
right to convert MRC Preferred Stock into MRC Common Stock. A vote in favor of
the Merger Agreement will be considered a vote in favor of these matters.
A copy of the Merger Agreement is set forth as Annex A to the
accompanying Joint Proxy Statement/Prospectus.
Only holders of record of MRC Common Stock and MRC Preferred Stock as
of the close of business on November 25, 1998, are entitled to notice of, and to
vote at, the MRC Meeting and any adjournments or postponements thereof.
If you object to the Merger, you can demand to be paid the fair value
of your MRC shares if you file a written objection with MRC before the MRC
Meeting and comply with other applicable provisions of Missouri law.
These provisions are set forth in Annex C-2.
--------------------
<PAGE>
NOTICE OF REDEMPTION OF PREFERRED STOCK
NOTICE IS HEREBY GIVEN that the holders of MRC Preferred Stock have the
right, in connection with the Merger, to require MRC to redeem their MRC
Preferred Stock in accordance with the terms of MRC's Articles of Incorporation.
Any holder of MRC Preferred Stock wishing to have his or her MRC Preferred Stock
redeemed must notify MRC in writing within 15 days of the receipt of this Notice
of Redemption in order to have such MRC Preferred Stock redeemed. The MRC
Preferred Stock will be redeemable for the following amounts:
Series IV Preferred Stock -- $381.10 per share
Series V Preferred Stock -- $381.10 per share
Series VI Preferred Stock -- $100.00 per share
--------------------
The Board of Directors of MRC has unanimously approved the Merger
Agreement and recommends that you vote "FOR" the MRC Merger Proposal.
By Order of the Board of Directors
Steven Bell, Secretary
Cleveland, Ohio
November 5, 1998
Whether or not you plan to attend the MRC Meeting in person, please
complete, date, sign and return promptly the enclosed proxy in the accompanying
envelope. You may revoke your proxy at any time prior to its exercise in the
manner provided in the accompanying Joint Proxy Statement/Prospectus.
<PAGE>
The information in this Joint Proxy Statement/Prospectus is not complete and may
be changed. We may not sell these securities until the Registration Statement
filed with the Securities and Exchange Commission is effective. This Joint Proxy
Statement/Prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
Subject to Completion, Dated October 30, 1998
PROXY STATEMENT/PROSPECTUS PROXY STATEMENT
[MEDQUIST LOGO] [MRC LOGO]
10,206,103 Shares
MedQuist Common Stock
The Boards of Directors of MedQuist Inc. ("MedQuist") and The MRC
Group, Inc. ("MRC") have approved the acquisition of MRC by MedQuist through a
merger of a wholly owned subsidiary of MedQuist into MRC (the "Merger").
If the Merger is completed, holders of (i) MRC common stock, (ii) MRC
Series IV Preferred Stock, (iii) MRC Series V Preferred Stock and (iv) MRC
Series VI Preferred Stock will receive that number of shares of MedQuist common
stock as set forth below:
- --------------------------------------------------------------------------------
Shares of MedQuist Common Stock to be
MRC Stock Received
- --------------------------------------------------------------------------------
MRC Common Stock (i) 0.5163 shares if the MedQuist Stock Value
(as defined below) is equal to or greater than
$16.28 and (ii) the number of shares equal to
$8.41 divided by the MedQuist Stock Value if the
MedQuist Stock Value is below $16.28
- --------------------------------------------------------------------------------
Series IV Preferred Stock (i) 34.2376 shares if the MedQuist Stock Value
is equal to or greater than $16.28 and (ii) the
number of shares equal to $557.70 divided by the
MedQuist Stock Value if the MedQuist Stock Value
is below $16.28
- --------------------------------------------------------------------------------
Series V Preferred Stock (i) 46.5619 shares if the MedQuist Stock Value
is equal to or greater than $16.28 and (ii) the
number of shares equal to $758.45 divided by the
MedQuist Stock Value if the MedQuist Stock Value
is below $16.28
- --------------------------------------------------------------------------------
Series VI Preferred Stock (i) 9.5476 shares if the MedQuist Stock Value is
equal to or greater than $16.28 and (ii) the
number of shares equal to $155.52 divided by the
MedQuist Stock Value if the MedQuist Stock Value
is below $16.28
- --------------------------------------------------------------------------------
"MedQuist Stock Value" means the market value of a single share of
MedQuist common stock, determined by taking the average of the closing prices of
a share of MedQuist common stock as reported on Nasdaq, as reported by The Wall
Street Journal, for the 10 trading days preceding the second business day prior
to the closing of the Merger.
There are two important aspects you should understand about the number
of shares of MedQuist Common Stock issuable in the Merger. First, the number of
shares of MedQuist Common Stock issuable to the holders of MRC Preferred Stock
has been determined so that holders of MRC Preferred Stock will receive the same
number of shares of MedQuist Common Stock such holder would have received if,
prior to the Merger, such holder's shares of MRC Preferred Stock were converted
into shares of MRC Common Stock. Second, there is a "floor" adjustment with
respect to the value of the shares of MedQuist Common Stock to be issued in the
Merger. If the MedQuist Stock Value is less than $16.28 as of the closing date
of the Merger, then MedQuist will issue additional shares so that MRC
shareholders receive at least $8.41 worth of MedQuist Common Stock (based on the
MedQuist Stock Value as of the closing date of the Merger) for each share of MRC
Common Stock held by an MRC shareholder or issuable to an MRC shareholder upon
conversion of a share of MRC Preferred Stock. Since the MedQuist Stock Value is
based on the average closing prices of MedQuist Common Stock over a 10-day
trading period, the value of a share of MedQuist Common Stock on the closing
date of the Merger may, and probably will, be different from the MedQuist Stock
Value as of the closing date of the Merger.
The Merger cannot be completed unless the shareholders of both
companies approve it. We have scheduled special meetings for our shareholders to
vote on the Merger. Whether or not you plan to attend the meeting, please take
the time to vote by completing and mailing the enclosed proxy to us.
The date, times and places of the meetings are as follows:
For MedQuist shareholders: December 10, 1998, 10:00 a.m., eastern
standard time, The Mansion at Main Street,
Plaza 1000, Vorhees, New Jersey 08043
For MRC shareholders: December 9, 1998, 10:00 a.m., eastern
standard time, 23240 Chagrin Boulevard,
Suite 400, Cleveland, Ohio 44122
For a more complete description of the Merger, the Agreement and Plan
of Merger and certain risk factors associated with the Merger, see "The Merger"
beginning on page 35 and "Risk Factors" beginning on page 24.
MedQuist common stock trades on the Nasdaq National Market under the
symbol MEDQ.
All information contained in this Joint Proxy Statement/Prospectus with
respect to MedQuist was supplied by MedQuist, and all information with respect
to MRC was supplied by MRC.
-------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Joint Proxy Statement/Prospectus is accurate or adequate. Any representation to
the contrary is a criminal offense.
--------------------------
Joint Proxy Statement/Prospectus dated November 2, 1998 and
first mailed to shareholders on or about November 5, 1998.
<PAGE>
TABLE OF CONTENTS
Page
----
WHERE YOU CAN FIND MORE INFORMATION....................................... 1
SUMMARY................................................................... 3
The Companies.................................................... 3
MedQuist Inc. and Mercury Acquisition Corporation....... 3
Recent Developments of MedQuist................ 3
The MRC Group, Inc............................. 3
Approval of the Merger/The Meetings.............................. 4
MedQuist Meeting........................................ 4
MRC Meeting............................................. 5
The Merger....................................................... 6
What MRC Shareholders Will Receive............................... 6
Treatment of MRC Stock Options................................... 8
Representations and Warranties................................... 8
Conduct of Business Pending the Merger........................... 8
Non-Solicitation................................................. 8
Indemnification and Insurance.................................... 8
Conditions to the Merger......................................... 9
Closing Date and Effective Time.................................. 9
Termination of the Merger Agreement.............................. 9
Termination Fees................................................. 9
MRC Option Agreement............................................. 10
Opinions of Financial Advisors................................... 10
MedQuist's Reasons for the Merger................................ 10
MRC's Reasons for the Merger..................................... 10
Interests of Certain Persons in the Merger....................... 11
Ownership of MedQuist following the Merger....................... 11
Management of the Surviving Corporation after the Merger......... 12
Regulatory Approvals............................................. 12
Affiliate Agreements............................................. 12
Resale of MedQuist Common Stock.................................. 12
Resale of MedQuist Common Stock.................................. 12
Rights of Dissenting Shareholders................................ 12
MedQuist................................................ 12
MRC..................................................... 13
Redemption Rights................................................ 13
Certain Federal Income Tax Consequences.......................... 13
Accounting Treatment............................................. 13
Comparison of Shareholders' Rights............................... 13
Risk Factors..................................................... 14
SELECTED HISTORICAL FINANCIAL DATA OF MEDQUIST............................ 15
i
<PAGE>
SELECTED SUPPLEMENTAL FINANCIAL DATA OF MEDQUIST.......................... 16
SELECTED HISTORICAL FINANCIAL DATA OF MRC................................. 18
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA...................... 20
COMPARATIVE PER SHARE DATA................................................ 22
MARKET PRICE INFORMATION.................................................. 23
DIVIDEND POLICIES......................................................... 23
RISK FACTORS.............................................................. 24
Risks Relating to the Merger..................................... 24
Risks Relating to MedQuist's Business............................ 25
SPECIAL MEETINGS OF SHAREHOLDERS.......................................... 30
MedQuist Meeting................................................. 30
MRC Meeting...................................................... 31
REDEMPTION RIGHTS OF MRC PREFERRED STOCK.................................. 34
THE MERGER................................................................ 35
Certain Terms of the Merger Agreement............................ 35
Conversion of Shares; No Fractional Amounts............. 35
Treatment of MRC Stock Options.......................... 36
Representations and Warranties.......................... 37
Conduct of Business Pending the Merger.................. 37
Non-Solicitation........................................ 39
Indemnification and Insurance........................... 39
Conditions to the Merger................................ 40
Closing Date and Effective Time......................... 42
Termination of the Merger Agreement..................... 43
Termination Fees........................................ 43
MRC Option Agreement............................................. 43
Opinions of Financial Advisors................................... 44
Opinion of Volpe Brown Whelan & Company, LLC............ 44
Opinion of BT Alex. Brown Incorporated.................. 49
Background of the Merger......................................... 50
MedQuist's Reasons for the Merger................................ 52
MRC's Reasons for the Merger..................................... 53
Interests of Certain Persons in the Merger....................... 55
Ownership of MedQuist Following the Merger....................... 57
Management of the Surviving Corporation Upon Consummation
of the Merger.................................................. 58
Regulatory Approvals............................................. 58
Affiliate Agreements............................................. 58
ii
<PAGE>
Resale of MedQuist Common Stock.................................. 59
Rights of Dissenting MedQuist Shareholders....................... 59
Rights of Dissenting MRC Shareholders............................ 60
Certain Federal Income Tax Consequences.......................... 62
Accounting Treatment............................................. 63
Nasdaq Listing................................................... 63
INFORMATION CONCERNING MRC................................................ 64
Overview......................................................... 64
Electronic Medical Transcription and Document Management......... 65
Product Development.............................................. 66
Sales and Marketing.............................................. 67
Clients.......................................................... 67
Competition...................................................... 67
Employees........................................................ 68
Government Regulations........................................... 68
Intellectual Property............................................ 68
Properties....................................................... 69
Legal Proceedings................................................ 69
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF MRC................................ 70
Overview......................................................... 70
Sources of Revenue............................................... 71
Results of Operations............................................ 71
Selected Quarterly Operating Results............................. 74
Liquidity and Capital Resources.................................. 75
Other............................................................ 76
Year 2000........................................................ 76
Recent Accounting Pronouncements................................. 77
MANAGEMENT OF MRC......................................................... 78
Executive Officers and Directors................................. 78
Compensation Committee Interlocks and Insider Participation...... 78
Directors Compensation........................................... 79
Executive Compensation........................................... 79
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values......................................... 79
PRINCIPAL SHAREHOLDERS OF MRC............................................. 80
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION........................ 83
COMPARISON OF SHAREHOLDERS' RIGHTS........................................ 93
Preferences...................................................... 93
Size and Classification of the Board of Directors................ 93
Removal of Directors............................................. 94
Meeting of Shareholders; Action by Written Consent............... 94
iii
<PAGE>
Shareholder Inspection Rights; Shareholder Lists................. 94
Amendment of Governing Documents................................. 94
Corporation's Best Interest...................................... 95
Required Vote for Authorization of Certain Actions............... 95
Business Combinations............................................ 96
LEGAL MATTERS............................................................. 97
EXPERTS................................................................... 97
Index To Financial Statements ............................................ F-1
ANNEX A. AGREEMENT AND PLAN OF MERGER
ANNEX B. STOCK OPTION AGREEMENT
ANNEX C-1. NEW JERSEY STATUTES
TITLE 14A. CORPORATIONS, GENERAL
CHAPTER 11. RIGHTS OF DISSENTING SHAREHOLDERS
ANNEX C-2. SECTION 351.455 OF THE MISSOURI GENERAL BUSINESS
AND CORPORATION LAW
ANNEX D. OPINION OF VOLPE BROWN WHELAN & COMPANY, LLC
ANNEX E. OPINION OF BT ALEX. BROWN INCORPORATED
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WHERE YOU CAN FIND MORE INFORMATION
MedQuist Inc., a New Jersey corporation ("MedQuist"), files annual,
quarterly and special reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). You may read and copy any
reports, statements and other information MedQuist files with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. MedQuist's SEC filings are also available on
the SEC's Internet site (http://www.sec.gov).
In addition, you may read reports, proxy statements and other
information MedQuist files at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
MedQuist filed a registration statement on Form S-4 (the "Registration
Statement") to register the shares of MedQuist common stock to be issued in the
Merger. This Joint Proxy Statement/Prospectus is a part of that Registration
Statement and constitutes a prospectus of MedQuist in addition to being a proxy
statement of each of MedQuist and MRC for their Special Meetings. As allowed by
SEC rules, this Joint Proxy Statement/Prospectus does not contain all the
information you can find in the Registration Statement or the exhibits to the
Registration Statement.
The SEC also allows MedQuist to "incorporate by reference" the
information it files with the SEC, which means MedQuist can disclose information
to you by referring you to another document filed separately with the SEC.
Information incorporated by reference is deemed to be part of this Joint Proxy
Statement/Prospectus. Later information by MedQuist filed with the SEC updates
and supersedes this Joint Proxy Statement/Prospectus.
This Joint Proxy Statement/Prospectus incorporates important business
and financial information about MedQuist that is not included in or delivered
with this Joint Proxy Statement/Prospectus. Copies of any such information are
available without charge to any person to whom this Joint Proxy
Statement/Prospectus is delivered, upon written or oral request. Written
requests for such documents should be directed to the Corporate Secretary,
MedQuist Inc., Five Greentree Centre, Suite 311, Marlton, New Jersey, 08053, and
telephone requests may be directed to the Corporate Secretary at (609) 596-8877.
In order to ensure timely delivery of the documents, any request should be made
by December 2, 1998.
The following documents previously filed by MedQuist with the SEC
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), are incorporated herein by this reference:
SEC Filings Period
----------- ------
Annual Report on Form 10-K (including those Year ended December 31, 1997
portions of MedQuist's proxy statement for its
1998 annual meeting of shareholders
incorporated by reference therein)
Quarterly Reports on Form 10-Q (as amended) Quarters ended March 31, 1998
and June 30, 1998
Current Reports on Form 8-K Filed on May 13, 1998,
June 12, 1998, June 29, 1998
and September 29, 1998
Registration Statement on Form 8-A filed Filed on March 11, 1992
pursuant to Section 12(g) of the Exchange Act
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All documents filed by MedQuist pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Joint Proxy
Statement/Prospectus and prior to the special meetings of MedQuist and MRC will
be deemed to be incorporated by reference in this Joint Proxy Statement/
Prospectus and to be a part of this Joint Proxy Statement/Prospectus from the
date any such document is filed.
You should rely only on the information contained or incorporated by
reference in this Joint Proxy Statement/Prospectus to vote on the Agreement and
Plan of Merger. Neither MRC nor MedQuist has authorized anyone to provide you
with information that is different from what is contained in this Joint Proxy
Statement/Prospectus. This Joint Proxy Statement/Prospectus is dated November 2,
1998. You should not assume that the information contained in the Joint Proxy
Statement/Prospectus is accurate as of any date other than that date, and
neither the mailing of this Joint Proxy Statement/Prospectus nor the issuance of
MedQuist common stock in the Merger will create any implication to the contrary.
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SUMMARY
This Summary highlights some information from this Joint Proxy
Statement/Prospectus. It may not contain all of the information that is
important to you. To understand the Merger fully, you should read the entire
Joint Proxy Statement/Prospectus carefully, including the "Risk Factors," the
Financial Statements and notes thereto, and the Annexes to this Joint Proxy
Statement/Prospectus before you decide how to vote. References in this Joint
Proxy Statement/Prospectus to "we" or "us" refer to MedQuist and MRC,
collectively.
The Companies
MedQuist Inc. and Mercury Acquisition Corporation
MedQuist is a leading national provider of electronic transcription and
information management solutions to the health care industry. Through its
proprietary software, open architecture environment and network of more than
3,300 trained transcriptionists, MedQuist converts free-form medical dictation
into electronically formatted patient records which health care providers use in
connection with patient care and for other administrative purposes. MedQuist's
customized outsourcing services enable clients to improve the accuracy of
transcribed medical reports, reduce report turnaround times, shorten billing
cycles and reduce overhead and other administrative costs. MedQuist was
incorporated in New Jersey in 1984 and reorganized in 1987 as a group of
out-patient health care businesses affiliated with a non-profit health care
provider. By the end of 1995, MedQuist had divested all of its non-medical
transcription businesses. Since May 1994, MedQuist has acquired 16 smaller
medical transcription companies. MedQuist's executive offices are located at
Five Greentree Centre, Suite 311, Marlton, New Jersey, 08053, and the telephone
number for MedQuist is (609) 596-8877. Mercury Acquisition Corporation ("Sub"),
a wholly owned subsidiary of MedQuist, was incorporated in Missouri in 1998 for
the purpose of consummating the merger with The MRC Group, Inc. See "Where You
Can Find More Information," "Selected Historical Financial Data of MedQuist,"
"Selected Supplemental Financial Data of MedQuist," "Selected Unaudited Pro
Forma Combined Financial Data," and the Supplemental Consolidated Financial
Statements of MedQuist Inc. and Subsidiary and notes thereto for additional
information concerning MedQuist and Sub.
Recent Developments of MedQuist
On August 18, 1998, MedQuist acquired all of the shares of
common stock of Signal Transcription Network, Inc. ("Signal"), a medical
transcription company, for consideration consisting of (i) 619,160 shares of
MedQuist common stock, no par value (the "MedQuist Common Stock"), and (ii)
$1,480,250 in cash. The Signal acquisition will be accounted for as a
pooling-of-interests transaction. See MedQuist's Supplemental Consolidated
Financial Statements and the notes thereto set forth on pages F-2 through F-26
for a supplemental presentation of MedQuist's financial statements retroactively
restated to reflect the combination with Signal.
The MRC Group, Inc.
The MRC Group, Inc., a Missouri corporation ("MRC"), is a leading
national provider of electronic medical transcription and document management
services to the health care industry. MRC currently operates more than 50 client
service centers in 24 states and employs more than 2,400 experienced medical
transcriptionists, approximately 70% of whom work from their homes. MRC
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serves more than 500 clients, primarily hospitals and medical centers, as well
as other non-hospital health care providers, such as managed care providers,
surgical centers, outpatient clinics and physician groups. Within hospitals and
medical centers, MRC primarily serves medical records departments. Increasingly,
the Company is providing its services to other hospital departments that seek to
outsource their medical transcription needs, including radiology, emergency
medicine, and pathology and cardiology departments.
MRC was incorporated in Missouri in 1981. MRC's executive offices are
located at 23240 Chagrin Boulevard, Suite 400, Cleveland, Ohio, 44122, and MRC's
telephone number is (216) 464-2244.
Approval of the Merger/The Meetings
MedQuist Meeting
The Special Meeting of the MedQuist shareholders (the "MedQuist Meeting") will
be held on December 10, 1998, at 10:00 a.m. (eastern standard time), at The
Mansion at Main Street, Plaza 1000, Vorhees, New Jersey, 08043. The purpose of
the MedQuist Meeting is to consider and vote on a proposal (the "MedQuist Merger
Proposal") to approve the Agreement and Plan of Merger among MedQuist, Sub and
MRC (the "Merger Agreement") and the Merger.
Only holders of record of MedQuist Common Stock as of the close of
business on October 29, 1998 (the "MedQuist Record Date") are entitled to notice
of, and to vote at, the MedQuist Meeting. As of the close of business on the
MedQuist Record Date, there were 23,784,313 shares of MedQuist Common Stock
outstanding.
Under New Jersey law, the affirmative vote of the majority of the votes
cast by the holders of shares of MedQuist Common Stock is required for approval
of the MedQuist Merger Proposal. Each holder of MedQuist Common Stock is
entitled to cast one vote for each share held of record on that date. The
presence either in person or by proxy of the holders of a majority of the votes
entitled to be cast will constitute a quorum for the transaction of business at
the MedQuist Meeting.
As of the MedQuist Record Date, the directors and executive officers of
MedQuist owned and have the right to vote at the MedQuist Meeting, 1,950,334
shares of MedQuist Common Stock, representing approximately 8.2 percent of the
outstanding shares of MedQuist Common Stock entitled to be voted at the MedQuist
Meeting. The directors and executive officers of MedQuist have expressed their
intent to vote for the approval of the MedQuist Merger Proposal.
Shares of MedQuist Common Stock represented by a proxy properly signed
and received at or prior to the MedQuist Meeting, unless subsequently revoked,
will be voted in accordance with the instructions on the proxy. If your proxy is
signed and returned without indicating any voting instructions, the shares of
MedQuist Common Stock represented by the proxy will be voted "FOR" the MedQuist
Merger Proposal. Your proxy may be revoked by giving written notice of such
revocation to the Secretary of MedQuist at any time before the proxy is voted,
by submitting to MedQuist a duly executed, later-dated proxy or by voting the
shares subject to such proxy by written ballot at the MedQuist Meeting. All
written notices of revocation and other communications with respect to
revocation of MedQuist proxies should be addressed to: MedQuist Inc., Five
Greentree Centre, Suite 311, Marlton, New Jersey 08053, Attention: John M.
Suender. Attendance at the MedQuist Meeting will not in and of itself constitute
a revocation of a proxy.
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MRC Meeting
The Special Meeting of MRC shareholders (the "MRC Meeting") will be
held on December 9, 1998, at 10:00 a.m. (eastern standard time) at 23240 Chagrin
Boulevard, Suite 400, Cleveland, Ohio 44122. The purpose of the MRC Meeting is
to consider and vote upon a proposal (the "MRC Merger Proposal") to approve the
Merger Agreement.
Only holders of record of MRC common stock, $.01 par value ("MRC Common
Stock"), MRC Series IV Preferred Stock, $1.00 par value ("Series IV Preferred
Stock"), MRC Series V Preferred Stock, $1.00 par value ("Series V Preferred
Stock"), MRC Series VI Preferred Stock, $1.00 par value ("Series VI Preferred
Stock" and, together with Series IV Preferred Stock and Series V Preferred
Stock, the "MRC Preferred Stock") as of the close of business on November 25,
1998 (the "MRC Record Date") are entitled to notice of, and to vote at, the MRC
Meeting. As of the close of business on October 30, 1998, there were 6,198,949
shares of MRC Common Stock, 10,362 shares of Series IV Preferred Stock, 45,902
shares of Series V Preferred Stock and 300,000 shares of Series VI Preferred
Stock outstanding.
Under Missouri law, the affirmative vote of the holders of at least
two-thirds of the outstanding shares of MRC entitled to vote at the MRC Meeting
is necessary to approve the MRC Merger Proposal. Holders of MRC Common Stock
will be entitled to one vote for each share of MRC Common Stock they hold on the
MRC Record Date. Holders of MRC Preferred Stock will be entitled to one vote for
each share of MRC Common Stock which would be issuable to such holders upon
conversion of all the shares of MRC Preferred Stock held on the MRC Record Date.
Accordingly, the holders of the Series IV Preferred Stock, Series V Preferred
Stock and Series VI Preferred Stock are entitled to, in the aggregate, 687,140,
4,139,609, and 5,547,672 votes, respectively. In addition, pursuant to the terms
of the Articles of Incorporation of MRC, the affirmative vote of at least (a) a
majority of the outstanding shares of Series IV Preferred Stock, (b) two-thirds
of the outstanding shares of Series V Preferred Stock, and (c) seventy-five
percent of the outstanding shares of Series VI Preferred Stock, each voting
separately as a class, is necessary to approve the MRC Merger Proposal. The
presence in person or by proxy of the holders of a majority of the outstanding
shares of MRC entitled to vote at the MRC Meeting will constitute a quorum for
purposes of conducting business at the MRC Meeting.
As of October 30, 1998, the directors and executive officers of MRC
beneficially owned and have the right to vote, in the aggregate, 13,664,466
shares of MRC Common Stock (which includes shares of MRC Common Stock issuable
upon conversion of the MRC Preferred Stock), representing approximately 83
percent of the votes entitled to be cast at the MRC Meeting. In addition, as of
October 30, 1998, the directors and executive officers of MRC beneficially
owned and have the right to vote, 131 shares of Series IV Preferred Stock,
representing approximately 1% of the votes entitled to be cast by such holders
voting as a class, 44,573 shares of Series V Preferred Stock, representing
approximately 97% of the votes entitled to be cast by such holders voting as a
class, and 241,571 shares of Series VI Preferred Stock, representing
approximately 80% of the votes entitled to be cast by such holders voting as a
class. The directors and executive officers of MRC have expressed their intent
to vote for the MRC Merger Proposal.
Shares of MRC Common Stock and MRC Preferred Stock represented by a
proxy properly signed and received at or prior to the MRC Meeting, unless
subsequently revoked, will be voted in accordance with the instructions thereon.
If a proxy is signed and returned without indicating any voting instructions,
the shares of MRC Common Stock or MRC Preferred Stock represented by the proxy
will be voted "FOR" the MRC Merger Proposal. You may revoke your proxy by giving
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written notice of such revocation to the Secretary of MRC at any time before the
proxy is voted, by submitting to MRC a duly executed, later-dated proxy or by
voting the shares subject to such proxy by written ballot at the MRC Meeting.
All written notices of revocation and other communications with respect to
revocation of MRC proxies should be addressed to: The MRC Group, Inc., 23240
Chagrin Boulevard, Suite 400, Cleveland, Ohio, 44122, Attention: Steven Bell.
Attendance at the MRC Meeting will not in and of itself constitute a revocation
of a proxy. The failure to either return your proxy card or attend the MRC
Meeting in person and vote in favor of the MRC Merger Proposal will have the
same effect as a vote against the MRC Merger Proposal.
The Merger
The Merger Agreement is attached as Annex A to this Joint Proxy
Statement/Prospectus. We encourage you to read the Merger Agreement because it
is the legal document that governs the Merger.
Subject to approval of the shareholders of MRC and MedQuist and the
satisfaction of certain other conditions, Sub will be merged with and into MRC.
MRC will continue as the surviving corporation under the name The MRC Group,
Inc. (the "Surviving Corporation"). As a result of the Merger, Sub's separate
corporate existence will cease and each share of common stock of Sub will be
converted into one share of common stock of the Surviving Corporation, which
will constitute all of the issued and outstanding capital stock of the Surviving
Corporation. Therefore, MedQuist will be the sole shareholder of the Surviving
Corporation. See "The Merger -- Certain Terms of the Merger Agreement."
What MRC Shareholders Will Receive
As a result of the Merger, each full and fractional share of MRC Common
Stock and MRC Preferred Stock outstanding immediately prior to the Merger (other
than shares held by shareholders who perfect their statutory dissenters' rights
under Missouri law) will be converted into the right to receive that number of
shares of MedQuist Common Stock as set forth below:
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- --------------------------------------------------------------------------------
Shares of MedQuist Common Stock to be
MRC Stock Received
- --------------------------------------------------------------------------------
MRC Common Stock (i) 0.5163 shares if the MedQuist Stock Value
(as defined below) is equal to or greater than
$16.28 and (ii) the number of shares equal to
$8.41 divided by the MedQuist Stock Value if the
MedQuist Stock Value is below $16.28
- --------------------------------------------------------------------------------
Series IV Preferred Stock (i) 34.2376 shares if the MedQuist Stock Value
is equal to or greater than $16.28 and (ii) the
number of shares equal to $557.70 divided by the
MedQuist Stock Value if the MedQuist Stock Value
is below $16.28
- --------------------------------------------------------------------------------
Series V Preferred Stock (i) 46.5619 shares if the MedQuist Stock Value
is equal to or greater than $16.28 and (ii) the
number of shares equal to $758.45 divided by the
MedQuist Stock Value if the MedQuist Stock Value
is below $16.28
- --------------------------------------------------------------------------------
Series VI Preferred Stock (i) 9.5476 shares if the MedQuist Stock Value is
equal to or greater than $16.28 and (ii) the
number of shares equal to $155.52 divided by the
MedQuist Stock Value if the MedQuist Stock Value
is below $16.28
- --------------------------------------------------------------------------------
"MedQuist Stock Value" means the market value of a single share of
MedQuist Common Stock, determined by taking the average of the closing prices of
a share of MedQuist Common Stock as reported on Nasdaq, as reported by The Wall
Street Journal, for the 10 trading days preceding the second business day prior
to the closing of the Merger.
There are two important aspects you should understand about the number
of shares of MedQuist Common Stock issuable in the Merger. First, the number of
shares of MedQuist Common Stock issuable to the holders of MRC Preferred Stock
has been determined so that holders of MRC Preferred Stock will receive the same
number of shares of MedQuist Common Stock such holder would have received if,
prior to the Merger, such holder's shares of MRC Preferred Stock were converted
into shares of MRC Common Stock. Second, there is a "floor" adjustment with
respect to the value of the shares of MedQuist Common Stock to be issued in the
Merger. If the MedQuist Stock Value is less than $16.28 as of the closing date
of the Merger, then MedQuist will issue additional shares so that MRC
shareholders receive at least $8.41 worth of MedQuist Common Stock (based on the
MedQuist Stock Value as of the closing date of the Merger) for each share of MRC
Common Stock held by an MRC shareholder or issuable to an MRC shareholder upon
conversion of a share of MRC Preferred Stock. Since the MedQuist Stock Value is
based on the average closing prices of MedQuist Common Stock over a 10-day
trading period, the value of a share of MedQuist Common Stock on the closing
date of the Merger may, and probably will, be different from the MedQuist Stock
Value as of the closing date of the Merger.
No fractional shares of MedQuist Common Stock will be issued. Each MRC
shareholder who otherwise would have been entitled to a fraction of a share of
MedQuist Common Stock will instead receive cash in accordance with the terms of
the Merger Agreement. The MedQuist Common Stock issuable to holders of shares of
MRC Common Stock and MRC Preferred Stock pursuant to the Merger and any cash to
be paid instead of fractional shares of MedQuist Common Stock are referred to
elsewhere in this Joint Proxy Statement/Prospectus collectively as the "Merger
Consideration."
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MedQuist will cause the shares of MedQuist Common Stock issuable pursuant to the
Merger Agreement to be listed on the Nasdaq National Market. See "The Merger --
Conversion of Shares; No Fractional Amounts" and "The Merger -- Nasdaq Listing."
MRC shareholders should not send in their stock certificates until
requested to do so after the Merger is completed.
Treatment of MRC Stock Options
As a result of the Merger, holders of MRC stock options will receive
MedQuist stock options and upon the exercise of their MedQuist stock options,
will receive a number of shares of MedQuist Common Stock determined as described
under "The Merger -- Certain Terms of the Merger Agreement -- Treatment of MRC
Stock Options."
Representations and Warranties
The Merger Agreement contains certain representations and warranties of
MedQuist, Sub and MRC. The respective representations and warranties of
MedQuist, Sub and MRC will not survive the closing date of the Merger and will
terminate on the closing date of the Merger. See "The Merger -- Certain Terms of
the Merger Agreement -- Representations and Warranties."
Conduct of Business Pending the Merger
The Merger Agreement contains certain covenants of MedQuist and MRC
related to the conduct of their respective business from and after the date of
the Merger Agreement to the consummation of the Merger. See "The Merger --
Certain Terms of the Merger Agreement -- Conduct of Business Pending the
Merger."
Non-Solicitation
Pursuant to the Merger Agreement, MRC has agreed that until
consummation or termination of the Merger Agreement, neither it, nor any of its
directors, officers, employees, agents, or advisors (including, without
limitation, attorneys, accountants, consultants, investment bankers and
financing sources, and advisors), would solicit, enter into or participate in
any discussions, negotiations, solicitation, arrangements or agreements with or
otherwise assist, facilitate, solicit or encourage, any corporation,
partnership, person or other entity or group concerning any merger,
consolidation, sale of all or substantially all of the assets, or the issuance
or sale of any shares of capital stock or similar transaction involving MRC.
During the term of the Merger Agreement, MRC is required to advise MedQuist
immediately if it receives any bids or proposals regarding such a transaction.
See "The Merger -- Certain Terms of the Merger Agreement - Non-Solicitation."
Indemnification and Insurance
Pursuant to the Merger Agreement, for a period of six years from
consummation of the Merger, MedQuist is required to take all actions necessary
to cause the Articles of Incorporation and Bylaws of the Surviving Corporation
to contain the provisions with respect to indemnification and exculpation from
liability set forth in MRC's Articles of Incorporation and Bylaws on the date of
the Merger Agreement. In addition, MedQuist agreed to certain indemnification
arrangements. The Merger Agreement also
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requires that for a period of six years from the consummation of the Merger,
MedQuist will cause the Surviving Corporation and Medical Records Corp. to
provide officers' and directors' liability insurance in respect of acts or
omissions occurring prior to the consummation of the Merger. See "The Merger --
Certain Terms of the Merger Agreement -- Indemnification and Insurance."
Conditions to the Merger
The completion of the Merger depends upon the satisfaction or waiver of
a number of conditions. See "The Merger -- Certain Terms of the Merger Agreement
- -- Conditions to the Merger."
Closing Date and Effective Time.
The closing of the Merger will be held on a date (the "Closing Date")
specified by the parties which shall be no later than the second business day
following the date on which all conditions to the Merger have been satisfied or
waived, unless another time, date or place is agreed to in writing by the
parties. The Merger will be consummated by filing with the Secretary of State of
Missouri articles of merger in such form as is required by and executed in
accordance with Missouri law and will become effective (the "Effective Time")
when a certificate of merger has been issued by the Secretary of State of
Missouri. It is anticipated that the Effective Time will be within two business
days after the MedQuist Meeting.
Termination of the Merger Agreement
MedQuist and MRC may agree to terminate the Merger Agreement without
completing the Merger, and either MedQuist or MRC may terminate the Merger
Agreement if any action has been instituted and is pending by any governmental
entity with proper authority to restrain, modify or prohibit the Merger. In
addition, MRC may terminate the Merger Agreement if: (a) any condition to its
obligation to complete the Merger has not been fulfilled by February 28, 1999
unless extended by both of MedQuist and MRC's boards of directors, except that
such right to terminate will not be available to MRC if MRC's failure to perform
any obligation under the Merger Agreement has been the cause or resulted in the
failure of the closing to occur; (b) the Board of Directors of MedQuist
withdraws, modifies or changes its recommendation of the Merger Agreement or the
Merger in a manner adverse to MRC; or (c) MedQuist's shareholders have not duly
approved the MedQuist Merger Proposal within 45 days of the effective date of
the Registration Statement. MedQuist may terminate the Merger Agreement if: (x)
any condition to its obligation to complete the Merger has not been fulfilled by
February 28, 1999 unless extended by both of MedQuist's and MRC's boards of
directors, except that such right to terminate will not be available to MedQuist
if MedQuist's failure to perform any obligation under the Merger Agreement has
been the cause or resulted in the failure of the closing to occur; (y) the board
of directors of MRC withdraws, modifies or changes its recommendation of the
Merger Agreement or the Merger in a manner adverse to MedQuist or Sub, or
recommends to the MRC shareholders a competing transaction; or (z) MRC's
shareholders have not duly approved the Merger within 45 days of the effective
date of the Registration Statement or if MRC has entered into an agreement with
respect to a competing transaction.
Termination Fees
The Merger Agreement requires MRC to pay to MedQuist a termination fee
of $7.5 million if the Merger Agreement is terminated under one of the
circumstances described in clauses (y) or (z) in the
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immediately preceding paragraph. See "The Merger -- Certain Terms of the Merger
Agreement -- Termination Fees."
MRC Option Agreement
As a condition to entering into the Merger Agreement, MedQuist required
that MRC grant to MedQuist an option to purchase up to 4,911,090 shares of MRC
Common Stock. The exercise price per share is $10.33. The option could
discourage other companies from trying or proposing to combine with MRC before
the Merger is completed. MedQuist cannot exercise the option unless one of the
circumstances described in clauses (y) or (z) of the "Termination of the Merger
Agreement" paragraph occurs. See "The Merger -- MRC Option Agreement" and the
Stock Option Agreement set forth as Annex B to this Joint Proxy
Statement/Prospectus.
Opinions of Financial Advisors
In deciding to approve the Merger, MedQuist's board of directors
considered the opinion (the "VBW&Co. Opinion") from its financial advisor, Volpe
Brown Whelan & Company, LLC ("VBW&Co.") that the Exchange Ratio (as defined in
the VBW&Co. Opinion) is fair to MedQuist from a financial point of view. In
deciding to approve the Merger, MRC's board of directors considered the opinion
(the "BT Alex. Brown Opinion") from its financial advisor, BT Alex. Brown
Incorporated, that the consideration payable to the holders of outstanding
capital stock of MRC is fair from a financial point of view.
The VBW&Co. Opinion and the BT Alex. Brown Opinion are set forth as
Annexes D and E, respectively, to this Joint Proxy Statement/Prospectus. We
encourage you to read these opinions. See "The Merger -- Opinions of Financial
Advisors" and Annexes D and E.
MedQuist's Reasons for the Merger
In connection with its evaluation of the Merger, the MedQuist Board
relied upon and consulted with MedQuist's senior management and their accounting
and legal advisors and considered the following matters: (i) the expectation
that the Merger will be a tax-free transaction and would be accounted as a
pooling-of-interests, (ii) excluding one time costs associated with the
transaction, the Merger is expected to be accretive to MedQuist's earnings per
share for 1999, (iii) the medical transcription industry is undergoing
consolidation and larger and better capitalized companies are entering the
market; scale is an important competitive factor which enables the largest
participants to leverage key resources, (iv) the strength of the MRC management
and research and development teams will provide long-term benefits to MedQuist,
(v) MedQuist's and MRC's respective technologies are potentially complementary,
(vi) the combined company is expected to have greater earnings and cash flow and
higher market capitalization, (vii) the results of the due diligence review of
MRC, (viii) the combined company should be able to reduce corporate overhead
costs by combining accounting, financial, legal, human resources and other
corporate overhead, (ix) the terms and conditions of the Merger Agreement, (x)
the various risks of the transaction, including those set forth herein under
"Risk Factors" and (xi) the VBW&Co. presentations and its opinion that the
Exchange Ratio (as defined in VBW&Co. Opinion) was fair to MedQuist from a
financial point of view. See "The Merger -- MedQuist's Reasons for the Merger."
MRC's Reasons for the Merger
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In reaching its conclusion to approve the Merger Agreement, the MRC
Board of Directors consulted with the management of MRC, as well as its
financial and legal advisors, and considered the following factors, which it
believed to be material to making such a decision: (i) the expectations of MRC's
shareholders created by MRC's proposed initial public offering, (ii) the
financial performance and condition, businesses and prospects of MRC and
MedQuist, including, but not limited to, information with respect to the
historical stock prices of MedQuist and the respective operating performances of
MRC and MedQuist, (iii) the terms of the Merger Agreement, including the form
and amount of the Merger Consideration to be received by the MRC shareholders
and option holders and the terms and structure of the Merger, (iv) the fact
that, in the absence of a combination with MedQuist, MRC is required, under the
terms of MRC's Articles of Incorporation, over the next six years to
incrementally redeem all of the outstanding shares of its Series V Preferred
Stock and Series VI Preferred Stock at times when MRC may not have the financial
resources to fund such redemptions, (v) the fact that it is a condition to
completion of the Merger that the Merger be tax-free to the MRC shareholders and
qualify as a pooling-of-interests transaction for accounting and financial
reporting purposes, (vi) the BT Alex. Brown Opinion that the consideration
payable to the holders of outstanding capital stock of MRC is fair from a
financial point of view and (vii) the likelihood that larger technology-based
companies would seek to enter the medical transcription business.
In reaching its conclusion, the MRC Board also considered the following
factors, which it believed argued against entering into the Merger Agreement:
(i) the fact that a combination with MedQuist would prevent it from seeking
other avenues of maximizing the value of the MRC Common Stock and the MRC
Preferred Stock for the MRC shareholders, (ii) the fact that the Merger would
prevent MRC from maximizing the value of the MRC Common Stock and the MRC
Preferred Stock by pursuing its existing strategic plan as an independent entity
and that, after the Merger, the holders of MRC Common Stock and the MRC
Preferred Stock who receive shares of MedQuist Common Stock in the Merger will
have to rely on the operating success of MedQuist to maximize the value of their
investment and (iii) the Merger Consideration consists of MedQuist Common Stock,
rather than cash. See "The Merger -- MRC's Reasons for the Merger."
Interests of Certain Persons in the Merger
Of the outstanding MRC Common Stock and the MRC Common Stock issuable
upon conversion of the MRC Preferred Stock, approximately 83% is beneficially
owned by MRC's officers and directors.
In considering the MRC Board's recommendation that you vote in favor of
the Merger, you should be aware that a number of officers of MRC, including some
officers who are also directors, have employment agreements, severance
agreements or other interests in the Merger that are different from, or in
addition to, yours. In addition, certain MRC shareholders have options,
registration rights or other interests in the Merger that are different from, or
in addition to yours. See "The Merger -- Interests of Certain Persons in the
Merger."
Ownership of MedQuist following the Merger
We anticipate that MedQuist will issue approximately 8,661,583 shares
of MedQuist Common Stock to MRC shareholders. Based upon the number of shares of
MedQuist Common Stock issued and outstanding on the MedQuist Record Date and the
anticipated number of shares of MedQuist Common Stock authorized to be issued in
the Merger, the shares of MedQuist Common Stock issued to MRC shareholders in
the Merger will constitute approximately 26.7% of the outstanding common stock
11
<PAGE>
of MedQuist after the Merger. In addition, holders of MRC stock options will
receive MedQuist stock options to purchase approximately 1,543,281 shares of
MedQuist Common Stock. Assuming the exercise of all MedQuist Stock Options after
the Merger, MRC shareholders will own approximately 28.1% of the fully diluted
common stock of MedQuist.
Management of the Surviving Corporation after the Merger
The members of the board of directors and the officers of Sub
immediately prior to the consummation of the Merger will serve as the directors
and officers of the Surviving Corporation, until their respective successors are
duly elected and qualified. See "The Merger -- Management of the Surviving
Corporation Upon Consummation of the Merger."
Regulatory Approvals
Other than certain filings made pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, there are no federal or state
regulatory requirements that must be complied with in connection with the
Merger. See "The Merger -- Regulatory Approvals."
Affiliate Agreements
Certain shareholders of MedQuist and MRC, who may be deemed to be
affiliates of MedQuist and MRC, respectively, for purposes of Rule 145 under the
Securities Act, have executed agreements that restrict the sale, transfer or
other disposition of MedQuist Common Stock, or MRC Common Stock in order to
comply with the requirements of certain federal securities laws and certain
pooling of interests accounting rules. See "The Merger -- Affiliate Agreements".
Resale of MedQuist Common Stock
The MedQuist Common Stock issued in connection with the Merger will be
freely transferable, except that shares issued to any MRC shareholder who is an
affiliate of MRC or who becomes an affiliate of MedQuist are subject to certain
restrictions on resale. Certain shareholders of MRC who may be deemed to be
affiliates will, as a condition to completion of the Merger, execute agreements
that, except under certain circumstances, prohibit the sale, transfer or other
disposition of MedQuist Common Stock received by such shareholders in the Merger
in order to comply with the requirements of certain federal securities laws and
certain pooling-of-interests requirements. See "The Merger -- Resale of MedQuist
Common Stock."
Rights of Dissenting Shareholders
MedQuist
Each holder of MedQuist Common Stock who files a written notice of
dissent to the Merger with MedQuist before the MedQuist Meeting and who
otherwise complies with the applicable procedures under New Jersey law will be
entitled to receive the fair value of his or her shares of MedQuist Common Stock
in cash if the Merger is completed. See "The Merger -- Rights of Dissenting
MedQuist Shareholders."
12
<PAGE>
MRC
Each holder of MRC Common Stock or MRC Preferred Stock who files a
written objection to the Merger with MRC before the MRC Meeting and who
otherwise complies with the applicable procedures under Missouri law will be
entitled to receive the fair value of his or her shares of MRC Common Stock or
MRC Preferred Stock in cash if the Merger is completed. See "The Merger --
Rights of Dissenting MRC Shareholders."
Redemption Rights
In connection with the Merger, the holders of MRC Preferred Stock have
the right to require MRC to redeem their Preferred Stock in accordance with the
terms of MRC's Articles of Incorporation. Any holder of MRC Preferred Stock must
notify MRC in writing within 15 days of the receipt of the notice accompanying
this Joint Proxy Statement/Prospectus in order to have such MRC Preferred Stock
redeemed. Any MRC Preferred Stock required to be redeemed will be redeemed for
the amounts set forth in the following table. The table also shows the minimum
value of MedQuist Common Stock that holders of MRC Preferred Stock will receive
in the Merger.
Minimum Value of
MedQuist Common Stock
Receivable in the
Series of MRC Redemption Price Merger Per Share of MRC
Preferred Stock Per Share Preferred Stock
- ----------------------- ----------------------- -------------------------
Series IV $381.10 $557.70
Series V $381.10 $758.45
Series VI $100.00 $155.52
Certain Federal Income Tax Consequences
It is a condition to the consummation of the Merger that we receive an
opinion from Blank Rome Comisky & McCauley LLP, counsel to MedQuist, that the
Merger will qualify as a tax-free exchange and that the MRC shareholders will
not recognize any gain or loss for federal income tax purposes in the Merger
(except for tax payable because of cash received instead of fractional shares by
MRC shareholders and cash received by MRC shareholders who have exercised their
dissenters' rights of appraisal under Missouri law.) See "The Merger -- Certain
Federal Income Tax Consequences."
Accounting Treatment
It is a condition to the consummation of the Merger that we receive a
letter from our accountants which states that such accountants believe that the
Merger qualifies as a "pooling-of-interests" transaction, which means that we
will treat our companies as if they had always been combined for accounting and
financial reporting purposes. See "The Merger -- Accounting Treatment."
Comparison of Shareholders' Rights
Pursuant to the Merger, at the Effective Time the holders of MRC Common
Stock and MRC Preferred Stock will become shareholders of MedQuist. See
"Comparison of Shareholders' Rights" for a summary of the material differences
between the rights of MedQuist shareholders and MRC shareholders. These
differences arise from the distinctions between the laws of the jurisdictions in
which
13
<PAGE>
each of MedQuist and MRC is incorporated (New Jersey and Missouri, respectively)
and the distinctions between the respective charters and bylaws of MedQuist and
MRC prior to the Merger.
Risk Factors
The Merger and an investment in securities of MedQuist involve certain
risks and uncertainties, including risks relating to the integration of MedQuist
and MRC, risks relating to the business of MedQuist and other risks and
uncertainties discussed under "Risk Factors" and elsewhere in this Joint Proxy
Statement/Prospectus and in the documents incorporated herein by reference. See
"Risk Factors."
14
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF MEDQUIST
(In thousands, except per share data)
MedQuist is providing the following financial information to aid you in
your analysis of the financial aspects of the Merger. MedQuist derived this
information from audited financial statements for the year ended December 31,
1993 through the year ended December 31, 1997 and unaudited financial statements
for the six months ended June 30, 1997 and 1998. These financial statements were
retroactively restated to reflect MedQuist's acquisition of Digital Dictation,
Inc. ("DDI") on May 28, 1998, which has been accounted for as a
pooling-of-interests. Operating results for the six months ended June 30, 1998
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1998. This information is only a summary and you
should read it in conjunction with MedQuist's historical financial statements
and related notes contained in the annual reports and other information MedQuist
has filed with the SEC. See "Where You Can Find More Information."
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operation Data(1):
Revenues $ 2,746 $ 28,679 $ 50,185 $ 68,417 $ 94,616 $ 43,162 $ 62,919
Costs of expenses:
Costs of revenues 2,381 21,960 38,190 51,516 70,906 32,353 47,086
Selling, general and
administrative 1,688 2,798 4,325 3,579 4,620 2,188 2,775
Depreciation 310 861 2,110 2,750 3,940 1,761 2,529
Amortization 12 264 496 1,176 1,517 710 885
Nonrecurring merger costs -- -- -- -- -- -- 750
-------- -------- -------- -------- -------- -------- --------
Total operating expenses 4,391 25,883 45,121 59,021 80,983 37,012 54,025
-------- -------- -------- -------- -------- -------- --------
Operating income (loss) (1,645) 2,796 5,064 9,396 13,633 6,150 8,894
Interest expense (income), net 1,457 2,765 3,720 1,686 194 128 (82)
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes (3,102) 31 1,344 7,710 13,439 6,022 8,976
Income tax provision (benefit) (1,290) 3 633 3,086 5,192 2,329 3.441
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations (1,812) 28 711 4,624 8,247 3,693 5,535
Discontinued operations(2) 3,746 1,612 (1,729) -- -- -- --
Extraordinary item(3) -- -- (545) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) 1,934 1,640 (1,563) 4,624 8,247 3,693 5,535
Inducement deduction(4) -- -- -- (707) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) available to common
shareholders $ 1,934 $ 1,640 $ (1,563) $ 3,917 $ 8,247 $ 3,693 $ 5,535
======== ======== ======== ======== ======== ======== ========
Basic income (loss) per common share:
Continuing operations(1) $ (0.19) $ 0.00 $ 0.09 $ 0.27 $ 0.38 $ 0.17 $ 0.24
Discontinued operations(2) 0.40 0.21 (0.22) -- -- -- --
Extraordinary item(3) -- -- (0.07) -- -- -- --
Inducement deduction(4) -- -- -- (0.04) -- -- --
-------- -------- -------- -------- -------- -------- --------
$ 0.21 $ 0.21 $ (0.20) $ 0.23 $ 0.38 $ 0.17 $ 0.24
======== ======== ======== ======== ======== ======== ========
Diluted income (loss) per common share:
Continuing operations(1) $ (0.19) $ 0.00 $ 0.08 $ 0.24 $ 0.35 $ 0.16 $ 0.23
Discontinuing operations(2) 0.40 0.21 (0.21) -- -- -- --
Extraordinary item(3) -- -- (0.06) -- -- -- --
Inducement deduction(4) -- -- -- (0.04) -- -- --
-------- -------- -------- -------- -------- -------- --------
$ 0.21 $ 0.21 $ (0.19) $ 0.20 $ 0.35 $ 0.16 $ 0.23
======== ======== ======== ======== ======== ======== ========
Balance Sheet Data:
Working capital $ 2,246 $ 1,121 $ 4,788 $ 19,068 $ 23,307 $ 19,943 $ 28,773
Total assets 30,347 52,631 59,735 76,595 94,142 81,895 99,219
Long-term debt, net of current portion 12,663 30,514 16,013 1,750 1,405 1,576 28
Shareholders' equity 9,574 11,521 11,025 66,740 78,018 70,837 87,648
</TABLE>
- ----------------
(1) Transcriptions, Ltd. was acquired by MedQuist effective May 1, 1994. All
prior businesses of MedQuist have been treated as discontinued operations.
(2) On November 14, 1995, MedQuist 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 Supplemental
Consolidated Financial Statements of MedQuist.
(3) Represents the loss on early extinguishment of debt, net of income taxes.
(4) Represents issuance of 128 shares of MedQuist Common Stock to induce a
warrant holder to exercise. MedQuist recorded a $707 non-recurring
deduction from net income available to common shareholders. See Note 7 of
Notes to Supplemental Consolidated Financial Statements of MedQuist.
15
<PAGE>
SELECTED SUPPLEMENTAL FINANCIAL DATA OF MEDQUIST
(In thousands, except per share data)
MedQuist is providing the following financial information to aid you in
your analysis of the financial aspects of the Merger. The following data is
supplemental to reflect the retroactive restatement of MedQuist's financial
statements for its August 18, 1998 acquisition of Signal accounted for as a
pooling-of-interests and does not include the estimated transaction costs of
$750 related to the Signal acquisition or a deferred tax asset of approximately
$4,600 related to the Signal acquisition which will be charged to expense and
credited directly to shareholders' equity, respectively, in the quarter ended
September 30, 1998. MedQuist derived this information from the audited
supplemental financial statements for the years ended December 31, 1995, 1996
and 1997 and from the unaudited supplemental financial statements for the years
ended December 31, 1993 and 1994 and for the six months ended June 30, 1997 and
1998. Operating results for the six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1998. This information is only a summary and you should read
it in conjunction with MedQuist's Supplemental Financial Statements and related
notes included elsewhere in this Joint Proxy Statement/Prospectus and other
information MedQuist has filed with the SEC. See "Where You Can Find More
Information."
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operation Data (1):
Revenues $ 6,177 $ 33,738 $ 57,305 $ 76,475 $103,910 $ 47,618 $ 68,200
Costs and expenses:
Cost of revenues 5,288 26,110 44,062 58,631 78,955 36,111 51,741
Selling, general and
administrative 1,688 2,798 4,325 3,579 4,620 2,188 2,775
Depreciation 444 988 2,236 2,872 4,121 1,828 2,635
Amortization 12 264 496 1,176 1,517 710 885
Nonrecurring merger costs -- -- -- -- -- -- 750
------- -------- -------- -------- -------- -------- --------
Total operating expenses 7,432 30,160 51,119 66,258 89,213 40,837 58,786
------- -------- -------- -------- -------- -------- --------
Operating income (loss) (1,255) 3,578 6,186 10,217 14,697 6,781 9,414
Interest expense (income), net 1,457 2,782 3,707 1,665 158 112 (105)
------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes (2,712) 796 2,479 8,552 14,539 6,669 9,519
Income tax provision (benefit) (2) (1,290) 3 633 3,086 5,192 2,329 3,441
------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations (2) (1,422) 793 1,846 5,466 9,347 4,340 6,078
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 4,340 6,078
Inducement deduction (5) -- -- -- (707) -- -- --
------- -------- -------- -------- -------- -------- --------
Net income (loss) available to common
shareholders $ 2,324 $ 2,405 $(428) $ 4,759 $ 9,347 $ 4,340 $ 6,078
======= ======== ======== ======== ======== ======== ========
Basic income (loss) per common share:
Continuing operations (2) $ (0.14) $ 0.10 $0.22 $ 0.31 $ 0.41 $ 0.20 $ 0.26
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 $ 0.20 $ 0.26
======= ======== ======== ======== ======== ======== ========
Diluted income (loss) per common share:
Continuing operations (2) $ (0.14) $ 0.10 $ 0.20 $ 0.28 $ 0.39 $ 0.18 $ 0.25
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 $ 0.18 $ 0.25
====== ======== ======== ======== ======== ======== ========
Balance Sheet Data:
Working capital $ 2,898 $ 2,097 $ 6,078 $ 20,426 $ 25,121 $ 21,676 $ 30,807
Total assets 31,320 54,192 61,610 78,760 96,889 84,480 102,281
Long-term debt, net of current portion 13,245 30,891 16,178 1,750 1,405 1,576 28
Shareholders' equity 9,905 12,391 12,369 68,427 80,328 73,005 89,757
</TABLE>
(1) Transcriptions, Ltd. was acquired by MedQuist effective May 1, 1994. All
prior businesses of MedQuist have been treated as discontinued operations.
(2) Signal was an "S" Corporation prior to its merger with MedQuist, and
accordingly, the supplemental 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 supplemental 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.
16
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------------------------------------------------------
1993 1994 1995 1996 1997 1997 1998
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing operations before
income taxes, as reported $(2,712) $ 796 $2,479 $8,552 $14,539 $6,669 $9,519
Pro forma income tax provision (benefit) (1,134) 309 1,087 3,423 5,632 2,588 3,658
----------------------------------------------------------------------------
Pro forma income (loss) from continuing
operations $(1,578) $ 487 $1,392 $5,129 $ 8,907 $4,081 $5,861
============================================================================
Pro forma income (loss) from continuing
operations per share:
Basic $ (0.16) $0.06 $ 0.16 $ 0.29 $ 0.40 $ 0.18 $ 0.25
============================================================================
Diluted $ (0.16) $0.06 $ 0.15 $ 0.26 $ 0.37 $ 0.17 $ 0.24
============================================================================
</TABLE>
(3) On November 14, 1995, MedQuist 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 Supplemental
Consolidated Financial Statements of MedQuist.
(4) Represents the loss on early extinguishment of debt, net of income taxes.
(5) Represents issuance of 128 shares of MedQuist Common Stock to induce a
warrant holder to exercise. MedQuist recorded a $707 non-recurring deduction
from net income available to common shareholders. See Note 7 of Notes to
Supplemental Consolidated Financial Statements of MedQuist.
17
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF MRC
(In thousands, except per share and statistical data)
MRC is providing the following financial information to aid you in your
analysis of the financial aspects of the Merger. MRC derived this information
from audited financial statements for the year ended December 31, 1993 through
the year ended December 31, 1997 and unaudited financial statements for the six
months ended June 30, 1997 and 1998. Operating results for the six months ended
June 30, 1998 are not necessarily indicative of the results that may be achieved
for the entire year ending December 31, 1998. This information is only a summary
and you should read it in conjunction with MRC's historical financial statements
and related notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations of MRC, included elsewhere in this Joint
Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------------------------------------- --------------------
1993 1994(1) 1995(1) 1996(2) 1997(3) 1997(3) 1998(3)
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operation Data:
Net revenues $ 21,127 $ 22,719 $ 49,180 $ 71,700 $108,117 $ 53,268 $ 60,173
Costs and expenses:
Cost of revenues 17,416 18,864 40,154 57,330 86,975 42,686 47,870
Selling, general and
administrative expenses 3,511 3,076 4,352 8,328 9,743 4,783 5,276
Depreciation and amortization 2,755 1,582 3,907 6,441 10,239 4,850 4,424
Restructuring charges (4) -- -- 347 644 2,075 -- --
-------- -------- -------- -------- -------- -------- --------
Total operating expenses 23,682 23,522 48,760 72,743 109,032 52,319 57,570
-------- -------- -------- -------- -------- -------- --------
Operating income (loss) (2,555) (803) 420 (1,043) (915) 949 2,603
Interest income (expense), net (203) 146 (539) (382) (310) (150) (98)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes (2,758) (657) (119) (1,425) (1,225) 799 2,505
Benefit (provision) from income taxes -- 532 (7) -- -- (522) (1,127)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ (2,758) $ (125) $ (126) $ (1,425) $ (1,225) $ 277 $ 1,378
======== ======== ======== ======== ======== ======== ========
Basic earnings per share $ (2.40) $ (0.08) $ (0.07) $ (0.39) $ (0.21) $ 0.05 $ 0.23
Diluted earnings per share $ (2.40) $ (0.08) $ (0.07) $ (0.39) $ (0.21) $ 0.02 $ 0.08
Basic weighted average common shares
outstanding 1,148 1,579 1,817 3,683 5,866 5,866 5,874
Diluted weighted average common shares
outstanding, unless antidilutive -- -- -- -- -- 17,137 17,380
Other Data:
EBITDA (5) $ 200 $ 779 $ 4,327 $ 5,398 $ 9,324 $ 5,799 $ 7,027
Cash flows from operating activities (656) 867 3,638 4,011 7,319 4,541 7,429
Cash flows from investing activities (11,517) 280 (2,532) (30,068) (8,496) (7,373) (3,060)
Cash flows from financing activities 13,490 244 184 27,091 (2,681) (1,242) 446
Balance Sheet Data:
Working capital $ 7,614 $ 4,398 $ 6,475 $ 12,118 $ 10,264 $ 9,053 $ 12,319
Total assets 18,094 31,285 28,538 78,307 75,148 78,854 78,570
Long-term debt, including current
portion 185 8,686 7,164 11,903 9,036 10,464 7,270
Shareholder equity (1,189) (420) (250) 3,512 2,286 3,788 5,650
</TABLE>
(1) In December 1994, MRC acquired all the outstanding common stock of
SecrePhone Ltd. This acquisition was accounted for as a purchase, and the
results of SecrePhone Ltd. are included in MRC's financial statements from
the date of the acquisition.
(2) In July 1996, MRC acquired all the outstanding stock of Medical Records
Corp. This acquisition has been accounted for as a purchase, and the results
of Medical Records Corp., a wholly owned subsidiary of MRC, are included in
MRC's financial statements from the date of the acquisition.
(3) During 1997, MRC acquired the assets of two entities and the stock of one
entity for cash totaling approximately $1,900, plus the assumption of
certain liabilities. Each of the 1997 acquisitions was accounted for as a
purchase, and the results of operations are included in MRC's financial
statements from the dates of acquisition.
(4) MRC's results of operations have been adversely affected in 1995, 1996 and
1997 by restructuring charges associated with the closure and consolidation
of redundant and less profitable client service centers and related costs
and other non-recurring acquisition and integration costs in 1997 in
connection with the acquisition of Medical Records Corp.
(5) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
represents operating income (loss) plus depreciation and amortization.
Management of MRC believes EBITDA is a meaningful measurement of MRC's
ability to generate cash flows to fund future growth and operating and
investing needs. EBITDA should not be considered as an alternative measure
of net income or cash provided by operating activities (both as determined
in accordance with generally accepted accounting principles), but is
presented to provide additional information related to MRC's debt service
capability. EBITDA should not be considered in isolation from, or as a
substitute for, other measures of financial performance or liquidity.
18
<PAGE>
A reconciliation of EBITDA to net income (loss) is as follows:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA $ 200 $ 779 $ 4,327 $ 5,398 $ 9,324 $ 5,799 $ 7,027
Interest income (expense), net (203) 146 (539) (382) (310) (150) (98)
Benefit (provision) from income taxes -- 532 (7) -- -- (522) (1,127)
Depreciation and amortization (2,755) (1,582) (3,907) (6,441) (10,239) (4,850) (4,424)
------- ------- ------- ------- -------- ------- -------
Net income (loss) $(2,758) $ (125) $ (126) $(1,425) $ (1,225) $ 277 $ 1,378
======= ======= ======= ======= ======== ======= =======
</TABLE>
19
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(In thousands, except per share data)
We expect that the Merger will be accounted for as a
"pooling-of-interests," which means that for accounting and financial reporting
purposes we will treat our companies as if they had always been combined.
We have presented below unaudited pro forma financial information that
reflects the pooling-of-interests method of accounting and is intended to
give you a better picture of what our businesses might have looked like had they
always been combined. We prepared the pro forma statements of operations and
balance sheet by adding or combining together the supplemental amounts of
MedQuist with the historical amounts of MRC. We then made adjustments for income
taxes, when appropriate, to retroactively reflect the combination. The companies
may have performed differently if they were combined. You should not rely on the
pro forma information as being indicative of the historical results that we
would have had or the future results that we will experience after the Merger.
The following pro forma statement of operations data does not include (i) the
estimated transaction costs of $8,000 related to the Merger and the costs
associated with known bonus and severance arrangements of approximately $1,550,
which will be charged to expense in the quarter which includes the Closing Date,
and (ii) the estimated transaction costs of $750 related to MedQuist's August
18, 1998 acquisition of Signal and estimated transactions costs related to MRC's
withdrawn initial public offering of $675, which will be charged to expense in
the quarter ended September 30, 1998. The following pro forma balance sheet data
does not include (i) the estimated transaction costs related to MedQuist's
Signal acquisition and (ii) a deferred tax asset of approximately $4,600 related
to MedQuist's Signal acquisition. In addition, the following pro forma financial
data does not include a restructuring charge expected to be recorded by the
combined company upon consummating the Merger for certain costs associated with
combining the companies. See "Unaudited Pro Forma Condensed Combined Financial
Information."
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------------- -------------------------
1995(1) 1996(1) 1997 1997 1998
--------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $106,485 $148,175 $212,027 $100,886 $128,373
Costs and expenses:
Cost of revenues 84,216 115,961 165,930 78,797 99,611
Selling, general and administrative 8,677 11,908 14,363 6,971 8,051
Depreciation 5,743 7,339 10,225 4,698 6,085
Amortization 896 3,149 5,652 2,690 1,859
Restructuring charges 347 644 2,075 -- --
Nonrecurring merger costs -- -- -- -- 750
-------- -------- -------- -------- --------
Total operating expenses 99,879 139,001 198,245 93,156 116,356
-------- -------- -------- -------- --------
Operating income 6,606 9,174 13,782 7,730 12,017
Interest expense, (income) net 4,246 2,047 468 262 (7)
-------- -------- -------- -------- --------
Income from continuing operations before
income taxes 2,360 7,127 13,314 7,468 12,024
Income tax provision(2) 640 2,721 5,293 2,851 4,568
-------- -------- -------- -------- --------
Income from continuing operations(2) $ 1,720 $ 4,406 $ 8,021 $ 4,617 $ 7,456
======== ======== ======== ======== ========
Income per share from continuing operations(2):
Basic(3) $0.14 $0.19 $0.26 $0.15 $0.23
Diluted $0.14 $0.17 $0.25 $0.14 $0.22
Weighted average shares outstanding:
Basic(3) 11,935 23,338 30,926 30,467 31,862
Diluted 12,487 25,244 32,558 32,202 33,785
Balance Sheet Data (as of June 30, 1998):
Working capital $ 32,901
Total assets 180,851
Long-term debt, net of current portion 5,284
Shareholders' equity 132,675
</TABLE>
(1) In July 1996, MRC acquired all of the outstanding capital stock of Medical
Records Corp. in a purchase transaction. Medical Records Corp. generated
revenues and operating income (loss) of $42,600 and $600 and $27,600 and
($400) in 1995 and in 1996 prior to the acquisition, respectively.
(2) Signal was an "S" Corporation prior to its merger with MedQuist, and
accordingly, MedQuist's supplemental statement of operations data and the
above pro forma statement of operations data do not include a provision for
income taxes on Signal's income. The following information sets forth the
pro forma income tax provision, income from continuing operations and income
from continuing operations per share assuming Signal was a "C" Corporation
for all periods presented.
20
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------------------------------
1995 1996 1997 1997 1998
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pro forma income from continuing operations
before income taxes, as presented $ 2,360 $ 7,127 $13,314 $ 7,468 $12,024
Pro forma income tax provision 1,094 3,058 5,733 3,110 4,785
------- ------- ------- ------- -------
Pro forma income from continuing operations $ 1,266 $ 4,069 $ 7,581 $ 4,358 $ 7,239
======= ======= ======= ======= =======
Pro forma income from continuing operations per share:
Basic(3) $ 0.11 $ 0.17 $ 0.25 $ 0.14 $ 0.23
======= ======= ======= ======= =======
Diluted $ 0.10 $ 0.16 $ 0.23 $ 0.14 $ 0.21
======= ======= ======= ======= =======
</TABLE>
(3) The weighted average shares outstanding used to calculate basic
earnings per share include MRC's convertible preferred stock on an
as-converted basis.
21
<PAGE>
COMPARATIVE PER SHARE DATA
(Unaudited)
The following table presents historical, supplemental and pro forma per
share data for MedQuist and historical and equivalent pro forma per share data
for MRC. Equivalent pro forma per share amounts for MRC were calculated by
multiplying the relevant MedQuist pro forma amount by 0.5163, the assumed
exchange ratio. The assumed exchange ratio is based on the assumption that the
MedQuist Stock Value will be equal to or greater than $16.28 as of the Closing
Date. If the MedQuist Stock Value is below $16.28, the exchange ratio will be
adjusted upward to equal $8.41 divided by the MedQuist Stock Value, which will
change the equivalent pro forma amounts presented below. The following tables
should be read in conjunction with the historical and supplemental consolidated
financial statements of MedQuist, the historical financial statements of MRC and
the unaudited pro forma financial data included under the caption "Unaudited Pro
Forma Combined Financial Information," all of which is included elsewhere in
this Joint Proxy Statement/Prospectus or contained in the annual reports and
other information MedQuist has filed with the SEC. See "Where You Can Find More
Information."
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
--------------------------------------- ---------------
1995 1996 1997 1998
----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
MEDQUIST
Income from continuing operations(1):
Historical - Basic $ 0.09 $ 0.27 $ 0.38 $ 0.24
Historical - Diluted 0.08 0.24 0.35 0.23
Supplemental - Basic 0.22 0.31 0.41 0.26
Supplemental - Diluted 0.20 0.28 0.39 0.25
Pro Forma - Basic 0.14 0.19 0.26 0.23
Pro Forma - Diluted 0.14 0.17 0.25 0.22
Dividends:
Historical(2) -- -- -- --
Book value(1):
Supplemental(3) -- -- $3.50 $ 3.79
Pro forma(4) -- -- 3.83 4.12
MRC
Net income (loss):
Historical - Basic $ (0.07) $ (0.39) $ (0.21) $ 0.23
Historical - Diluted ` (0.07) (0.39) (0.21) 0.08
Equivalent Pro Forma - Basic(5) 0.07 0.10 0.13 0.12
Equivalent Pro Forma - Diluted(5) 0.07 0.09 0.13 0.11
Dividends:
Historical -- -- -- --
Book value:
Historical(6) -- -- $ 3.07 $ 3.22
Equivalent pro forma(7) -- -- 1.98 2.13
</TABLE>
(1) MedQuist's income amounts do not include an adjustment to reflect a "C"
corporation income tax provision on the income attributable to Signal, and
MedQuist's book value amounts do not include a deferred tax asset of
approximately $4.6 million that will be recorded in connection with the
Signal acquisition (see Notes 1 and 9 of Notes to Supplemental Consolidated
Financial Statements of MedQuist).
(2) Does not include distributions made by DDI and Signal prior to their mergers
with MedQuist (see "Recent Developments of MedQuist").
(3) Computed by dividing MedQuist's shareholders' equity by the number of shares
of MedQuist Common Stock outstanding at the end of the period.
(4) Computed by dividing pro forma shareholders' equity by the pro forma number
of shares of MedQuist Common Stock outstanding at the end of the period
which includes the MedQuist Common Stock issuable to MRC shareholders in the
Merger.
(5) Computed by multiplying the relevant pro forma net income amount by the
assumed exchange ratio of 0.5163.
(6) Computed by dividing MRC's shareholders' equity by the number of shares of
common stock outstanding at the end of the period, assuming the conversion
of MRC's convertible securities.
(7) Computed by multiplying the relevant pro forma book value amount by the
assumed exchange ratio of 0.5163.
22
<PAGE>
MARKET PRICE INFORMATION
Since May 24, 1996, MedQuist Common Stock has been traded on the Nasdaq
National Market under the symbol "MEDQ." From September 20, 1994 until May 24,
1996, MedQuist Common Stock was traded on the American Stock Exchange under the
symbol "MBS." There is no established trading market for MRC Common Stock or MRC
Preferred Stock.
The information set forth in the table below presents: (i) the last
sales price per share of MedQuist Common Stock, as reported by the Nasdaq
National Market on September 17, 1998, the last day on which trading occurred
prior to public announcement of the Merger; and (ii) the pro forma equivalent
per share of MRC Common Stock, Series IV Preferred Stock, Series V Preferred
Stock and Series VI Preferred Stock calculated by multiplying the closing price
per share of MedQuist Common Stock reported by the Nasdaq National Market by the
assumed exchange ratios of 0.5163, 34.2376, 46.5619 and 9.5476, respectively.
<TABLE>
<CAPTION>
Pro Forma Equivalent of MRC Stock
------------------------------------------------------
MedQuist Series IV Series V Series VI
Common Common Preferred Preferred Preferred
Stock Stock Stock Stock Stock
------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Price Per Share as of September 17, 1998 $ 26.125 $ 13.49 $ 894.46 $ 1,216.43 $ 249.43
</TABLE>
MedQuist will cause the listing on the Nasdaq National Market of the
shares of MedQuist Common Stock issuable in connection with the Merger. See "The
Merger -- Nasdaq Listing."
MRC shareholders are urged to obtain a current market quotation for the
MedQuist Common Stock. No assurance can be given as to the future prices of, or
markets for, MedQuist Common Stock.
DIVIDEND POLICIES
To date, MedQuist has not paid any dividends on its capital stock.
MedQuist currently intends to retain any future earnings to fund operations and
for the continued development of its business and, therefore, does not
anticipate paying any cash dividends on MedQuist Common Stock in the foreseeable
future. Future cash dividends, if any, will be determined by the Board of
Directors of MedQuist, and will be based upon MedQuist's earnings, capital
requirements, financial condition and other factors deemed relevant by the Board
of Directors. MedQuist's senior lender restricts the payment of any dividends.
MRC has never paid cash dividends on the MRC Common Stock or on any
class of MRC Preferred Stock.
23
<PAGE>
RISK FACTORS
In considering whether to approve the Merger, you should consider
carefully the risks associated with the Merger and with ownership of MedQuist
Common Stock following the Merger. These risks are described in detail below.
Some of the information in this Joint Proxy Statement/Prospectus may
contain forward-looking statements. Such statements can be identified by the use
of forward-looking language such as "will likely result," "may," "are expected
to," "is anticipated," "estimate," "projected," "intends to" or other similar
words. Such statements are subject to certain risks and uncertainties, including
but not limited to the risks described below. When considering such
forward-looking statements, you should keep in mind these risk factors and other
cautionary statements in this Joint Proxy Statement/Prospectus. You should not
place undue reliance on any forward-looking statement which speaks only as of
the date made.
Risks Relating to the Merger
Risks Associated with Acquisitions Generally. Since May 1994, MedQuist
has made 16 acquisitions of smaller transcriptions companies. MedQuist's
continued growth strategy anticipates additional acquisitions. The success or
failure of such a strategy will depend on many factors, including MedQuist's
ability to identify suitable acquisition candidates, the purchase price, the
availability and terms of financing, and management's ability to integrate
effectively the acquired businesses or technologies into MedQuist's operations.
In addition, MedQuist may be required to incur additional indebtedness or other
liabilities, which could have a material adverse effect on MedQuist's liquidity
and capital resources, or issue shares of its capital stock, which could result
in dilution to its shareholders. MedQuist cannot assure that it will be
successful in its efforts to identify suitable acquisition candidates, finance
such acquisitions, negotiate terms favorable to MedQuist for such acquisitions,
or to consummate any such acquisitions or, if any such acquisitions are
consummated, to integrate the acquired businesses into MedQuist's operations. In
addition, MedQuist cannot assure that a given acquisition, if consummated, will
not have a material adverse effect on MedQuist's business, financial condition
and results of operations.
Risks Associated with the Merger. One of the reasons for the Merger is
the opportunity to achieve operating efficiencies as a result of the combination
of the two companies. However, since the Merger involves the integration of two
companies that have previously operated independently, difficulties may be
encountered in the integration of the operations of MedQuist or MRC and benefits
and attendant cost savings possible from such integration ultimately may not be
realized. For example, MedQuist and MRC operate on different technical platforms
and there are likely to be difficulties in integrating the two. Any delays or
unexpected costs incurred in connection with such integration could have a
material adverse effect on MedQuist's business, financial condition and results
of operations.
Rights of Holders of MRC Common Stock and MRC Preferred Stock Following
the Merger. Following the Merger, holders of MRC Common Stock and MRC Preferred
Stock outstanding as of the Effective Time will become holders of MedQuist
Common Stock. Certain differences exist between the rights of shareholders of
MRC under MRC's Amended and Restated Articles of Incorporation and MRC's Bylaws
and the rights of shareholders of MedQuist under MedQuist's Amended and Restated
Certificate of Incorporation and MedQuist's Bylaws. See "Comparison of Rights of
Holders of MedQuist Common Stock and Holders of MRC Common Stock."
24
<PAGE>
Shares Eligible For Future Sale. Approximately 8,661,583 shares of
MedQuist Common Stock and 1,544,281 options to purchase MedQuist Common Stock
will be issued in connection with the Merger. Sales in the public market of a
substantial number of such shares (and shares underlying the options) following
the completion of the Merger could adversely affect the market price of the
MedQuist Common Stock. The shares issued in connection with the Merger will be
freely tradeable without restriction or further registration except: (i) by
holders who were deemed "affiliates" of MedQuist, as that term is defined under
the Act, subject to the resale limitations of Rule 145 and Rule 144 under the
Securities Act of 1933, as amended (the "Act") and (ii) by holders who are
deemed "affiliates" of MRC at the time of the MRC Meeting, all of whom will be
prohibited from transferring, disposing or otherwise reducing their risk
relative to their shares (other than certain de minimis amounts) until MedQuist
shall have published financial results covering at least 30 days of post merger
combined operations of MedQuist and MRC. In addition, the MRC "affiliates" have
certain registration rights. See "Interests of Certain Persons in the Merger --
Registration Rights." If such MRC "affiliates," by exercising their registration
rights, were to cause a large number of shares to be registered and sold in the
public market, such sales could have a material adverse effect on the market
price for the MedQuist Common Stock.
Risks Relating to MedQuist's Business
Dependence on Key Personnel. MedQuist's success is dependent, in part,
upon its ability to attract and retain its key managerial personnel. The loss of
services of certain of MedQuist's executive officers for any reason or the
inability of MedQuist to attract additional management personnel could have a
material adverse effect upon MedQuist's business, financial condition or results
of operations. MedQuist does not have key-man insurance on any of its executive
officers.
Rapid Technological Change. The health care information services
industry is characterized by rapid technological change, evolving customer needs
and emerging technical standards. The introduction of competing services or
products incorporating new technologies, such as voice recognition capabilities
or other alternative means of data entry and the emergence of new technical
standards could render some or all of MedQuist's services unmarketable. MedQuist
believes that its future success is dependent in part on its ability to enhance
its current services and develop new services that keep pace with technological
developments and emerging technical standards, and that address the increasingly
sophisticated needs of its customers. MedQuist cannot assure that it will be
successful in developing and marketing enhancements to its existing services or
new services that respond to technological developments, emerging technical
standards, or evolving customer needs, on a timely basis or at all, or that any
such enhancements or new services, if developed and introduced, will achieve
market acceptance. The failure of MedQuist to develop and introduce service
enhancements and new services in a timely and cost-effective manner in response
to changing technologies or customer requirements, could have a material adverse
effect on MedQuist's business, financial condition and results of operations.
Ability to Attract and Retain Qualified Transcriptionists. MedQuist's
success is also dependent, in part, upon its ability to attract and retain
qualified transcriptionists, who can provide the accuracy and turnaround time
required by MedQuist's customers. Competition for transcriptionists is intense.
MedQuist cannot assure that it will be successful in attracting and retaining
the personnel necessary to conduct its business successfully. The inability of
MedQuist to attract, hire, assimilate and retain such personnel could have a
material adverse effect upon MedQuist's business, financial condition and
results of operations.
25
<PAGE>
Risks Associated with an At-Home Workforce. MedQuist treats its
transcriptionists as independent contractors for state tax, benefits and
unemployment purposes and as statutory employees for federal income tax and
social security tax purposes. MRC treats its transcriptionists as employees for
state tax, benefits, unemployment, federal income tax and social security tax
purposes. MedQuist's position may be disputed by federal and state officials,
which, if successful, could result in the incurrence of additional employment
costs and penalties by MedQuist, and could have a material adverse effect on
MedQuist's business, financial condition and results of operations. In addition,
any failure by MedQuist to supervise and monitor the MRC at-home workforce, when
acquired by MedQuist, or to enforce its policies and procedures with respect to,
among other things, confidential information, health and safety, wage and hour,
or other governmental regulations, could have a material adverse effect on
MedQuist's business, financial condition and results of operations.
Potential for Significant Fluctuations in Quarterly Operating Results.
MedQuist may, in the future, experience significant quarter to quarter
fluctuations in its results of operations. Such fluctuations may result in
volatility in the price of MedQuist Common Stock. Quarterly results of
operations may fluctuate as a result of a variety of factors, including demand
for MedQuist's services, the timing of introduction of new services and service
enhancements by MedQuist or its competitors, market acceptance of new services,
the size and timing of individual customer contracts, changes in customer
budgets, the size and timing of acquisitions, the integration of acquired
businesses into MedQuist's operations, the number and timing of new hires,
competitive conditions in the industry and general economic conditions. Further,
MedQuist's contracts generally involve a significant commitment and may require
time-consuming authorization procedures within the customer's organization. For
these and other reasons, the sales cycles for MedQuist's services are typically
lengthy and subject to a number of factors outside of MedQuist's control. As a
result, MedQuist's revenues are difficult to forecast. Accordingly, MedQuist
believes that period to period comparisons of results of operations are not
necessarily meaningful and that you should not rely upon such comparisons as an
indication of future results of operations. In addition, MedQuist's
transcription business has grown in recent periods as a result of both internal
growth and acquisitions, and MedQuist cannot assure that it can maintain the
rate of growth in revenues and profits recently achieved by its transcription
business in the future. Because of the foregoing factors, it is possible that in
future quarters MedQuist's operating results may be below the expectations of
public market analysts and investors. Such an event could have a material
adverse effect on the price of MedQuist Common Stock.
Potential Volatility of Stock Price. The market price of MedQuist
Common Stock has been, and may in the future be, volatile. Factors such as
health care reform measures, acquisitions and operating results, technological
innovations or new products or services by MedQuist or its competitors,
government regulation, health care legislation, fluctuations in MedQuist's
operating results and general market and economic conditions could cause the
market price of MedQuist Common Stock to fluctuate substantially. In addition,
the stock market in general has experienced extreme price and volume
fluctuations which has resulted in substantial volatility of health care service
companies that has often been unrelated to the operating performance of these
companies. These or other factors may adversely affect the market price of
MedQuist Common Stock. See "Market Price Information."
Dependence on Single Line of Business. MedQuist anticipates that it
will derive its future revenues solely from providing electronic transcription
services to hospitals and other health care organizations on an outsourced
basis. MedQuist's future success will depend in part on the continued market
acceptance of its transcription services and the continued trend towards
outsourcing of transcription services to third-party providers such as MedQuist.
A reduction in demand or increase in
26
<PAGE>
competition in the market for its transcription services, or decline in sales of
its transcription services, could have a material adverse effect on MedQuist's
business, financial condition and results of operations.
Changes in the Health Care Industry. The health care industry is
subject to changing political, economic and regulatory influences that may
affect the outsourcing arrangements of health care providers. Many federal and
state legislators from time to time announce proposed programs to reform the
United States health care system at both the federal and state level. These
programs may contain proposals to increase governmental involvement in health
care, lower reimbursement rates and otherwise change the environment in which
providers operate. Health care providers may react to these proposals and the
uncertainty surrounding such proposals by curtailing outsourcing arrangements or
deferring decisions regarding the use of outsourced services. In response to
this environment, many health care providers are consolidating to create larger
health care delivery organizations. This consolidation reduces the number of
potential customers for MedQuist's services, and the increased bargaining power
of these organizations could lead to reductions in the amounts paid for
MedQuist's services. The impact of these developments in the health care
industry is difficult to predict and could have a material adverse effect on
MedQuist's business, operating results and financial condition.
Inability to Expand Into New Markets. To date, MedQuist's services have
been purchased primarily by the medical records departments of hospitals.
However, health care services are increasingly being provided at sites other
than hospitals, such as outpatient clinics and physician practice groups.
MedQuist intends to attempt to increase its limited presence in these alternate
site markets. In addition, MedQuist intends to market its services to direct
patient care departments within hospitals. Because MedQuist has limited
experience in non-hospital markets and in direct patient care departments within
hospitals, it may find that significant modifications to its services are
necessary before they become useful to a customer or that it may have to adjust
its pricing downward. Further, because MedQuist intends to market its services
to more departments within hospitals and to hospital related clinics and
physician practice groups, purchases of MedQuist's services by these new clients
will require approval by different managers at the customer as opposed to the
medical records department managers by whom MedQuist is better known. MedQuist's
business, operating results and financial condition may be materially and
adversely affected if such efforts are not successful.
Competition. The transcription services industry remains highly
fragmented and primarily consists of small, local or regional companies. The
Medical Transcription Industry Alliance estimates that there are over 1,500
medical transcription service companies in the United States. As a result,
MedQuist competes with a large number of third party transcription companies
that offer services that are similar to MedQuist's services and that target the
same customers and qualified transcriptionists as MedQuist. MedQuist believes
that its ability to compete depends upon many factors within and outside of its
control, including the timing and market acceptance of new services and service
enhancements developed by MedQuist and its competitors, service quality,
performance, price, reliability, customer service and support and ability to
attract qualified transcriptionists.
In addition, MedQuist anticipates increasing competition from other
companies that were not traditionally in the medical transcription business. For
example, IDX Systems Corporation ("IDX") recently announced the acquisition of
EDIX Transcription, one of MedQuist's larger competitors. IDX is a provider of
health care information services and stated that it acquired EDIX because of
perceived synergies of the medical transcription business (data input) and
health information management businesses. IDX currently is larger and better
capitalized than MedQuist. Such potential competitors
27
<PAGE>
could have substantially greater financial, technical and marketing resources
than MedQuist. As a result, such potential competitors, if they were to enter
the medical transcription business, may be able to respond more quickly to
evolving technological developments, changing customer needs or emerging
technical standards or to devote greater resources to the development, promotion
or sale of their services. MedQuist also competes with several other substantial
national companies including Transcend Services, Inc., Rodeer Systems, Inc., and
a subsidiary of Harris Corp. ("Harris"). Harris is a multi-billion dollar entity
and has substantially greater financial resources than MedQuist.
MedQuist's services also compete with the in-house transcription staffs
of potential customers. While MedQuist believes that its growth and earnings
have significantly benefitted from the outsourcing by health care providers of
non-patient care functions, including transcription services, the current trend
could change direction and cause such health care providers to bring all or some
of those services in-house.
In addition, competition may increase due to consolidation of
transcription companies. Current and potential competitors may establish
cooperative relationships with third parties to increase the ability of their
services to address the needs of MedQuist's current and prospective customers.
Increased competition may result in price reductions for MedQuist's services,
reduced operating margins and the inability of MedQuist to increase its market
share, any of which would have a material adverse effect on MedQuist's business,
financial condition and results of operations. MedQuist cannot assure that it
will be able to compete successfully against current or future competitors or
that competitive pressures will not have a material adverse effect on MedQuist's
business, financial condition and results of operations.
Dependence on Proprietary Rights; Risks of Infringement. MedQuist's
success is dependent upon its proprietary technology. MedQuist regards the
software underlying its services as proprietary, and relies primarily on a
combination of contract, copyright and trademark law, trade secrets,
confidentiality agreements and contractual provisions to protect its proprietary
rights. MedQuist has no patents or patent applications pending, and existing
trade secrets and copyright laws afford only limited protection. Despite
MedQuist's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of MedQuist's software or to obtain and use information
that MedQuist regards as proprietary. Policing unauthorized use of MedQuist's
software is difficult. MedQuist cannot assure that its efforts to maintain the
confidentiality of its trade secrets and proprietary information will
effectively prevent disclosure of MedQuist's confidential information or provide
meaningful protection for MedQuist's confidential information if there is
unauthorized use or disclosure, or that MedQuist's trade secrets or proprietary
information will not be independently developed by MedQuist's competitors.
MedQuist cannot assure that its copyrights will provide competitive advantages
for MedQuist's products or that they will not be challenged or circumvented by
MedQuist's competitors. Litigation may be necessary to defend against claims of
infringement, to enforce copyrights of MedQuist, or to protect trade secrets and
could result in substantial cost to, and diversion of efforts by, MedQuist.
MedQuist cannot assure that it would prevail in any such litigation.
MedQuist is not aware that any of its software, trademarks, or other
proprietary rights infringe the proprietary rights of third parties. However,
MedQuist cannot assure that third parties will not assert infringement claims
against MedQuist in the future. Any such claims, with or without merit, can be
time-consuming and expensive to defend or require MedQuist to enter into royalty
or licensing agreements or cease the infringing activities. The failure to
obtain such royalty agreements, if required, and MedQuist's involvement in such
litigation, could have a material adverse effect on MedQuist's business, results
of operations and financial condition.
28
<PAGE>
Confidentiality Requirements. The medical information transcribed by
MedQuist is extremely sensitive. In providing its services, MedQuist is subject
to certain contractual, statutory, regulatory and common law requirements
regarding the confidentiality of such medical information. MedQuist requires its
personnel to agree to keep all medical information confidential and monitors
compliance with applicable confidentiality requirements. Failure to comply with
such confidentiality requirements could result in material liability to
MedQuist.
Year 2000. There are numerous 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
significant issue is whether computer systems will properly recognize date
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. MedQuist relies on its systems in operating and monitoring all
aspects of its business. MedQuist also relies heavily on the external systems of
its customers, suppliers and other organizations with which it does business.
MedQuist management is in the process of assessing its internal and external
systems to assure MedQuist is prepared for the year 2000. Management does not
anticipate that MedQuist will incur significant expenses or be required to
invest heavily in computer systems improvements to be year 2000 compliant.
However, significant uncertainty exists concerning the potential costs and
effects associated with any year 2000 compliance. To date, no material issue has
been identified as they relate to MedQuist's efforts to identify year 2000
issues.
However, despite MedQuist's efforts thus far to address year 2000
compliance, MedQuist cannot guarantee that all internal or external systems will
be compliant, or that its business will not be materially adversely affected by
any such non-compliance.
Certain Anti-Takeover Provisions. The New Jersey Shareholders
Protection Act prohibits MedQuist from entering into certain business
combination transactions with any shareholder of MedQuist which owns 10% or more
of the outstanding voting securities of MedQuist, except under certain limited
circumstances. In addition, MedQuist's Amended and Restated Certificate of
Incorporation gives the Board of Directors the authority without shareholder
approval to issue shares of preferred stock, in one or more series, with rights,
preferences and privileges that could adversely affect the voting power and the
other rights of the holders of the MedQuist Common Stock. MedQuist's Certificate
of Incorporation provides for staggered terms for the members of the Board of
Directors such that no more than one-third of its members stands for re-election
in any one year. MedQuist has also entered into certain severance arrangements
which provide for payments to certain of its officers upon a "change in control"
(as defined therein) of MedQuist. Moreover, the terms of the MedQuist 1992 Stock
Option Plan provide that outstanding options automatically vest and become
exercisable upon a change in control. These provisions and arrangements may have
the effect of delaying, deferring or making more costly a change in control of
MedQuist including transactions in which shareholders might otherwise receive a
premium for their shares over the then current market price and, therefore,
could adversely effect the market price of the Common Stock. See "Comparison of
Shareholders Rights -- Business Combinations."
<PAGE>
SPECIAL MEETINGS OF SHAREHOLDERS
We are sending you this Joint Proxy Statement/Prospectus in order to
provide you with important information regarding the Merger and to solicit your
proxy for use at the special meetings (and any adjournments or postponements
thereof). The special meetings are scheduled to be held at the times and places
described below.
MedQuist Meeting
General. The MedQuist Meeting is scheduled to be held on December 10,
1998 at 10:00 a.m. (eastern standard time), at The Mansion at Main Street, Plaza
1000, Vorhees, New Jersey, 08043. At the MedQuist Meeting, MedQuist shareholders
will have the opportunity to consider and vote upon the MedQuist Merger
Proposal.
The MedQuist board of directors has approved the Merger Agreement and
recommends that MedQuist shareholders vote "FOR" the MedQuist Merger Proposal.
Record Date. The close of business on October 29, 1998, has been fixed
by the MedQuist board of directors as the "MedQuist Record Date" for the
determination of holders of shares of MedQuist Common Stock entitled to notice
of and to vote at the MedQuist Meeting.
Stock Entitled to Vote. At the close of business on the MedQuist Record
Date, MedQuist had 23,784,313 shares of MedQuist Common Stock outstanding. Each
holder of MedQuist Common Stock will have the right to one vote for each share
registered in such holder's name on the books of MedQuist as of the close of
business on the MedQuist Record Date with respect to the matters to be acted
upon at the MedQuist Meeting.
Quorum; Required Vote. The presence either in person or by proxy of the
holders of a majority of the outstanding shares of MedQuist Common Stock
entitled to vote at the MedQuist Meeting will constitute a quorum for the
transaction of business at the MedQuist Meeting. Under New Jersey law, the
affirmative vote of the majority of the votes cast by the holders of shares of
MedQuist Common Stock at the MedQuist Meeting is required for approval of the
MedQuist Merger Proposal.
Stock Ownership. As of the MedQuist Record Date, the directors and
executive officers of MedQuist beneficially own and have the right to vote, in
the aggregate, 1,950,334 shares of MedQuist Common Stock, representing
approximately 8.2 percent of the total votes entitled to be cast at the MedQuist
Meeting. It is currently expected that members of the management of MedQuist
will vote the shares of MedQuist Common Stock that they are entitled to vote in
favor of the MedQuist Merger Proposal.
Voting and Revocation of Proxies. All shares of MedQuist Common Stock
represented by a proxy properly signed and received at or prior to the MedQuist
Meeting, unless subsequently revoked, will be voted in accordance with the
instructions thereon. If a proxy is signed and returned without indicating any
voting instructions, the shares of MedQuist Common Stock represented by the
proxy will be voted "FOR" the MedQuist Merger Proposal. You may revoke your
proxy and reclaim your right to vote your shares by giving written notice of
such revocation to the Secretary of MedQuist at any time before it is voted, by
submitting to MedQuist a duly executed, later-dated proxy or by voting the
shares subject to such proxy by written ballot at the MedQuist Meeting. All
written notices of
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revocation and other communications with respect to revocation of MedQuist
proxies should be addressed to: MedQuist Inc., Five Greentree Centre, Suite 311,
Marlton, NJ 08053, Attention: John Suender. Attendance at the MedQuist Meeting
will not in and of itself constitute a revocation of a proxy.
The MedQuist Board is not aware of any business to be acted upon at the
MedQuist Meeting other than as described in this Joint Proxy
Statement/Prospectus. If, however, other matters are brought before the MedQuist
Meeting, including, among other things, a motion to adjourn or postpone the
MedQuist Meeting to another time or place for the purpose of soliciting
additional proxies or otherwise, the persons appointed as proxies will have
discretion to vote or act on such matters according to their best judgment.
However, no proxy which is voted against the MedQuist Merger Proposal will be
voted in favor of any such adjournment or postponement. The grant of a proxy
will also confer discretionary authority on the persons named in the proxy to
vote on matters incident to the conduct of the MedQuist Meeting.
Abstentions and "broker non-votes" (defined below) will be counted as
shares present for purposes of determining whether a quorum is present but will
not be voted for or against the MedQuist Merger Proposal. Abstentions and broker
non-votes also will not be counted as votes cast for purposes of determining
whether sufficient votes have been received to approve a proposal. Accordingly,
abstentions and broker non-votes will have no effect on the outcome of the
MedQuist Merger Proposal. Broker non-votes are shares held in the name of a
broker or nominee for which an executed proxy is received, but are not voted on
the proposal because the voting instructions have not been received from the
beneficial owner or persons entitled to vote and the broker or nominee does not
have the discretionary power to vote.
Solicitation of Proxies. The solicitation of proxies may be made by
directors, officers and regular employees of MedQuist or its subsidiaries in
person or by mail, telephone, facsimile or telegraph without additional
compensation payable with respect thereto. Arrangements will be made with
brokerage houses and other custodians, nominees and fiduciaries to forward proxy
soliciting materials to the beneficial owners of MedQuist Common Stock held of
record by such persons, and MedQuist will reimburse them for reasonable expenses
incurred by them in so doing. The cost of such solicitation will be borne by
MedQuist.
Dissenters' Rights. MedQuist shareholders will be entitled to
dissenters' rights under New Jersey law. See "The Merger -- Rights of Dissenting
MedQuist Shareholders."
MRC Meeting
General. The MRC Meeting is scheduled to be held on December 9, 1998 at
10:00 a.m., eastern standard time, at 23240 Chagrin Boulevard, Suite 400,
Cleveland, Ohio 44122. The purpose of the MRC Meeting is to consider and vote
upon the MRC Merger Proposal.
The MRC board of directors has approved the Merger Agreement and
recommends that MRC shareholders vote "FOR" the MRC Merger Proposal.
Record Date. The close of business on November 25, 1998, has been fixed
by the MRC board of directors as the "MRC Record Date" for the determination of
holders of shares of MRC Common Stock and MRC Preferred Stock entitled to notice
of and to vote at the MRC Meeting.
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Stock Entitled to Vote. At the close of business on October 30, 1998,
MRC had 6,198,949 shares of MRC Common Stock, 10,362 shares of Series IV
Preferred Stock, 45,902 shares of Series V Preferred Stock and 300,000 shares of
Series VI Preferred Stock outstanding. At the MRC Meeting, holders of shares of
MRC Common Stock will be entitled to one vote for each share of MRC Common Stock
they hold on the MRC Record Date. Holders of shares of MRC Preferred Stock will
be entitled to one vote for each share of MRC Common Stock which would be
issuable to such holder upon conversion of all the shares of MRC Preferred Stock
held by such holders on the Record Date. The holders of the Series IV Preferred
Stock, Series V Preferred Stock and Series VI MRC Preferred Stock are entitled
to an aggregate of 687,140, 4,139,609 and 5,547,672 votes, respectively.
Holders of shares of MRC Preferred Stock will also be entitled to one vote for
each share they hold of such series of MRC Preferred Stock with respect to the
class vote required to approve the MRC Merger Proposal.
Quorum; Required Vote. The presence in person or by proxy of a majority
of the outstanding shares of MRC entitled to vote at the MRC Meeting by the
holders of MRC Common Stock and MRC Preferred Stock will constitute a quorum for
purposes of conducting business at the MRC Meeting. Under Missouri law, the
affirmative vote of the holders of not less than two-thirds of the outstanding
shares of MRC entitled to vote at the MRC Meeting will be necessary for the
approval of the MRC Merger Proposal. In addition, pursuant to the terms of the
Articles of Incorporation of MRC, the affirmative vote of not less than (a) a
majority of the outstanding shares of Series IV Preferred Stock, (b) two-thirds
of the outstanding shares of Series V Preferred Stock, and (c) seventy-five
percent of the outstanding shares of Series VI Preferred Stock, each voting as a
separate class, will be necessary for approval of the MRC Merger Proposal.
Stock Ownership. As of October 30, 1998, the directors and executive
officers of MRC have the right to vote, in the aggregate, 13,664,466 shares of
MRC Common Stock (which includes shares of MRC Common Stock issuable upon
conversion of the MRC Preferred Stock), representing approximately 83 percent of
the votes entitled to be cast at the MRC Meeting. In addition, as of the MRC
Record Date, the directors and executive officers of MRC beneficially own and
have the right to vote, 131 shares of Series IV Preferred Stock, representing
approximately 1% of the votes entitled to be cast by such holders voting as a
class, 44,573 shares of Series V Preferred Stock, representing approximately 97%
of the votes entitled to be cast by such holders, voting as a class, and 241,571
shares of Series VI Preferred Stock, representing approximately 80% of the votes
entitled to be cast by such holders, voting as a class. The directors and
executive officers of MRC have expressed their intent to vote for approval of
the MRC Merger Proposal.
Voting and Revocation of Proxies. All shares of MRC Common Stock and
MRC Preferred Stock represented by a proxy properly signed and received at or
prior to the MRC Meeting, unless subsequently revoked, will be voted in
accordance with the instructions thereon. If you sign and return your proxy
without indicating any voting instructions, the shares of MRC Common Stock and
MRC Preferred Stock represented by the proxy will be voted "FOR" the MRC Merger
Proposal. You may revoke your proxy and reclaim your right to vote at any time
by giving written notice of revocation to the Secretary of MRC at any time
before it is voted, by submitting to MRC a duly executed, later-dated proxy or
by voting the shares subject to such proxy by written ballot at the MRC Meeting.
You should send all written notices of revocation and other communications with
respect to revocation of MRC proxies to: The MRC Group, Inc., 23240 Chagrin
Blvd., Suite 400, Cleveland, Ohio 44122, Attention: Steven Bell, Secretary.
Attendance at the MRC Meeting will not, in and of itself, constitute a
revocation of a proxy.
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The MRC Board is not aware of any business to be acted upon at the MRC
Meeting other than as described in this Joint Proxy Statement/Prospectus. If,
however, other matters are brought before the MRC Meeting, including, among
other things, a motion to adjourn or postpone the MRC Meeting to another time or
place for the purpose of soliciting additional proxies or otherwise, the persons
appointed as proxies will have discretion to vote or act thereon according to
their best judgment. However, no proxy which is voted against the MRC Merger
Proposal will be voted in favor of any such adjournment or postponement. The
grant of a proxy will also confer discretionary authority on the persons named
in the proxy to vote on matters incident to the conduct of the MRC Meeting.
The MRC Meeting may be adjourned for up to 90 days for the purpose of
obtaining additional proxies or votes or for any other purpose, and at any
subsequent reconvening of the MRC Meeting, all proxies will be voted in the same
manner as such proxies would have been voted at the original convening of the
MRC Meeting (except for any proxies that have theretofore been revoked or
withdrawn), notwithstanding that they may have been voted on the same or any
other matters at a previous meeting.
Abstentions and "broker non-votes" (defined below) will be counted as
shares present for purposes of determining whether a quorum is present but will
not be voted for or against the MRC Merger Proposal. Abstentions and broker
non-votes effectively will be a vote against the MRC Merger Proposal. Similarly,
the failure to either return your proxy card or attend the MRC Meeting in person
and vote in favor of the MRC Merger Proposal will count as a vote against the
MRC Merger Proposal. Broker non-votes are shares held in the name of a broker or
nominee for which an executed proxy is received, but are not voted on the
proposal because the voting instructions have not been received from the
beneficial owner or persons entitled to vote and the broker or nominee does not
have discretionary power.
Solicitation of Proxies. The solicitation of proxies may be made by
directors, officers and regular employees of MRC in person or by mail,
telephone, facsimile or telegraph without additional compensation payable with
respect thereto. The cost of such solicitation will be borne by MRC.
Dissenters' Rights. MRC shareholders will be entitled to dissenters'
rights under Missouri law. See "The Merger -- Rights of Dissenting MRC
Shareholders."
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<PAGE>
REDEMPTION RIGHTS OF MRC PREFERRED STOCK
Pursuant to MRC's Articles of Incorporation, if MRC desires to merge
with or into another corporation, such as in the Merger, MRC is required to send
a written notice to each holder of MRC Preferred Stock setting forth that such
holder has a right to have MRC redeem its shares of MRC Preferred Stock. This
notice has been sent to the holders of shares of MRC Preferred Stock pursuant to
the Notice of Redemption accompanying this Joint Proxy Statement/Prospectus. In
order for a holder of MRC Preferred Stock to exercise this redemption right,
such holder must send MRC a written notice within 15 days of receiving the
Notice of Redemption which states how many shares of MRC Preferred Stock such
holder would like to have redeemed. This notice should be sent to MRC's
principal office at Commerce Park, Building Four, 23240 Chagrin Boulevard, Suite
400, Cleveland, Ohio 44122-5400. Attention: Steven Bell, Secretary. If any
holder of MRC Preferred Stock elects to require MRC to redeem any such shares,
MRC must provide such holder with a second written notice setting forth the
number of shares of MRC Preferred Stock such holder elected to redeem, the
redemption price of each share of MRC Preferred Stock, the section of the
Articles of Incorporation of MRC pursuant to which such redemption will be made,
and the place and date of such redemption. This second notice must be sent 60
days prior to the date of such redemption.
The following table sets forth a comparison of the cash redemption
price payable for one share of each series of MRC Preferred Stock upon
redemption by MRC and the minimum value of MedQuist Common Stock receivable
pursuant to the Merger for one share of each series of MRC Preferred Stock.
Minimum Value of
MedQuist Common Stock
Receivable in the
Series of Redemption Price Merger Per Share of MRC
MRC Preferred Stock Per Share Preferred Stock
------------------------- --------------------- -----------------------
Series IV Preferred Stock $381.10 $557.70
Series V Preferred Stock $381.10 $758.45
Series VI Preferred Stock $100.00 $155.52
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<PAGE>
THE MERGER
Certain Terms of the Merger Agreement
The following is a brief summary of certain terms of the Merger
Agreement. This summary is qualified in its entirety by reference to the Merger
Agreement, which is incorporated by reference herein and attached to this Joint
Proxy Statement/Prospectus as Annex A. You should read the entire Merger
Agreement carefully.
As a result of the Merger, Sub will no longer exist as a corporation.
MRC will continue as the Surviving Corporation under Missouri law with the name
The MRC Group, Inc.
Conversion of Shares; No Fractional Amounts
At the Effective Time, each share of common stock of Sub will be
converted into one share of common stock of the Surviving Corporation, which
will constitute all of the issued and outstanding capital stock of the Surviving
Corporation. Therefore, MedQuist will be the sole shareholder of the Surviving
Corporation. In addition, each full and fractional share of MRC Common Stock and
MRC Preferred Stock outstanding immediately prior to the Effective Time (other
than shares owned by shareholders who perfect their statutory dissenters' rights
under Missouri law) by virtue of the Merger and without any action on their
part, will be converted into the right to receive that number of shares of
MedQuist Common Stock as set forth below:
- --------------------------------------------------------------------------------
MRC Stock Shares of MedQuist Common Stock to be Received
- --------------------------------------------------------------------------------
MRC Common Stock (i) 0.5163 shares if the MedQuist Stock Value
is equal to or greater than $16.28 and (ii)
the number of shares equal to $8.41 divided by
the MedQuist Stock Value if the MedQuist Stock
Value is below $16.28
- --------------------------------------------------------------------------------
Series IV Preferred Stock (i) 34.2376 shares if the MedQuist Stock Value
is equal to or greater than $16.28 and (ii)
the number of shares equal to $557.70 divided
by the MedQuist Stock Value if the MedQuist
Stock Value is below $16.28
- --------------------------------------------------------------------------------
Series V Preferred Stock (i) 46.5619 shares if the MedQuist Stock Value
is equal to or greater than $16.28 and (ii)
the number of shares equal to $758.45 divided
by the MedQuist Stock Value if the MedQuist
Stock Value is below $16.28
- --------------------------------------------------------------------------------
Series VI Preferred Stock (i) 9.5476 shares if the MedQuist Stock Value
is equal to or greater than $16.28 and (ii)
the number of shares equal to $155.52 divided
by the MedQuist Stock Value if the MedQuist
Stock Value is below $16.28
- --------------------------------------------------------------------------------
"MedQuist Stock Value" means the market value of a single share of
MedQuist Common Stock as determined by taking the average of the closing prices
of a share of MedQuist Common Stock as
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reported on Nasdaq, as reported by The Wall Street Journal, for the 10 trading
days preceding the second business day prior to the closing of the Merger.
There are two important aspects you should understand about the number
of shares of MedQuist Common Stock issuable in the Merger. First, the number of
shares of MedQuist Common Stock issuable to the holders of MRC Preferred Stock
has been determined so that holders of MRC Preferred Stock will receive the same
number of shares of MedQuist Common Stock such holder would have received if,
prior to the Merger, such holder's shares of MRC Preferred Stock were converted
into shares of MRC Common Stock. Second, there is a "floor" adjustment with
respect to the value of the shares of MedQuist Common Stock to be issued in the
Merger. If the MedQuist Stock Value is less than $16.28 as of the closing date
of the Merger, then MedQuist will issue additional shares so that MRC
shareholders receive at least $8.41 worth of MedQuist Common Stock (based on the
MedQuist Stock Value as of the closing date of the Merger) for each share of MRC
Common Stock held by an MRC shareholder or issuable to an MRC shareholder upon
conversion of a share of MRC Preferred Stock. Since the MedQuist Stock Value is
based on the average closing prices of MedQuist Common Stock over a 10-day
trading period, the value of a share of MedQuist Common Stock on the closing
date of the Merger may, and probably will, be different from the MedQuist Stock
Value as of the closing date of the Merger.
No fractional shares of MedQuist Common Stock will be issued pursuant
to the Merger. Each MRC shareholder who otherwise would have been entitled to a
fraction of a share of MedQuist Common Stock will instead receive cash in
accordance with the terms of the Merger Agreement. The MedQuist Common Stock
issuable to holders of shares of MRC Common Stock and MRC Preferred Stock
pursuant to the Merger and any cash to be paid in lieu of fractional shares of
MedQuist Common Stock are referred to in this Joint Proxy Statement/Prospectus
collectively as the "Merger Consideration." MedQuist will cause the shares of
MedQuist Common Stock issuable to the MRC shareholders to be listed on the
Nasdaq National Market.
Treatment of MRC Stock Options
At the Effective Time, each outstanding unexpired option to purchase
shares of MRC Common Stock (a "MRC Stock Option"), will be converted into an
option to purchase MedQuist Common Stock ("MedQuist Stock Options"). Each holder
of MRC Stock Options will receive a number of MedQuist Stock Options equal to
(i) the number of shares of MRC Common Stock issuable upon the exercise of such
holder's MRC Stock Options multiplied by (ii) 0.5163 if the MedQuist Stock Value
is equal to or greater than $16.28 or $8.41 divided by the MedQuist Stock Value
if the MedQuist Stock Value is below $16.28. Any fractional shares of MedQuist
Common Stock resulting from such multiplication will be rounded to the nearest
whole share. The exercise price for the MedQuist Stock Options will equal (A)
the exercise price of the MRC Stock Option for which the MedQuist Stock Option
is being converted and issued divided by (B) 0.5163 if the MedQuist Stock Value
is equal to or greater than $16.28 or $8.41 divided by the MedQuist Stock Value
if the MedQuist Stock Value is below $16.28. Such exercise price will be rounded
to the nearest whole cent. The duration, vesting provisions and other terms of
each MedQuist Stock Option will be substantially the same as that of each MRC
Stock Option from which it was converted.
MedQuist has reserved for issuance a sufficient number of shares of
MedQuist Common Stock for delivery upon exercise of the MedQuist Stock Options
exchanged for MRC Stock Options in accordance with the Merger Agreement.
MedQuist has agreed that it will file with the SEC within 14
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calendar days after the Effective Time a Registration Statement on Form S-8 to
register such shares of MedQuist Common Stock issuable upon exercise of the
MedQuist Stock Options.
Representations and Warranties
The Merger Agreement contains certain representations and warranties,
including without limitation, representations and warranties by MedQuist and Sub
as to: (i) organization and good standing; (ii) power and authority; (iii)
consents, approvals and violations; (iv) the validity of shares to be issued;
(v) capitalization of MedQuist; (vi) financial statements; (vii) brokers or
finders; (viii) undisclosed liabilities; (ix) absence of certain changes; (x)
defaults; (xi) litigation, compliance with laws and permits; (xii) tax matters;
(xiii) labor relations; (xiv) accounting matters; (xv) SEC documents; (xvi)
registration statement; and (xvii) certain statements being true and correct.
The Merger Agreement contains further representations and warranties by
MRC as to: (i) organization and good standing; (ii) power and authority; (iii)
consents, approvals and violations; (iv) capitalization; (v) financial
statements; (vi) undisclosed liabilities; (vii) the absence of certain changes;
(viii) defaults; (ix) litigation, compliance with laws and permits; (x)
intellectual property; (xi) contracts; (xii) employee and management agreements;
(xiii) tax matters; (xiv) employee benefit matters; (xv) labor relations; (xvi)
brokers or finders; (xvii) insurance; (xviii) bank accounts; (xix) real
property; (xx) accounts receivable; (xxi) loans to officers, employees and
others; (xxii) accounting matters; (xxiii) registration statement; and (xxiv)
certain statements being true and correct.
The Merger Agreement provides that the respective representations and
warranties of MedQuist, Sub and MRC will not survive the Closing Date and will
terminate on the Closing Date.
Conduct of Business Pending the Merger
Certain Covenants of MedQuist. The Merger Agreement provides that from
and after the date of the Merger Agreement to the Effective Time, MedQuist shall
conduct its business in the ordinary course and shall: (i) use reasonable
efforts to preserve MedQuist's business organization intact and preserve the
goodwill of its customers, suppliers and others having business relations with
it; (ii) promptly advise MRC in writing of the commencement of, and of any known
threat to commence, any action and of the occurrence (or failure to occur) of
any fact or circumstance which may become known to MedQuist or Sub that would
cause MedQuist's and Sub's representations and warranties to be inaccurate in
any material respect; and (iii) not declare or pay any extraordinary cash
dividend.
Pursuant to the Merger Agreement, MedQuist also agreed that, prior to
the Effective Time, it will not enter into any agreement to acquire any business
or entity other than MRC, whether by merger, acquisition of stock or assets or
otherwise, that would require a filing under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 or that involves the issuance of securities of MedQuist
which cannot be effected pursuant to an exemption from the registration
requirements under the Act.
Certain Covenants of MRC. The Merger Agreement provides that from and
after the date of the Merger Agreement to the Effective Time, except with the
consent of MedQuist or as otherwise specifically contemplated by the Merger
Agreement, MRC shall, and shall cause Medical Records Corp., its wholly owned
subsidiary, to conduct their business in the ordinary course and shall:
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<PAGE>
(i) not amend MRC's or Medical Records Corp.'s Articles of
Incorporation or Bylaws or Code of Regulations except as may be necessary to
carry out the Merger Agreement, the Merger or as required by law;
(ii) not declare or pay any dividend of any kind on or make any other
distribution or payment in respect of any of the capital stock of MRC, or
repurchase or agree to repurchase any of the stock, or issue any shares of the
stock of MRC or Medical Records Corp. or grant any options or other securities
whether or not presently authorized (except for MRC Common Stock issued upon the
conversion of MRC Preferred Stock or upon the exercise of MRC stock options, or
except for redemption of MRC Preferred Stock required pursuant to the Articles
of Incorporation of MRC provided that such redemption does not adversely affect
the qualification of the Merger for pooling-of-interests accounting treatment),
or change any of the characteristics of the capital stock of MRC or Medical
Records Corp. or merge or consolidate MRC or Medical Records Corp. with any
other corporation or allow MRC or Medical Records Corp., its assets or any part
of the business to be acquired by any person;
(iii) not sell, transfer, or otherwise dispose of any assets except in
the ordinary course of business or any other dispositions that are not,
individually or in the aggregate, material to the business of MRC and Medical
Records Corp.;
(iv) not create, incur, assume, or guarantee any indebtedness for money
borrowed or create any encumbrance on any of their assets, except in the
ordinary course of business;
(v) maintain the assets of MRC and Medical Records Corp. in good
operating repair, order, and condition, reasonable wear and tear excepted, and
notify MedQuist immediately upon any material loss of, damage to, or destruction
of any of the assets of MRC and Medical Records Corp. taken as a whole;
(vi) maintain in full force and effect the insurance coverage of the
types and in the amounts disclosed pursuant to the Merger Agreement and apply
the proceeds received under any insurance policy or as a result of any loss or
destruction of or damage to any assets or operations of MRC or Medical Records
Corp. to the repair or replacement of such assets;
(vii) use reasonable efforts to preserve MRC's and Medical Records
Corp.'s business organization intact and preserve the good will of its
customers, suppliers and others having business relations with it;
(viii) promptly advise MedQuist in writing of the commencement of, and
of any known threat to commence, any action or tax audit against MRC or Medical
Records Corp. and of the occurrence (or failure to occur) of any fact or
circumstance which may become known to MRC and Medical Records Corp. that would
cause MRC's representations or warranties to be inaccurate in any material
respect;
(ix) not materially change the titles, duties or responsibilities of or
voluntarily terminate any executive officer of MRC; and
(x) not discount or otherwise invoice or bill clients inconsistent with
past practices.
In addition, the Merger Agreement provides that, without the prior
written consent of MedQuist, which may not unreasonably be withheld, MRC may
not, and may not permit Medical Records Corp. or
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<PAGE>
any subsidiary of MRC to, (i) participate in any merger, consolidation or
reorganization or (ii) acquire the business or all or a substantial part of the
assets of any other person or entity.
Certain Mutual Covenants. The Merger Agreement contains certain mutual
covenants of the parties, including covenants relating to: (i) using reasonable
efforts to take all action and to do all things necessary, proper or advisable
to consummate the Merger and the transactions contemplated by the Merger
Agreement; (ii) actions and filings with respect to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 and other government approvals; (iii) using
reasonable efforts to cause the Merger to qualify for pooling-of-interests
accounting treatment for financial reporting purposes and constitute a tax-free
"reorganization" under Section 368(a) of the Internal Revenue Code of 1986, as
amended; (iv) the issuances of press releases with respect to the Merger; (v)
access to the other's premises, properties, books, records, contracts, tax
records, documents, customers and suppliers; (vii) using reasonable efforts to
maintain the truthfulness and accuracy of such party's representations and
warranties set forth in the Merger Agreement; (vi) calling of the shareholder
meetings to approve the Merger; and (vii) preparation and filing of the
Registration Statement of which this Joint Proxy Statement/Prospectus forms a
part.
Non-Solicitation
Pursuant to the Merger Agreement, MRC has agreed that until
consummation or termination of the Merger Agreement, neither it, nor any of its
directors, officers, employees, agents, or advisors (including, without
limitation, attorneys, accountants, consultants, investment bankers and
financing sources, and advisors), would solicit, enter into or participate in
any discussions, negotiations, solicitation, arrangements or agreements with or
otherwise assist, facilitate, solicit or encourage, any corporation,
partnership, person or other entity or group concerning any merger,
consolidation, sale of all or substantially all of the assets, or the issuance
or sale of any shares of capital stock or similar transaction involving MRC.
During the term of the Merger Agreement, MRC is required to advise MedQuist
immediately if it receives any bids or proposals regarding such a transaction.
Indemnification and Insurance
Pursuant to the Merger Agreement, MedQuist is required to take all
actions necessary to cause the Articles of Incorporation and Bylaws of the
Surviving Corporation to contain the provisions with respect to indemnification
and exculpation from liability set forth in MRC's Articles of Incorporation and
Bylaws on the date of the Merger Agreement, which provisions may not be amended,
repealed or otherwise modified for a period of six years from the Effective Time
in any manner that would adversely affect the rights of individuals who on or
prior to the Effective Time were directors, officers, employees or agents of MRC
or Medical Records Corp., as the case may be, unless such modification is
required by law. In addition, MedQuist unconditionally and irrevocably
guaranteed for the benefit of MRC's and Medical Records Corp.'s directors and
officers the obligations of MRC, Medical Records Corp. and the Surviving
Corporation under the foregoing indemnification arrangements. If MedQuist, the
Surviving Corporation or Medical Records Corp. or any of their successors or
assigns (i) consolidates with or merges into any other person and is not the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
person, then and in each such case, proper provisions are required to be made so
that the successors and assigns of MedQuist, the Surviving Corporation or
Medical Records Corp., as the case may be, assume the foregoing obligations of
MedQuist.
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The Merger Agreement also requires that for a period of six years from
the Effective Time, MedQuist will cause the Surviving Corporation and Medical
Records Corp. to provide officers' and directors' liability insurance in respect
of acts or omissions occurring prior to the Effective Time covering each such
person currently covered by MRC's and Medical Records Corp.'s officers' and
directors' liability insurance policies on terms with respect to coverage and
amount no less favorable that those of such policies in effect on the date of
the Merger Agreement.
Conditions to the Merger
Mutual Conditions. The obligations of the parties to consummate the
Merger are subject to the satisfaction or waiver of the following conditions on
or prior to the Closing Date:
(i) On the Closing Date, no action will be pending or threatened before
any court or governmental entity in which it is sought to restrain or prohibit
the consummation of the Merger or, except as disclosed pursuant to the Merger
Agreement, to obtain damages the amount of which would be reasonably likely to
have a material adverse effect on the business, operations or financial
condition of a party and their respective subsidiaries, as the case may be,
taken as a whole and no investigation that might result in any such action are
pending, or to the knowledge of the parties, threatened.
(ii) All applicable waiting periods with respect to the transactions
contemplated by the Merger Agreement shall have expired under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and neither the Federal
Trade Commission nor the Antitrust Division of the Department of Justice shall
have (a) required any party to divest itself of any assets in order to
consummate such transactions, or (b) taken any actions to prohibit the
consummation of such transactions.
(iii) At the closing of the Merger, MedQuist and MRC shall have
received a letter in form and substance satisfactory to them from Arthur
Andersen LLP dated as of the Closing Date stating that such firm believes that
the Merger will qualify as a pooling-of-interests transaction under Opinion 16
of the Accounting Principles Board.
(iv) MedQuist and MRC shall have received an opinion letter from Blank
Rome Comisky & McCauley LLP (or, upon failure of Blank Rome Comisky & McCauley
LLP to deliver such an opinion, from Baker & Hostetler LLP) that the Merger will
qualify as a tax-free exchange within the meaning of Section 368(a) of the Code.
(v) The SEC shall have declared effective the Registration Statement of
which this Joint Proxy Statement/Prospectus forms a part and MedQuist shall have
received all state securities laws permits and other authorizations necessary to
consummate the Merger and no stop order or similar restraining order shall have
been threatened by the SEC or entered by the SEC or any state securities
administrator prohibiting the Merger.
Conditions Precedent to MedQuist's and Sub's Obligations. The
obligations of MedQuist and Sub to consummate the Merger are subject to the
satisfaction, or the waiver by MedQuist and Sub, of the following conditions on
or prior to the Closing Date:
(i) The representations and warranties of MRC set forth in the Merger
Agreement shall have been true and correct on the date of the Merger Agreement
and shall be true and correct as of the Closing Date as though made on and as of
such Closing Date, except for representations and warranties that
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speak as of a specific date before the Closing Date, and except for such
inaccuracies which have not had and would not reasonably be expected to have a
material adverse effect on MRC, and MRC shall have performed in all material
respects all covenants and agreements to be performed by it under the Merger
Agreement on or prior to the Closing Date, and MRC's Chief Executive Officer and
Chief Financial Officer shall have delivered to MedQuist and Sub a certificate
to such effect dated the Closing Date signed by them which certificate will be
in form and substance satisfactory to MedQuist's and Sub's counsel.
(ii) On or prior to the closing of the Merger, MRC shall have obtained
the consent of the persons listed pursuant to the Merger Agreement and MRC shall
have made such filings or certifications to governmental entities as is required
by it.
(iii) On or prior to the closing of the Merger, MRC shall not have
suffered, and there shall not be, or likely to be, a material adverse effect on
MRC.
(iv) The MRC shareholders shall have approved the Merger and the number
of shares of MRC Common Stock and MRC Preferred Stock held by MRC shareholders
who have exercised their dissenters' rights shall not exceed 9% of the number of
shares of MRC Common Stock and MRC Preferred Stock eligible to vote on the
Merger. The shareholders of MedQuist shall have approved the Merger and the
required matters related to the Merger Agreement.
(v) The employment agreements and severance agreements between MRC and
each of Messrs. Edward Samek, Ethan Cohen, Dennis Byerly, Steven Bell and Ms.
Ellen Norton shall remain in full force and effect unless terminated in
accordance with the terms thereof. See "-- Interests of Certain Persons in the
Merger -- Employment and Severance Agreements."
(vi) Baker & Hostetler LLP, counsel for MRC, shall have delivered to
Sub and MedQuist an opinion as to certain matters dated as of the Closing Date.
(vii) MRC shall have delivered to MedQuist good standing certificates
for MRC and Medical Records Corp., dated no earlier than 10 days before the
Closing Date, from the States of Missouri and Ohio, as applicable, and from each
other jurisdiction in which either is qualified or registered to do business as
a foreign corporation.
(viii) MedQuist shall have received a duly signed affiliate letter from
each affiliate of MRC, stating that such affiliate (i) has not sold any shares
of capital stock or other securities of MRC or MedQuist at any time during the
30-day period ending on the Closing Date, and (ii) will not sell, assign, give,
pledge (except in connection with fully recourse bank loans), or otherwise
transfer, dispose of or reduce such affiliate's risk related to any of such
affiliate's shares of capital stock or other securities of MRC or of MedQuist
except under the de minimus exception to the pooling rules until MedQuist shall
have published financial results covering at least 30 days of post-Merger
combined operations of MedQuist and MRC and thereafter, except in compliance
with applicable federal and state securities laws.
(ix) MedQuist shall have delivered to MRC evidence that the MedQuist
Common Stock has been approved, upon official notice of issuance, for listing on
Nasdaq.
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(x) MedQuist shall have received duly executed resignations from all of
the directors of MRC and Medical Records Corp.
(xi) An amendment to a certain registration rights agreement with
certain shareholders of MRC shall be in full force and effect. See "-- Interests
of Certain Persons in the Merger -- Registration Rights."
Conditions Precedent to MRC's Obligations. The obligations of MRC to
consummate the Merger are subject to the satisfaction by MedQuist and Sub or the
waiver by MRC of the following conditions on or prior to the Closing Date:
(i) The representations and warranties of MedQuist and Sub set forth in
the Merger Agreement shall have been true and correct on the date of the Merger
Agreement and shall be true and correct as of the Closing Date as though made on
and as of such Closing Date, except for representations and warranties that
speak as of a specific date before the Closing Date, and except for such
inaccuracies which have not had and would not reasonably be expected to have a
material adverse effect on MedQuist, and MedQuist and Sub shall have performed
in all material respects all covenants and agreements to be performed by them on
or prior to the Closing Date, and MedQuist's and Sub's Chief Executive Officers
and Chief Financial Officers shall have delivered to MRC a certificate to such
effect dated the Closing Date signed by them which certificate will be in form
and substance satisfactory to MRC's counsel.
(ii) The MRC shareholders shall have approved the Merger and the
MedQuist shareholders shall have approved the Merger and the required matters
related to the Merger Agreement.
(iii) Blank Rome Comisky & McCauley LLP, counsel for MedQuist and Sub,
shall have delivered to MRC an opinion as to certain matters dated as of the
Closing Date.
(iv) MedQuist shall have delivered to MRC good standing certificates
for MedQuist and Sub, dated no earlier than ten days before the Closing Date,
from the States of New Jersey and Missouri, respectively.
(v) MedQuist shall have provided MRC with copies of a duly signed
letter from each affiliate of MedQuist stating that such affiliate (i) has not
sold any shares of capital stock or other securities of MRC or MedQuist at any
time during the 30-day period ending on the Closing Date, and (ii) will not
sell, assign, give, pledge (except in connection with fully recourse bank
loans), or otherwise transfer, dispose of or reduce such affiliate's risk
related to any of such affiliate's shares of capital stock or other securities
of MRC or of MedQuist except pursuant to the de minimus exception permitted
under the pooling rules until MedQuist shall have published financial results
covering at least 30 days of post-Merger combined operations of MedQuist and MRC
and thereafter, except in compliance with applicable federal and state
securities laws.
Closing Date and Effective Time
The Closing Date of the Merger will be the date specified by the
parties which will be no later than the second business day following the date
on which all conditions to the Merger have been satisfied or waived, unless
another time, date or place is agreed to in writing by the parties. The Merger
will be consummated by filing with the Secretary of State of Missouri articles
of merger in such form as is
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required by and executed in accordance with Missouri law and will become
effective when a certificate of merger has been issued by the Secretary of State
of Missouri. It is anticipated that the Effective Time will be within two
business days after the MedQuist Meeting.
Termination of the Merger Agreement
MedQuist and MRC may agree to terminate the Merger Agreement without
completing the Merger, and either MedQuist or MRC may terminate the Merger
Agreement if any action has been instituted and is pending by any governmental
entity with proper authority to restrain, modify or prohibit the Merger. In
addition, MRC may terminate the Merger Agreement if: (a) any condition to its
obligation to complete the Merger has not been fulfilled by February 28, 1999
unless extended by both MedQuist's and MRC's boards of directors, except that
such right to terminate will not be available to MRC if MRC's failure to perform
any obligation under the Merger Agreement has been the cause or resulted in the
failure of the closing to occur; (b) the Board of Directors of MedQuist
withdraws, modifies or changes its recommendation of the Merger Agreement or the
Merger in a manner adverse to MRC; or (c) MedQuist's shareholders have not duly
approved the Merger within 45 days of the effective date of the Registration
Statement. MedQuist may terminate the Merger Agreement if: (x) any condition to
its obligation to complete the Merger has not been fulfilled by February 28,
1999 unless extended by both of MedQuist's and MRC's boards of directors, except
that such right to terminate will not be available to MedQuist if MedQuist's
failure to perform any obligation under the Merger Agreement has been the cause
or resulted in the failure of the closing to occur; (y) the board of directors
of MRC withdraws, modifies or changes its recommendation of the Merger Agreement
or the Merger in a manner adverse to MedQuist or Sub, or recommends to the MRC
shareholders a competing transaction; or (z) MRC's shareholders have not duly
approved the Merger within 45 days of the effective date of the Registration
Statement or if MRC has entered into an agreement with respect to a competing
transaction.
Termination Fees
The Merger Agreement requires MRC to pay to MedQuist a non-refundable
termination fee of $7.5 million within five business days after the termination
of the Merger Agreement if the Merger Agreement is terminated by MedQuist
because (i) MRC's Board of Directors withdraws, modifies or changes its
recommendation of the Merger Agreement in a manner adverse to MedQuist, (ii)
MRC's Board of Directors recommends to its shareholders a competing transaction,
(iii) MRC's shareholders have not approved the Merger within 45 days of the
effective date of the Registration Statement, or (iv) MRC enters into an
agreement with another person in connection with a competing transaction.
MRC Option Agreement
As a condition to entering into the Merger Agreement, MedQuist required
that MRC enter into a Stock Option Agreement, a copy of which is attached to
this Joint Proxy Statement/Prospectus as Annex B. Pursuant to the Stock Option
Agreement, MRC granted to MedQuist an option to purchase up to 4,911,090 shares
of MRC Common Stock at an exercise price of $10.33 per share. MedQuist cannot
exercise the option unless certain events occur. These events are (i) if MRC's
board of directors withdraws, modifies or changes its recommendation of the
Merger Agreement in a manner adverse to MedQuist, (ii) if MRC's board of
directors recommends to its shareholders a competing transaction, (iii) if MRC's
shareholders have not approved the Merger within 45 days of the effective date
of the Registration Statement or (iv) if MRC enters into an agreement with any
other person relating to a competing transaction (the "Triggering Events"). The
option could discourage other companies from trying or proposing to combine with
MRC before the Merger is completed. The option will terminate
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upon the earliest to occur of (i) the Effective Time or (ii) termination of the
Merger Agreement. However, if the Merger Agreement is terminated as a result of
one of the Triggering Events, then the option will not terminate until one year
after the date the Merger Agreement is terminated.
Opinions of Financial Advisors
Opinion of Volpe Brown Whelan & Company, LLC
MedQuist Inc. retained VBW&Co. to render an opinion to the MedQuist
Board of Directors as to the fairness, from a financial point of view, to
MedQuist of the consideration to be received by the shareholders of MRC in the
Merger. On September 18, 1998, VBW&Co. rendered its opinion to MedQuist's Board
of Directors to the effect that, as of such date and based on and subject to the
matters stated in the VBW&Co. Opinion, the Exchange Ratio, as defined in the
VBW&Co. Opinion, is fair, from a financial point of view, to MedQuist.
THE FULL TEXT OF VBW&CO.'S WRITTEN OPINION DATED SEPTEMBER 18, 1998,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED, AND LIMITATIONS ON
THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX D AND IS INCORPORATED HEREIN BY
REFERENCE. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION. HOLDERS OF MEDQUIST STOCK ARE URGED TO, AND SHOULD, READ
THIS OPINION CAREFULLY IN ITS ENTIRETY. THE ENGAGEMENT OF VBW&CO. AND ITS
OPINION ARE FOR THE BENEFIT OF THE MEDQUIST BOARD. VBW&CO.'S OPINION ADDRESSES
ONLY THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW TO
MEDQUIST AND IT DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER NOR DOES IT
CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF MEDQUIST COMMON STOCK AS TO HOW TO
VOTE WITH RESPECT TO THE MERGER.
In arriving at its opinion, VBW&Co.: (i) reviewed the Merger Agreement;
(ii) interviewed the management teams of MedQuist and MRC concerning their
business prospects, financial outlook and operating plans as stand-alone
concerns and as combined; (iii) reviewed certain historical and projected
MedQuist and MRC financial statements and other relevant financial and operating
data of both companies prepared by the management teams of MedQuist and MRC;
(iv) reviewed the relevant contribution each party is making to the combined
company in terms of financial results and compared the results of this analysis
with the implied pro forma ownership of the combined company; (v) reviewed the
valuation of selected publicly traded companies VBW&Co. deemed comparable and
relevant to MRC; (vi) reviewed, to the extent publicly available, the financial
terms of selected merger and acquisition transactions that VBW&Co. deemed
comparable and relevant to the Merger; (vii) performed an analysis of the
potential valuation which would be accorded MRC by public market investors in a
public offering of its equities; (viii) performed a discounted cash flow
analysis of MRC as a stand-alone entity based upon the financial projections
provided by MedQuist management through 1999 and as extrapolated by VBW&Co. and
reviewed by MedQuist management thereafter; (ix) performed a pro forma financial
impact analysis of the combined entity, based upon financial projections
provided by MedQuist management for 1999 and as extrapolated by VBW&Co. and
reviewed by MedQuist management thereafter; and (x) performed such other
studies, analyses and inquiries and considered such other information as VBW&Co.
deemed relevant.
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In rendering its opinion, VBW&Co. relied without independent
verification upon the accuracy and completeness of all of the financial,
accounting, legal, tax, operating and other information provided to VBW&Co. by
MedQuist and MRC and relied upon the assumptions that all such information
provided by them is complete and accurate in all material respects and that
there is no additional material information known to them that would make any of
the information made available to VBW&Co. either incomplete or misleading.
MedQuist also retained outside legal, accounting and tax advisors to advise on
matters relating to the Merger. Accordingly, VBW&Co. relied on their advice and
expresses no opinion on such matters. With respect to the projected financial
data of MedQuist and MRC, all of which was provided by or reviewed by the
management of MedQuist, as well as the combined business plan, VBW&Co. relied
upon the assumptions that such data was prepared in good faith on a reasonable
basis reflecting the best currently available estimates and judgments of the
respective management teams as to the future financial performance of MRC
separately and as combined with MedQuist and that all extrapolations of such
projected financial data are reasonable. The VBW&Co. Opinion is based, in large
part, on these projected financial data and estimates.
VBW&Co. relied upon the information provided to it by MedQuist and MRC
for the purposes of rendering the VBW&Co. Opinion. VBW&Co. expressed no opinion
and made no investigation with respect to the validity, accuracy or completeness
of the information provided to it and does not warrant any projections included
in such information. Actual results that MedQuist or MRC might achieve in the
future as stand-alone entities or as a combined company may vary materially from
those used in VBW&Co.'s analysis. VBW&Co. assumed that the Merger will be
consummated in accordance with the terms of the Merger Agreement without waiver
of any of the conditions to the parties' obligations thereunder. VBW&Co. did not
make any independent appraisals or valuations of any assets of MedQuist or MRC,
nor was VBW&Co. furnished with any such appraisals or valuations. VBW&Co. did
not make any investigations relating to the representations and warranties made
by MedQuist or MRC, including any representations or warranties with respect to
their intellectual property and status of any litigation pending or threatened
against either company. In addition, VBW&Co. assumed that the Merger would be
accounted for as a pooling-of-interests for financial reporting purposes and the
consideration would not be taxable to MRC shareholders when received. The
VBW&Co. Opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to VBW&Co. as of, the date it
rendered its opinion. VBW&Co. assumed no obligation to update, revise or
reaffirm its opinion.
The VBW&Co. opinion was based on the number of shares, options and
warrants of MedQuist and MRC outstanding on the date of its opinion, and VBW&Co.
assumed there will be no change in such number between the date of its opinion
and the effective date of the Merger. Based on the number of shares, options and
warrants outstanding, the exercise price of the options, share prices and the
Exchange Ratio, VBW&Co. calculated an expected pro forma ownership level of MRC
in the combined entity of approximately 27.3% (the "Pro Forma Ownership Level"),
determined on a common stock equivalent basis. VBW&Co. used the Pro Forma
Ownership Level as the basis against which it compared the implied pro forma
ownership levels arising out of the various analyses performed by VBW&Co.
The following is a brief summary of the material analyses performed by
VBW&Co. in rendering its opinion to the Board of Directors of MedQuist.
Contribution Analysis. VBW&Co. performed a valuation analysis of MRC
based on MedQuist's and MRC's relative contributions to various measures of
operational activity. This analysis is based on historical financial data as
well as the projections for each respective business as if each were operating
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independently. VBW&Co. also calculated certain contribution percentages on an
adjusted basis to reflect the differences in capital structures of the two
companies, as capital structure affects such ratios. The analysis generated a
range of between 6.8 and 52.7 percent implied pro forma ownership of the
combined company with a median of 36.7 percent. VBW&Co. determined that MRC's
contribution to 1999 projected net income was one of the more relevant indices
and noted that MRC's projected contribution to 1999 net income implied a pro
forma ownership level of 30.2 percent.
Comparable Publicly-Traded Company Analysis. VBW&Co. compared certain
financial information of MRC with selected publicly-traded companies it deemed
comparable to MRC (the "Business Services Panel"). The Business Services Panel
was composed of companies providing services to hospitals and integrated
delivery networks, including National Data Corp., MedQuist Inc., Envoy
Corporation, Superior Consultant Holdings Corp., First Consulting Group, Inc.,
Healthcare Recoveries, Inc. and DAOU Systems, Inc. In addition, VBW&Co. compared
certain financial information of MRC with a panel comprised solely of MedQuist,
which VBW&Co. deemed to be one of the most closely comparable companies. For
both panels, the financial information reviewed by VBW&Co. included stock price
in relation to the last 12 months ("L12M"), projected 1998 and 1999 earnings per
share ("EPS"); market value (defined as stock price multiplied by shares
outstanding) in relation to book value of shareholders' equity; and enterprise
value (defined as market value plus debt less cash) in relation to L12M revenue,
L12M EBITDA and L12M EBIT. 1998 net income and 1999 net income were based on
estimates provided by MedQuist.
VBW&Co. noted that, based on closing stock prices and earnings
estimates as of September 11, 1998, the Business Services Panel traded in a
range of 15.0 to 52.1 times L12M earnings (with a median of 49.0 times), 11.2 to
46.4 times 1998 earnings (with a median of 21.9 times), 7.5 to 37.1 times 1999
earnings (with a median of 16.3 times), and 3.1 to 6.5 times book value (with a
median of 3.7 times). The enterprise value of the Business Services Panel
implied from the stock prices provided a range of 1.8 to 4.7 times L12M revenues
(with a median of 2.2 times), 6.1 to 30.0 times EBITDA (with a median of 17.9
times) and 7.0 to 36.6 times EBIT (with a median of 22.2 times). The implied
ownership percentage of the combined company for MRC based on the Business
Services Panel's stock prices in relation to L12M EPS was 5.1 to 15.6 percent
(with a median of 14.8 percent), 8.2 to 27.1 percent (with a median of 14.9
percent) in relation to 1998 EPS, 9.0 to 32.8 percent (with a median of 17.7) in
relation to 1999 EPS, and 21.2 to 36.4 percent (with a median of 24.6 percent)
market value in relation to book value. The implied pro forma ownership of the
combined company for MRC based on enterprise value was 24.9 to 46.7 percent
(with a median of 29.2 percent) in relation to L12M revenue, 11.9 to 40.1
percent (with a median of 28.5 percent) for L12M EBITDA and 4.4 to 19.6 percent
(with a median of 13.0 percent) for L12M EBIT.
With respect to MedQuist, VBW&Co. noted that, based on closing stock
price and earnings estimates as of September 11, 1998, MedQuist traded at 52.1
times L12M earnings, 46.4 times 1998 earnings, 37.1 times 1999 earnings and 6.5
times book value. MedQuist's enterprise value to L12M revenue was 4.7 times,
enterprise value to EBITDA was 22.5 times and enterprise value to EBIT was 30.8
times. The implied ownership percentage of the combined company for MRC based on
MedQuist's stock price in relation to L12M EPS was 15.6 percent, 27.1 percent in
relation to 1998 EPS, 32.8 percent in relation to 1999 EPS and 36.4 percent
market value in relation to book value. The implied ownership percentage of the
combined company for MRC based on the enterprise value was 46.7 percent in
relation to L12M revenue, 33.5 percent for L12M EBITDA and 17.1 percent for L12M
EBIT.
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Comparable Merger and Acquisition Transaction Analysis. VBW&Co.
prepared a valuation of MRC based upon 43 merger and acquisition transactions of
target companies in the health care information services industry ("HCIS
Transaction Panel"). In selecting the HCIS Transaction Panel, VBW&Co. considered
whether or not the target company generated most of its revenues and earnings
from HCIS-related businesses.
VBW&Co. reviewed the HCIS Transaction Panel's financial terms, to the
extent publicly available. The enterprise value of these transactions ranged
from 0.5 to 11.8 times L12M revenue (with a median of 2.8 times), 1.1 to 10.9
times next twelve months ("N12M", and, in the case of MRC, defined as Q4:98
through Q3:99) forecasted revenue (with a median of 3.0 times), 7.0 to 132.8
times EBITDA (with a median of 21.7 times), and 8.2 to 631.9 times EBIT (with a
median of 31.5 times). The equity value of these transactions ranged from 12.6
to 365.9 times L12M Net Income (with a median of 42.4 times), 11.0 to 62.4 times
N12M Net Income (with a median of 34.1 times) and 2.5 to 421.3 times book value
(with a median of 5.6 times).
The implied ownership percentage of the combined company for MRC based
on the HCIS Transaction Panel enterprise value in relation to L12M revenue was
9.4 to 68.9 percent (with a median of 34.2 percent), 20.8 to 71.5 percent (with
a median of 41.1 percent) in relation to N12M revenue, 13.6 to 74.7 percent
(with a median of 32.6 percent) in relation to L12M EBITDA and 5.3 to 80.8
percent (with a median of 17.4 percent) in relation to L12M EBIT. The implied
ownership percentage of the combined company for MRC based on the HCIS
Transaction Panel equity value in relation to L12M Net Income was 4.3 to 56.5
percent (with a median of 13.1 percent), 11.5 to 42.6 percent (with a median of
28.8 percent) in relation to N12M Net Income and 18.0 to a not meaningful
percent (with a median of 33.1 percent) in relation to book value.
IPO Analysis. VBW&Co. performed an analysis of potential pre-money
values MRC could potentially command if it were to complete an initial public
offering ("IPO"). Such values are derived from examining pro forma results for
MRC in relation to multiples of operating results of the Business Services Panel
used in the Comparable Publicly-Traded Companies Analysis and of MedQuist.
VBW&Co. made certain adjustments to MRC's forecast 1999 net income to reflect
the cash received from a prospective offering and its effect on interest income.
The analysis of pre-money IPO values based on the Business Services panel
yielded a range of implied pro forma ownership levels of 9.8 to 37.4 percent
with a median of 20.9 percent and the value based on MedQuist yielded a value of
35.6 percent.
VBW&Co. considered the most relevant multiple for the IPO analysis to
be 1999 price to earnings. Using this analysis, pre-money IPO values based on
the Business Services Panel yielded implied ownership percentages of the
combined company for MRC of 0.0 to 30.7 percent with a median of 11.7 percent
and 30.7 percent based on MedQuist.
Discounted Cash Flow Analysis. VBW&Co. performed a discounted cash flow
analysis of MRC based on projections provided by MedQuist management through
1999 and extrapolated by VBW&Co. and reviewed by MedQuist management thereafter.
Unlevered free cash flows were calculated as net income available to common
stockholders plus the sum of depreciation, amortization and other non-cash
charges minus capital expenditures and plus or minus changes in working capital
and minus tax adjusted interest expense. VBW&Co. calculated terminal values by
applying exit multiples on 2003 net income; and the cash flow streams and
terminal values were then discounted to the present using a range of
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discount rates deemed appropriate by VBW&Co. Based on this analysis, VBW&Co.
calculated implied pro forma ownership of the combined company for MRC ranging
from 23.4 to 32.5 percent.
Pro Forma Financial Impact Analysis. VBW&Co. analyzed the pro forma
combined company merger analysis which examines the impact to MedQuist's EPS and
other operating results for the calendar years 1998 through 2003 as a result of
the Merger. The analysis was performed utilizing stand-alone operating estimates
provided by MedQuist management through 1999 and thereafter extrapolated by
VBW&Co. and reviewed by MedQuist management. In the case of MRC, MRC management
provided 1998 estimates; 1999 estimates were provided by MedQuist management and
thereafter extrapolated by VBW&Co. and reviewed by MedQuist management. VBW&Co.
noted that based on management projections, the Merger would be accretive to
MedQuist's 1999 EPS.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, VBW&Co. considered the results of all of its analyses
as a whole and did not attribute any particular weight to any analysis or factor
considered by it. Furthermore, selecting any portion of the analysis, without
considering all of the analyses, would create an incomplete view of the process
underlying its opinion. In addition, VBW&Co. may have given various analyses and
factors more or less weight than other analyses and factors, and may have deemed
various assumptions more or less probable than other assumptions, so that the
ranges of valuations resulting from any particular analysis described above
should not be taken to be VBW&Co.'s view of the actual value of MRC.
The analyses performed by VBW&Co. are not necessarily indicative of
actual value, which may be significantly more or less favorable than suggested
by such analyses. Such analyses were prepared solely as part of VBW&Co.'s
analysis of the fairness of the Exchange Ratio from a financial point of view to
MedQuist. The analyses do not purport to be appraisals or to reflect the prices
at which MRC might actually be purchased. Because such estimates are inherently
subject to uncertainty, none of MedQuist, MRC, VBW&Co. nor any other person
assumes responsibility for their accuracy. Consequently, the VBW&Co. analyses
described herein should not be viewed as determinative of the opinion of the
MedQuist Board of Directors with respect to the value of MRC or of whether the
MedQuist Board of Directors or the MRC Board of Directors would have been
willing to agree to a different exchange ratio.
VBW&Co. is a nationally recognized investment banking firm and was
selected by MedQuist based on VBW&Co.'s experience and expertise. VBW&Co., as a
customary part of its investment banking business, engages in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and valuations for corporate and other purposes. In the ordinary
course of its business, VBW&Co. and its affiliates may actively trade the equity
securities of MedQuist for its and their own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
VBW&Co. will receive a fee for rendering its opinion, no portion of
which is conditioned upon the Opinion being favorable. VBW&Co. will also receive
a fee equal to one percent of the aggregate value of the transaction if the
Merger closes.
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Opinion of BT Alex. Brown Incorporated
BT Alex. Brown Incorporated ("BT Alex. Brown") has acted as MRC's
financial advisor in connection with the Merger. On September 18, 1998, BT Alex.
Brown rendered to the MRC Board of Directors the BT Alex. Brown Opinion, as
investment bankers, that, as of such date, based upon the facts and
circumstances as they existed at the time, and subject to certain assumptions
and factors set forth in such opinion, the consideration payable to the holders
of the outstanding capital stock of MRC was fair, from a financial point of
view. The BT Alex. Brown Opinion is directed to the MRC Board of Directors,
addressed only the fairness of the consideration payable to the holders of
outstanding capital stock of MRC from a financial point of view and does not
constitute a recommendation to any MRC shareholder as to how such shareholder
should vote at the MRC Meeting. The BT Alex. Brown Opinion was rendered to the
MRC Board of Directors for its consideration in determining whether to approve
the Merger Agreement.
In connection with BT Alex. Brown's role as financial advisor to MRC,
and in arriving at its opinion, BT Alex. Brown reviewed certain publicly
available financial and other information concerning MedQuist and certain
internal analyses and other information furnished to it by managements of
MedQuist and MRC regarding the businesses and prospects of their respective
companies and the joint prospects of a combined company. In addition, BT Alex.
Brown (i) reviewed the reported prices and trading activity for MedQuist Common
Stock, (ii) compared certain financial and stock market information for MedQuist
with similar information for certain companies whose securities are publicly
traded, (iii) reviewed the financial terms of certain recent business
combinations which BT Alex. Brown deemed comparable, in whole or in part, (iv)
reviewed the terms of the Merger Agreement, and (v) performed such other studies
and analyses and considered such other factors as it deemed appropriate.
In conducting its review and arriving at its opinion, BT Alex. Brown
assumed and relied upon, without independent verification, the accuracy and
completeness of all information, whether publicly available or furnished to it,
concerning MedQuist and MRC furnished to or otherwise reviewed by or discussed
with it for purposes of rendering its opinion, including, without limitation,
all financial information, forecasts or projections considered in connection
with the rendering of its opinion. BT Alex. Brown did not conduct a physical
inspection of any of the properties or assets, and did not prepare, obtain or
receive any independent evaluation or appraisal of any of the assets or
liabilities, of MedQuist or MRC. With respect to the financial forecasts and
projections, including the analyses and forecasts of certain cost savings,
operating efficiencies, revenue effects and financial synergies expected by MRC
and MedQuist to be achieved as a result of the Merger (collectively, the
"Synergies"), made available to BT Alex. Brown and used in its analyses, BT
Alex. Brown assumed that they have been reasonably prepared on bases reflecting
the best currently available estimate and judgments of the management of
MedQuist or MRC, as the case may be, as to the matters covered thereby. In
rendering this opinion, BT Alex. Brown expressed no view as to the
reasonableness of such forecasts and projections, including the Synergies, or
the assumptions on which they are based. BT Alex. Brown's opinion was
necessarily based upon economic, market and other conditions as in effect on,
and the information made available to it as of, the date of this opinion.
The fees to date payable to BT Alex. Brown for rendering its opinion
are $500,000, which amount will be credited against the final transaction fee of
1.25% of the equity consideration to be paid in the Merger, payable upon
consummation of the Merger. In addition, MRC has agreed to reimburse BT Alex.
Brown for its reasonable out-of-pocket expenses incurred in connection with
rendering financial advisory services, including fees and disbursement of its
legal counsel. MRC has agreed to indemnify BT Alex. Brown and its directors,
officers, agents, employees and controlling persons, for
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certain costs, expenses, losses, claims, damages and liabilities related to or
arising out of its rendering of services under its engagement as financial
advisor.
The MRC Board of Directors retained BT Alex. Brown to act as its
advisor based upon BT Alex. Brown's reputation, experience and expertise in
similar situations. BT Alex. Brown is an internationally recognized investment
banking firm and, as a customary part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements and
valuations for corporate and other purposes. BT Alex. Brown may actively trade
the equity securities of MedQuist for it own account and for the account of its
customers and accordingly may at any time hold a long or short position in such
securities. BT Alex. Brown regularly publishes research reports regarding the
health care information services industry and the businesses and securities of
publicly traded companies in the health care information services industry.
Background of the Merger
The medical transcription industry is undergoing rapid consolidation.
MedQuist and MRC each independently considered that scale is an important
competitive factor in this environment, with the largest participants being able
to best leverage key resources. In addition, as the health care industry grows
and becomes decentralized, information needs are becoming increasingly complex.
As a result, medical providers and third-party payors are requiring larger, more
sophisticated medical transcription vendors. Accordingly, for a period of time,
MRC considered various alternatives to address its capital needs and the goal of
liquidity for its shareholders. MRC engaged BT Alex. Brown in May 1998 to be its
lead underwriter in connection with a proposed initial public offering. In
addition, MRC engaged BT Alex. Brown to be its advisor in connection with a
possible sale of MRC.
MRC filed its Registration Statement on Form S-1 relating to a proposed
initial public offering with the SEC on June 23, 1998. After that filing,
between June 24, 1998 and July 6, 1998, BT Alex. Brown contacted 16 entities
regarding a potential merger with MRC. BT Alex. Brown had management meetings or
extensive discussions with two of those entities, one of which was MedQuist.
None of the solicitations of interest, other than with respect to MedQuist,
generated indications of interest that merited serious further discussions.
In response to BT Alex. Brown's initial contact with MedQuist, on July
1, 1998, MedQuist hired VBW&Co. to advise MedQuist management on a potential
transaction with MRC. Also on July 1, 1998, MedQuist and MRC entered into
reciprocal non-disclosure agreements. On July 7, 1998, BT Alex. Brown, on behalf
of MRC, provided MedQuist with confidential due diligence information. During
the period of July 8, 1998 through July 17, 1998, MRC and MedQuist exchanged
additional confidential due diligence materials.
On July 22, 1998, at a regular meeting of the board of directors of
MedQuist, the board discussed a potential transaction between MedQuist and MRC
and reviewed, among other things, materials presented by VBW&Co.
On July 24, 1998, members of senior management of MedQuist and MRC and
their respective financial advisors and members of Welsh, Carson, Anderson &
Stowe ("WCAS") (affiliates of which are MRC shareholders and two of whose
partners are MRC directors) met in Newark, New Jersey to discuss a potential
acquisition of MRC by MedQuist. At that meeting, the parties discussed operating
strategies
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of the companies, the potential synergies resulting from a combination and
integration issues that may arise in the event of a combination. At the
conclusion of the meeting, the parties agreed that a combination of the
companies appeared to make sense and that negotiations regarding a potential
merger of the companies should proceed.
On July 30, 1998, MedQuist submitted a preliminary, non-binding
indication of interest to acquire MRC in a stock transaction in which MedQuist
would issue shares of MedQuist Common Stock in exchange for all of the
outstanding capital stock of MRC. The MRC Board of Directors briefly discussed
this indication of interest at its meeting on that date and authorized
management to continue to negotiate with MedQuist with respect to a possible
transaction, while continuing to pursue an initial public offering. On August 4,
1998, MRC submitted a response to MedQuist's proposal, suggesting that the
exchange ratio be increased. On August 5, 1998, MedQuist provided a response
letter to MRC reaffirming its original proposal.
On August 11, 1998 David Cohen, Chairman and Chief Executive Officer of
MedQuist, met with Bruce Anderson, a director of MRC and representative of WCAS,
to discuss certain terms of the transaction. Mr. Cohen and Mr. Anderson agreed
to proceed with due diligence based on an agreed upon preliminary exchange ratio
subject to the completion of due diligence and the finalization of the other
terms of the transaction. On August 11, 1998, VBW&Co. provided BT Alex. Brown
with a draft term sheet and draft exclusivity agreement whereby MRC and MedQuist
would agree to refrain from discussions regarding certain transactions with
third parties until September 20, 1998. On August 12, 1998, MedQuist's board of
directors held a special meeting at which it discussed the potential acquisition
of MRC.
On August 13, 1998, MRC held a meeting of its Board of Directors at
which the directors discussed the status of the initial public offering and
negotiations with MedQuist and at which BT Alex. Brown made presentations
regarding MedQuist and the potential transaction. After discussion, the MRC
Board of Directors authorized MRC to continue pursuing both the initial public
offering and a possible business combination track, with a delay of the initial
public offering, and authorized execution of the exclusivity agreement. Later on
August 13, 1998, Mr. Cohen and Edward L. Samek, Chairman and Chief Executive
Officer of MRC, met in Newark, New Jersey to discuss certain terms of the
transaction.
On August 19 and August 20, 1998, MedQuist, Arthur Andersen LLP and
VBW&Co. performed a due diligence investigation of MRC. On August 25 and August
26, 1998, MRC, Arthur Andersen LLP, BT Alex. Brown and MRC's legal counsel
performed an on site due diligence investigation of MedQuist. From August 26
through September 18, 1998, the parties continued due diligence, responded to
various document requests and participated in conference calls related to the
transaction.
On September 9, 1998, representatives of MedQuist, MRC and their
respective financial advisors and members of WCAS met in Newark, New Jersey to
discuss the status of the transaction. On September 10, 1998, the parties agreed
in principal on certain terms of the transaction including the final exchange
ratio.
From September 10, 1998 through September 18, 1998, MedQuist and MRC
and their counsel conferred and negotiated the details of the Merger Agreement
and various ancillary documents, including terms relating to registration rights
of MRC shareholders and employee retention issues. In the course of these
discussions, the material terms of the transaction were finalized.
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On September 18, 1998, the boards of directors of MedQuist and MRC each
held meetings to approve the Merger. The Merger Agreement was signed and
MedQuist issued a press release announcing the Merger later that day.
MedQuist's Reasons for the Merger
At its annual Board Retreat in January 1998, MedQuist management made a
formal presentation to the MedQuist Board of Directors (the "MedQuist Board")
regarding the advantages and disadvantages of making acquisitions using MedQuist
Common Stock in transactions qualifying for pooling-of-interests accounting
treatment. After considerable discussion, the MedQuist Board recognized that the
ability to use MedQuist Common Stock in such transactions represented a distinct
advantage over MedQuist's principal competitors. In addition, the MedQuist Board
recognized that the higher the price of MedQuist Common Stock, the lower the
cost of capital when using MedQuist Common Stock for acquisitions. Accordingly,
as a matter of strategy, the MedQuist Board directed management to pursue
actively transactions using MedQuist Common Stock and qualifying for
pooling-of-interests accounting treatment.
In reaching its determination to approve the Merger, the MedQuist Board
relied upon and consulted with MedQuist's senior management and their accounting
and legal advisors and considered the following matters:
Tax and Accounting Treatment. The MedQuist Board considered the
expectation that the Merger will be a tax-free transaction and would be
accounted as a pooling-of-interests.
Earnings Per Share Accretion. Excluding one time costs associated with
the transaction, the Merger is expected to be accretive to MedQuist's earnings
per share for 1999. In addition, the Merger was expected to be consistent with
the strategy of MedQuist to maintain above average growth in both revenues and
earnings.
Consolidation; Economies of Scale. The MedQuist Board considered that
the medical transcription industry is undergoing consolidation and that larger
and better capitalized companies are entering the market. In addition, providers
of outsourcing services and health information services, many of which providers
are larger and have significantly greater financial resources, have begun to
compete with MedQuist. The MedQuist Board anticipates that this trend will
continue. The MedQuist Board considered that scale is an important competitive
factor, with the largest participants able to leverage key resources. In
addition, as the hospital health care industry continues to consolidate, grow in
size and become decentralized, information needs tend to increase in complexity.
As a result, providers and payors increasingly require larger, more
sophisticated transcription vendors like MedQuist and MRC. Similarly, the
MedQuist Board considered that MedQuist's size, especially if the Merger is
completed, permits it to leverage capital and human resources to fund the cost
of research and development and to provide more sophisticated services, which
are believed necessary to attract and retain customers.
Management. The MedQuist Board believes that the strength of the MRC
management and research and development teams will provide long-term benefits to
MedQuist.
Technology. The MedQuist Board believes that MedQuist's and MRC's
respective technologies are potentially complementary.
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Stronger Combined Companies; Improved Liquidity. The combined company
is expected to have greater earnings and cash flow and higher market
capitalization. This is expected to help MedQuist realize its growth potential
and to continue to pursue development opportunities. In addition, the Merger is
expected to be consistent with MedQuist's strategy to increase the market
capitalization and liquidity of its shares of MedQuist Common Stock, while
minimizing the impact of ownership dilution resulting from issuing additional
shares. The MedQuist Board believes that issuing shares in connection with the
Merger is preferable to an offering of primary shares, because the proceeds of
the issuance are immediately invested for shareholders in the acquired company.
Due Diligence. The MedQuist Board considered the results of the due
diligence review of MRC.
Reductions in Overhead. The MedQuist Board believes that the combined
companies should be able to reduce corporate overhead costs by combining
accounting, financial, legal, human resources and other corporate overhead.
Merger Agreement. The MedQuist Board considered the terms and
conditions of the Merger Agreement.
Certain Risks. The MedQuist Board also considered various risks of the
transaction, including those set forth herein under "Risk Factors," and
determined that the potential benefits outweighed such risks.
VBW&Co. Opinion The MedQuist Board considered the VBW&Co. presentations
and its opinion that the Exchange Ratio (as defined in the VBW&Co. Opinion) was
fair to MedQuist from a financial point of view. The MedQuist Board also
reviewed the methodology used by VBW&Co. in rendering its fairness opinion.
The foregoing discussion of the information and factors considered by
the MedQuist Board is not exhaustive. The MedQuist Board did not quantify or
attempt to assign relative weights to the importance of these factors. Rather,
the MedQuist Board made a decision based upon the totality of the information
presented at the various board meetings, informal telephone calls and otherwise
distributed to the MedQuist Board. In addition, different Board members may have
assigned different importance to each of the factors.
MRC's Reasons for the Merger
In reaching its conclusion to approve the Merger Agreement, the MRC
Board of Directors consulted with the management of MRC, as well as its
financial and legal advisors, and considered the following factors which it
believed to be material to making such a decision (the MRC Board did not believe
that it could, and thus did not, quantify the value of each factor and did not
assign relative weights to each factor).
(i) The MRC Board considered the expectations of MRC's
shareholders created by MRC's proposed initial public offering. In June
1998, MRC filed a registration statement on Form S-1 with the SEC for
an initial public offering of MRC's Common Stock. Following receipt of
comments on the registration statement from the staff of the SEC, MRC
filed an amendment and began preparation for a "road show." However,
over the course of the summer, the market for initial public offerings
declined. Based on advice from BT Alex. Brown, the
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MRC Board concluded that it might not be able to consummate the
proposed initial public offering on acceptable terms in light of
current market conditions. The proposed offering created an expectation
of liquidity for MRC's shareholders. The MRC Board considered this
expectation in determining that a consolidation with MedQuist would
provide MRC shareholders with some liquidity.
(ii) The MRC Board considered the financial performance and
condition, businesses and prospects of MRC and MedQuist, including, but
not limited to, information with respect to the historical stock prices
of MedQuist and the respective operating performances of MRC and
MedQuist.
(iii) The MRC Board considered the terms of the Merger
Agreement, including the form and amount of the Merger Consideration to
be received by the MRC shareholders and option holders and the terms
and structure of the Merger, including the fact that there was a
"floor" but not a "ceiling" on the exchange ratio and the absence of
any post-closing indemnification. The MRC Board deemed it significant
that the Merger would provide the shareholders of MRC with MedQuist
Common Shares, for which there is an active and liquid trading market,
in exchange for their shares of MRC Common Stock and MRC Preferred
Stock, for which there is no established trading market or other means
to readily achieve liquidity.
(iv) The MRC Board considered that in the absence of a
combination with MedQuist, MRC is required, under the terms of MRC's
Articles of Incorporation, over the next six years to incrementally
redeem all of the outstanding shares of its Series V Preferred Stock
and Series VI Preferred Stock at times when MRC may not have the
financial resources to fund such redemptions.
(v) The MRC Board considered the fact that it is a condition
to the consummation of the Merger that the Merger be treated as a
pooling-of-interests for financial reporting and accounting purposes.
(vi) The MRC Board considered the BT Alex. Brown Opinion that
the consideration payable to the holders of outstanding capital stock
of MRC is fair from a financial point of view. The MRC Board also
reviewed the methodology used by BT Alex. Brown in rendering its
fairness opinion. See "-- Opinions of Financial Advisors --Opinion of
BT Alex. Brown Incorporated."
(vii) The MRC Board considered the likelihood that larger
technology-based companies would seek to enter the medical
transcription business.
In reaching its conclusion, the MRC Board also considered the following
factors, which it believed argued against entering into the Merger Agreement
(the MRC Board did not believe that it could, and thus did not, quantify the
value of each such factor and did not assign relative weights to each factor):
(i) The MRC Board considered the fact that a combination with
MedQuist would prevent it from seeking other avenues of maximizing the
value of MRC Common Stock and MRC Preferred Stock for the MRC
shareholders, including resuming efforts to consummate an
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initial public offering of MRC Common Stock or seeking a business
combination with a third party that offered greater value to the MRC
shareholders.
(ii) The MRC Board considered the fact that the Merger would
prevent MRC from maximizing the value of the MRC Common Stock and the
MRC Preferred Stock by pursuing its existing strategic plan as an
independent entity and that, after the Merger, the holders of MRC
Common Stock and the MRC Preferred Stock who receive shares of MedQuist
Common Stock in the Merger will have to rely on the operating success
of MedQuist to maximize the value of their investment.
(iii) The MRC Board considered the fact that all of the Merger
Consideration consists of MedQuist Common Stock, rather than cash.
Interests of Certain Persons in the Merger
In considering the recommendation of the MRC Board with respect to the
Merger Agreement, MRC shareholders should note that certain officers and
directors of MRC (or their affiliates) have interests in the Merger that are
different from or in addition to the interests of MRC shareholders generally.
The Boards of Directors of MedQuist and MRC were aware of these interests and
took these interests into account in approving the Merger Agreement and the
transactions contemplated thereby.
Election of Directors. Pursuant to the Merger Agreement, MedQuist
agreed to appoint Edward L. Samek, Bruce K. Anderson and Richard H. Stowe, each
of whom is an executive officer and/or director of MRC, to the Board of
Directors of MedQuist at the Effective Time of the Merger with terms ending in
1999, 2000 and 2001, respectively. MedQuist also agreed that at the next annual
meeting of shareholders, it would nominate Mr. Samek and recommend his election
as a director for a new term and would recommend the confirmation of Messrs.
Anderson and Stowe as directors for the balance of their terms. See "Management
of MRC."
MRC Options. Upon consummation of the Merger, holders of MRC Stock
Options will be entitled to receive MedQuist Stock Options and, upon the
exercise of their MedQuist Stock Options, a number of shares of MedQuist Common
Stock determined as described under "The Merger -- Certain Terms of the Merger
Agreement -- Treatment of MRC Stock Options."
MedQuist has agreed under the Merger Agreement to file with the SEC
within 14 calendar days after consummation of the Merger, a registration
statement on Form S-8 or other appropriate form under the Securities Act to
register the MedQuist Common Stock issuable upon exercise of the MedQuist
Options to be received by the MRC Stock Option holders and to use reasonable
efforts to cause such registration statement to remain effective until the
exercise or expiration of such options. Various officers and directors of MRC
have stock options.
Employment and Severance Agreements. On September 18, 1998, Mr. Edward
L. Samek, the Chairman of the Board and Chief Executive Officer of MRC, Mr.
Dennis R. Byerly, the President and Chief Operating Officer of MRC, and Mr.
Steven Bell, a Senior Vice President and the Chief Financial Officer of MRC,
each entered into an amendment to his existing employment agreement with MRC. In
addition, on September 18, 1998, Mr. Ethan Cohen, a Senior Vice President and
the Chief Technology Officer of MRC, entered into a new employment agreement
with MRC. Neither any of the amendments nor Mr. Cohen's new employment agreement
is effective until the completion of the Merger.
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Under Mr. Samek's amended employment agreement, he will be appointed as
Vice Chairman of the Board of Directors of MedQuist on the effective date
of the Merger. For a six-month period after the Merger, Mr. Samek will be an
employee of MedQuist and receive a base salary of $2,500 per month. At the end
of the six-month period, Mr. Samek will cease to be an employee of MedQuist, but
will remain Vice Chairman of the Board of Directors of MedQuist through the end
of his term on the Board of Directors of MedQuist. Mr. Samek will receive
$700,000 in bonus and severance compensation, payable in two equal installments.
The first installment will be paid on the date the Merger becomes effective and
the second installment will be paid at the end of the six-month employment term.
Mr. Samek and his wife will be eligible to participate in MedQuist's health plan
and MedQuist will continue to pay for 50% of Mr. Samek's and his wife's health
insurance premiums through December 31, 2001, unless Mr. Samek receives health
insurance benefits from a new employer or another source prior December 31,
2001. On the effective date of the Merger, Mr. Samek will also receive an option
to purchase 10,000 shares of MedQuist Common Stock at a price equal to the fair
market value of a share of MedQuist Common Stock on the date of the completion
of the Merger. The option will vest fully 30 months after the date of grant.
Under Mr. Byerly's amended employment agreement, his salary will remain
$200,000 per year through the end of 1999. In 2000, Mr. Byerly's base salary
will increase to $220,000. Under the amended employment agreement, Mr. Byerly
will be eligible to receive a bonus of up to 35% of his salary, commencing in
1999. Under the amended agreement, Mr. Byerly may also receive a long-term
retention bonus of up to $150,000, payable in three equal annual installments.
Each installment is payable only if Mr. Byerly is still employed by MedQuist on
each such due date. On the effective date of the Merger, Mr. Byerly will receive
an option to purchase 50,000 shares of MedQuist Common Stock at a price equal to
the fair market value of a share of MedQuist Common Stock on the date of the
completion of the Merger. The option will vest in one-third increments on each
of the first three anniversary dates of the Merger. Mr. Byerly will be entitled
to 12 months severance compensation based on his monthly base salary in effect
on the date his employment is terminated, if he resigns or MedQuist terminates
his employment agreement for any reason other than "cause" (as defined in the
agreement).
Under Mr. Bell's amended employment agreement, he will be employed for
a three-month period following completion of the Merger to assist in the
integration of the two companies. During the three-month transition period, Mr.
Bell will receive compensation of $12,000. In addition, Mr. Bell will receive
severance compensation of $233,000, payable in two installments. The first
installment of $209,700 will paid upon the consummation of the Merger and the
second installment of $23,300 will be paid upon completion of the three-month
term.
Under Mr. Ethan Cohen's new employment agreement, Mr. Cohen will
continue to be employed as the Chief Technology Officer, at his current base
salary of $150,000 in 1999 and $165,000 in 2000. Mr. Cohen will also be eligible
to receive a bonus of up to 25% of his base salary. Mr. Cohen may also receive a
long-term retention bonus of up to $60,000. The retention bonus is payable
$40,000 on the first anniversary date of the completion of the Merger and
$20,000 on the second anniversary date of the completion of the Merger, but is
payable only if Mr. Cohen is still employed by MedQuist on each such due date.
On the effective date of the Merger, Mr. Cohen will receive an option to
purchase 50,000 shares of MedQuist Common Stock at a price equal to the fair
market value of a share of MedQuist Common Stock on the date of the completion
of the Merger. The option will vest in one-fifth increments on each of the first
five anniversary dates of the Merger. If Mr. Cohen's employment is terminated by
MRC for any reason other than "cause" (as defined in the agreement) or if Mr.
Cohen terminates the agreement for "good reason" (as defined in the agreement),
Mr. Cohen is entitled to severance
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compensation equal to one year's base salary and any performance bonus paid to
Mr. Cohen or accrued during the immediately preceding 12 months, payable in 12
equal installments.
In addition to the amendments to employment agreements and Mr. Ethan
Cohen's new employment agreement, MRC is a party to an existing employment and
severance agreement with Mr. Philip Cohen, Vice President, Corporate Development
of MRC. Under this agreement, if Mr. Cohen's employment is terminated "without
cause" (as defined in the agreement), MRC must pay Mr. Cohen severance
compensation equal to the sum of one year's base salary at his then current rate
of compensation, plus an amount equal to any performance bonus paid or accrued
during the immediately preceding 12 months, payable in 12 equal installments. If
Mr. Cohen accepts other employment or provides services to another person or
entity within one year of his termination, MRC will be entitled to a reduction
in the amount equal to the amount payable to him in the amount of his other
earnings.
Indemnification; Insurance. In the Merger Agreement, MedQuist has
agreed that, for a period of six years from and after the Effective Time, it
will cause the Surviving Corporation to indemnify and hold harmless the present
and former officers and directors of MRC in respect of acts or omissions
occurring prior to the Effective Time to the extent provided under the MRC
Articles of Incorporation and the MRC By-Laws in effect on the date of the
Merger Agreement. MedQuist has also agreed to cause MedQuist to maintain in
effect for six years after the Effective Time MRC's current policy of directors'
and officers' insurance with respect to matters occurring prior to the Effective
Time.
Registration Rights. Pursuant to an Amended and Restated Registration
Rights Agreement dated July 19, 1996 (the "Registration Rights Agreement"),
certain holders of MRC Common Stock and MRC Preferred Stock have the right under
certain circumstances to require MRC to register their shares under the
Securities Act of 1933, as amended (the "Securities Act") for resale to the
public on a Form S-1 Registration Statement on no more than two occasions, and
certain holders of MRC Common Stock and MRC Preferred Stock have the right to
under certain circumstances to require MRC to register their shares under the
Securities Act for resale to the public if MRC is eligible to use a Form S-3
Registration Statement and the reasonably anticipated price to the public in the
aggregate, will exceed $2 million, as well as have the "piggyback" right to
include their shares in a registration statement filed by MRC. Pursuant to the
Merger Agreement, MedQuist agreed to adhere to MRC's obligations under the
Registration Rights Agreement with respect to registration of shares of MedQuist
Common Stock. However, in connection with execution of the Merger Agreement,
William Blair Capital Partners V., L.P., M. and L. Marcus Family Limited
Partnership, H. and R. Marcus Family Limited Partnership, Welsh, Carson,
Anderson & Stowe VI, L.P., and WCAS Healthcare Partners, L.P. entered into a
letter agreement with MRC and MedQuist, effective upon completion of the Merger,
amending the Registration Rights Agreement as to those entities to provide (i)
that such entities would have no rights to demand the filing of a Registration
Statement on Form S-1, (ii) that such entities' rights to demand the filing of a
Registration Statement on Form S-3 would be limited to two registrations, (iii)
that such entities' piggyback and demand rights would only be available for the
two-year period following the Effective Time and (iv) for various other
restrictions on such entities' registration rights.
Ownership of MedQuist following the Merger
As a result of the Merger, the holders of MRC Common Stock and MRC
Preferred Stock (other than those who perfect their statutory dissenters'
rights) will become shareholders of MedQuist. Upon consummation of the Merger,
each outstanding share of MRC Common Stock and MRC Preferred Stock (except for
shares owned by shareholders who perfect their statutory dissenters' rights)
will be converted
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into the right to receive the Merger Consideration. MedQuist will cause the
shares of MedQuist Common Stock to be issued pursuant to the Merger to be listed
on the Nasdaq National Market. See "-- Nasdaq Listing."
We anticipate that MedQuist will issue approximately 8,661,583 shares
of MedQuist Common Stock to MRC shareholders. Based upon the number of shares of
MedQuist Common Stock issued and outstanding on the MedQuist Record Date and the
anticipated number of shares of MedQuist Common Stock authorized to be issued in
the Merger, the shares of MedQuist Common Stock issued to MRC shareholders in
the Merger will constitute approximately 26.7% of the outstanding common stock
of MedQuist after the Merger. In addition, holders of MRC stock options will
receive options to purchase 1,543,281 shares of MedQuist Common Stock. Assuming
the exercise of all MedQuist and MRC stock options after the Merger, MRC
shareholders will own approximately 28.1% of the fully diluted common stock of
MedQuist.
Management of the Surviving Corporation Upon Consummation of the Merger
The members of the board of directors and the officers of Sub
immediately prior to consummation of the Merger will serve as the directors and
officers of the Surviving Corporation until their respective successors are duly
elected and qualified.
Regulatory Approvals
Other than certain filings made pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, there are no federal or state
regulatory requirements that must be complied with in connection with the
Merger.
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended and the rules promulgated thereunder by the Federal Trade Commission,
the Merger may not be consummated until notifications have been given and
certain information has been furnished to the Federal Trade Commission and the
Antitrust Division of the Department of Justice and specified waiting period
requirements have been satisfied or early termination of the waiting period is
granted at the request of MedQuist and MRC. MedQuist, MRC and a principal
shareholder of MRC filed notification and report forms under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended with the
Federal Trade Commission and the Antitrust Division of the Deparment of Justice
on September 22, 1998. On October 7, 1998 both MedQuist and such principal
shareholder of MRC received letters from the Federal Trade Commission and the
Antitrust Division of the Department of Justice granting early termination of
the waiting period with regard to such principal shareholder's receipt of
MedQuist Common Stock in consideration for its interest in MRC. On October 20,
1998, MedQuist and MRC both received letters from the Federal Trade Commission
and the Antitrust Division of the Department of Justice granting early
termination of the waiting period with respect to the proposed Merger.
Affiliate Agreements
It is a condition to consummation of the Merger that each person who
could reasonably be determined to be an "affiliate," as such term is defined in
Rule 145 promulgated under the Securities Act, of MedQuist and MRC ("Affiliate")
execute an agreement that states that such Affiliate (i) has not sold any shares
of capital stock or securities of MedQuist or MRC at any time during the 30-day
period ending on the Closing Date, and (ii) will not sell, assign, give, pledge
(except in connection with fully
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recourse bank loans), or otherwise transfer, dispose of or reduce such
Affiliate's risk related to any of such Affiliates shares of capital stock or
other securities of MedQuist or of MRC, except under the de minimus exception to
the pooling rules, until MedQuist shall have published financial results
covering as least 30 days of post-Merger combined operations of MedQuist and MRC
and thereafter, except in compliance with applicable federal and state
securities laws.
Resale of MedQuist Common Stock
The MedQuist Common Stock issued in connection with the Merger will be
freely transferable, except that shares issued to any MRC shareholder who is an
affiliate of MRC or who becomes an affiliate of MedQuist are subject to certain
restrictions on resale. An affiliate is defined generally as including, without
limitation, directors, certain executive officers and certain other persons who
control a company. Certain shareholders of MRC who may be deemed to be
affiliates will, as a condition to completion of the Merger, execute agreements
that prohibit the sale, transfer or other disposition of MedQuist Common Stock
received by such shareholders in the Merger, except under certain circumstances,
in order to comply with the requirements of certain federal securities laws and
certain pooling of interests requirements. Certain shareholders will deliver to
MedQuist certificates certifying that such shareholders have no present
intention to dispose of certain of the shares of MedQuist Common Stock to be
received by such shareholders in the Merger in order to comply with the
requirements of certain U.S. federal tax laws. See "-- Certain Federal Income
Tax Consequences."
Rights of Dissenting MedQuist Shareholders
Holders of shares of MedQuist Common Stock are entitled to dissent and
dissenters' rights under Sections 14A:11-1 through 14A:11-11 of the New Jersey
Business Corporation Act (the "New Jersey Dissenters' Statute"). The following
summary of the applicable provisions of the New Jersey Dissenters' Statute is
not intended to be a complete statement of such provisions and is qualified in
its entirety by reference to the full text of the New Jersey Dissenters'
Statute, which is attached as Annex C-1 to this Joint Proxy
Statement/Prospectus. A person having a beneficial interest in shares of
MedQuist Common Stock that are held of record in the name of another person,
such as a bank, broker or other nominee, must act promptly to cause the record
holder to follow the steps summarized below properly and in a timely manner if
such person wishes to perfect any dissenters' rights such person may have.
This discussion and Annex C-1 should be reviewed carefully by any
shareholder of MedQuist who wishes to exercise statutory dissenters' rights or
who wishes to preserve the right to do so, because failure to strictly comply
with any of the procedural requirements of the New Jersey Dissenters' Statute
may result in a termination or waiver of dissenters' rights under the New Jersey
Dissenters' Statute.
Under the New Jersey Dissenters' Statute, each MedQuist Shareholder
electing to dissent from the Merger and demand payment of the fair value of his
or her shares of MedQuist Common Stock must file with MedQuist a written notice
of dissent stating that such shareholder intends to demand payment for his or
her shares if the Merger is consummated. Such written notice of dissent must be
filed with MedQuist before the vote of MedQuist shareholders on the Merger.
Within 10 days after the effective date of the Merger, MedQuist will
give written notice of the effective date of the Merger by certified mail to
each shareholder who filed a written notice of dissent, except for any
shareholder who voted for the Merger. Within 20 days after the mailing of such
notice,
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the dissenting shareholder may make written demand on MedQuist for payment of
the fair value of his or her shares.
Not later than 20 days after demanding payment for his or her shares,
the shareholder must submit any certificate(s) representing their shares to
MedQuist for notation that such demand has been made. Such certificate(s) will
then be returned to the shareholder. No later than 10 days after the expiration
of the 20 day period in which a shareholder may make written demand for the fair
value of his or her shares, MedQuist will mail to each dissenting shareholder
MedQuist's financial statements as of the latest available date. MedQuist may
accompany such mailing with a written offer to pay each dissenting shareholder a
specified price deemed by MedQuist to be the fair value of such shareholders'
shares. If, not later than 30 days after the expiration of the 10 day period in
which MedQuist sends out mailings to dissenting shareholders, the fair value of
the shares is agreed upon between any dissenting shareholder and MedQuist,
payment shall be made upon surrender of any certificate(s) representing such
shares. The "fair value" is determined as of the day prior to the MedQuist
Meeting.
If the fair value of the shares is not agreed upon within the 30 day
period, the dissenting shareholder may serve upon MedQuist a written demand that
it commence an action in the Superior Court of New Jersey for the determination
of the fair value of the shares. Such demand must be served by the shareholder
not later than 30 days after the expiration of the 30 day period in which the
shareholder and MedQuist could not agree upon the fair value of the shares. Such
action must be commenced by MedQuist not later than 30 days after receipt of
such demand. If MedQuist fails to commence the action within the 30 day period,
a dissenting shareholder may do so in the name of MedQuist, not later than 60
days after the expiration of the 30 day period in which MedQuist may commence
such an action.
All dissenting shareholders must be made parties to the action and the
court shall render judgment for the fair value of their shares. The judgment
shall include an allowance for interest at such rate as the court finds
equitable, from the date of the dissenting shareholder's demand for payment to
the day of payment, unless the court finds that the refusal of any dissenting
shareholder to accept an offer of payment made by MedQuist was arbitrary,
vexatious or otherwise not in good faith. The court will determine and assess
the reasonable expenses incurred by the court appraiser as the court finds
equitable. In addition, reasonable fees and expenses of counsel may be assessed
against MedQuist if the court finds that the offer of payment made by MedQuist
was not made in good faith or if no such offer was made.
A shareholder who makes a written demand for payment under the New
Jersey Dissenters' Statute will cease to have any of the rights of a shareholder
except the right to be paid the fair value of his or her shares. The right of a
shareholder to be paid the fair value of his shares will terminate for a number
of reasons, including: failure to submit any certificate(s) held by shareholder
for notation; if the dissenting shareholder's demand for payment is withdrawn
with the written consent of MedQuist; if the fair value of the shares is not
agreed upon and no action for the determination of fair value by the Superior
Court of New Jersey is commenced within the appropriate time period; if the
Superior Court of New Jersey determines that the shareholder is not entitled to
payment for his or her shares; if the Merger is abandoned; or if a court having
jurisdiction permanently enjoins or sets aside the Merger.
Rights of Dissenting MRC Shareholders
Holders of shares of MRC Common Stock or MRC Preferred Stock who object
to the Merger are entitled to demand value for their shares under Section
351.455 of the Missouri General Business
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Corporation Law ("MGBCL"). The following summary of the applicable provisions of
Section 351.455 of the MGBCL is not intended to be a complete statement of such
provisions and is qualified in its entirety by reference to the full text of
Section 351.455 of the MGBCL, which is attached as Annex C-2 to this Joint Proxy
Statement/Prospectus. A person having a beneficial interest in shares of MRC
Common Stock or MRC Preferred Stock that are held of record in the name of
another person, such as a bank, broker or other nominee, must act promptly to
cause the record holder to follow the steps summarized below properly and in a
timely manner if such person wishes to perfect any dissenters' rights such
person may have.
This discussion and Annex C-2 should be reviewed carefully by any
shareholder of MRC who wishes to exercise statutory dissenters' rights or who
wishes to preserve the right to do so, because failure to strictly comply with
any of the procedural requirements of Section 351.455 of the MGBCL may result in
a termination or waiver of dissenters' rights under Section 351.455 of the
MGBCL.
If a holder of shares of MRC Common Stock or MRC Preferred Stock files
with MRC, prior to or at the MRC Meeting, a written objection to the Merger, and
does not vote in favor of the Merger, and such shareholder, within 20 days after
the Effective Time, makes written demand on the Surviving Corporation for
payment of the fair value of such shareholder's shares of MRC Common Stock or
MRC Preferred Stock as of the day prior to the date on which the vote was taken
approving the Merger, the Surviving Corporation will pay to such shareholder,
upon surrender of such certificate or certificates representing such shares of
MRC Common Stock or MRC Preferred Stock, the fair value thereof (as an
alternative to payment of the applicable Merger Consideration for such holder's
shares of MRC Common Stock or MRC Preferred Stock pursuant to the Merger). Such
demand must state the number of shares of MRC Common Stock or MRC Preferred
Stock owned by such dissenting shareholder. Any shareholder who has filed a
written objection to the Merger but who fails to make demand within the 20-day
period will be conclusively presumed to have consented to the Merger and will be
bound by the terms thereof and the shares of MRC Common Stock or MRC Preferred
Stock held by such shareholder will thereupon be treated as though such shares
had been exchanged pursuant to the Merger Agreement. A vote against the Merger
is not, in and of itself, sufficient to meet the written objection and demand
requirements.
If within 30 days after the Effective Time the value of such shares of
MRC Common Stock or MRC Preferred Stock is agreed upon between the dissenting
shareholder and the Surviving Corporation, payment for such shares of MRC Common
Stock or MRC Preferred Stock will be made within 90 days after the Effective
Time, upon the surrender of such shareholder's certificate or certificates
representing such shares of MRC Common Stock or MRC Preferred Stock. Upon
payment of the agreed value, the dissenting shareholder will cease to have any
interest in such shares of MRC Common Stock or MRC Preferred Stock or in the
Surviving Corporation.
If within such period of 30 days the dissenting shareholder and the
Surviving Corporation do not so agree, then the dissenting shareholder may,
within 60 days after the expiration of the 30 day period, file a petition in any
court of competent jurisdiction within the county in which the registered office
of the Surviving Corporation is situated, asking for a finding and determination
of the fair value of such shares of MRC Common Stock or MRC Preferred Stock, and
will be entitled to judgment against the Surviving Corporation for the amount of
such fair value as of the day prior to the date on which such vote was taken
approving the Merger, together with interest on such amount to the date of such
judgment. The judgment will be payable only upon and simultaneously with the
surrender to the Surviving Corporation of the certificate or certificates
representing such shares of MRC Common Stock or MRC Preferred Stock. Upon the
payment of the judgment, the dissenting shareholder will cease to
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have any interest in such shares of MRC Common Stock or MRC Preferred Stock, or
in the Surviving Corporation. Such shares of MRC Common Stock or MRC Preferred
Stock may be held and disposed of by the Surviving Corporation as it may see
fit. Unless the dissenting shareholder files such petition within the time
period set forth herein, such shareholder and all persons claiming under such
shareholder will be conclusively presumed to have approved and ratified the
Merger and will be bound by the terms of the Merger Agreement, and the shares of
MRC Common Stock or MRC Preferred Stock held by such dissenting shareholder and
all persons claiming under such shareholder will thereupon be treated as though
such shares had been exchanged pursuant to the Merger Agreement.
The right of a dissenting shareholder to be paid the fair value of such
shareholder's shares of MRC Common Stock or MRC Preferred Stock will cease if
and when MRC abandons the Merger. All notices of election to dissent should be
addressed to The MRC Group, Inc., 23240 Chagrin Blvd., Suite 400, Cleveland,
Ohio 44122, Attention: Steven Bell, Secretary.
Certain Federal Income Tax Consequences
The following is a summary description of the material United States
federal income tax consequences of the Merger to MRC and the MRC shareholders
who receive MedQuist Common Stock pursuant to the Merger or perfect dissenters'
rights. This summary is not a complete description of all of the tax
consequences of the Merger and, in particular, does not address tax
considerations which may affect the treatment of certain special status
taxpayers such as financial institutions, broker-dealers, life insurance
companies, tax-exempt organizations, investment companies and foreign taxpayers
or of MRC shareholders who do not hold their MRC Common Stock as a capital asset
at the Effective Time. In addition, no information is provided herein with
respect to the tax consequences of the Merger either under applicable foreign,
state or local laws or to persons who acquired MRC Common Stock pursuant to
employee stock options or otherwise as compensation.
The following discussion is based on the Internal Revenue Code of 1986,
as amended (the "Code") as in effect on the date of this Joint Proxy
Statement/Prospectus, without consideration of the particular facts or
circumstances of any particular holder of MRC Common Stock. MRC and MedQuist
have not sought and will not seek any rulings from the Internal Revenue Service,
with respect to any of the matters discussed herein. It is a condition to the
closing that Blank Rome Comisky & McCauley LLP, counsel to MedQuist, render an
opinion that the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code. Provided that the Merger qualifies as a statutory
merger under applicable state law: (1) the Merger will constitute a
reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of
the Code; (2) no gain or loss will be recognized by MedQuist upon the exchange
of MRC Common Stock solely in exchange for MedQuist Common Stock; (3) no gain or
loss will be recognized by MRC shareholders upon the exchange of their MRC
Common Stock solely for MedQuist Common Stock, except that any MRC shareholder
who receives cash proceeds in lieu of a fractional share interest in MedQuist
Common Stock will recognize gain or loss equal to the difference between such
cash proceeds and the tax basis in the fractional share interest, and such gain
or loss will constitute capital gain or loss if such shareholder's MRC Common
Stock was held as a capital asset at the Effective Time ; (4) the basis of
MedQuist Common Stock received by MRC shareholders in the Merger will be the
same as the basis of their MRC Common Stock surrendered in exchange therefor;
(5) for capital gains purposes, the holding period of MedQuist Common Stock
received by MRC shareholders in the Merger will include the period during which
the MRC Common Stock surrendered in exchange therefor was held, provided that
such MRC Common Stock is held as a capital asset at the Effective Time.
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An MRC shareholder who perfects dissenters' rights with respect to his
or her shares of MRC Common Stock, and who does not withdraw such rights,
should, in general, treat the difference between the tax basis of the shares of
MRC Common Stock held by such person with respect to which such dissenters'
rights are perfected and the amount received in payment therefor as capital gain
or loss. However, depending on the MRC shareholder's particular circumstances,
such amount might be treated for federal income tax purposes as dividend income.
The foregoing is a general discussion of certain material federal
income tax consequences of the merger for MRC and MRC shareholders and is
included for general information only. The foregoing discussion does not take
into account the particular facts and circumstances of each MRC shareholder's
tax status and attributes. Accordingly, each MRC shareholder should consult his
or her own tax advisor regarding the specific tax consequences of the Merger,
including the application and effect of federal, state, local and other tax laws
and the possible effects of changes in such tax laws.
Accounting Treatment
MedQuist and MRC believe that the Merger will qualify as a
"pooling-of-interests" for accounting and financial reporting purposes. The
unaudited pro forma financial information contained in this Joint Proxy
Statement/Prospectus has been prepared using the "pooling-of-interests"
accounting method to account for the Merger. See "Unaudited Pro Forma Combined
Financial Data."
It is a mutual condition to consummation of the Merger by both MRC and
MedQuist that MedQuist receive a letter from Arthur Andersen LLP, independent
public accountants for MedQuist and MRC, to the effect that such firm believes
that the Merger will qualify for "pooling-of-interests" accounting treatment
under Accounting Principles Board Opinion No. 16. Both MedQuist and MRC have
agreed not to take any action or fail to take any action that would jeopardize
the treatment of the Merger as a "pooling-of-interests."
Nasdaq Listing
MedQuist will cause the shares of MedQuist Common Stock to be issued in
connection with the Merger to be listed on the Nasdaq National Market.
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INFORMATION CONCERNING MRC
Overview
MRC is a leading national provider of electronic medical transcription
and document management services to the health care industry. MRC currently
operates more than 50 client service centers in 24 states and employs more than
2,400 experienced medical transcriptionists, approximately 70% of whom work from
their homes. MRC serves more than 500 clients, primarily hospitals and medical
centers, as well as other non-hospital health care providers, such as managed
care providers, surgical centers, outpatient clinics and physician groups.
Within hospitals and medical centers, MRC primarily serves medical records
departments. Increasingly, MRC is providing its services to other hospital
departments that seek to outsource their medical transcription needs, including
radiology, emergency medicine, pathology and cardiology departments and
outpatient surgical units.
MRC's objective has been to capitalize on the health care industry's
trend toward increased dictation of medical reports and outsourcing of medical
transcription and document management services. The principal elements of this
strategy have been to (i) accelerate internal growth through superior client
retention, deeper penetration of existing clients and increased sales to new
clients; (ii) expand operating margins by further standardizing operations,
taking advantage of economies of scale and executing disciplined pricing
strategies; (iii) apply state-of-the-art technology to expand services, enhance
client satisfaction and lower costs; and (iv) identify and complete strategic
acquisitions.
MRC applies state-of-the-art technology and proprietary software
applications, protocols and procedures to create customized systems tailored to
meet specific client requirements and to enhance client satisfaction. MRC
leverages technology and technological advances to standardize further its
internal systems, lower costs and expand the breadth and functionality of its
services. MRC believes that its technical personnel and capabilities enable it
to meet demanding client requests. MRC has an advanced infrastructure that
allows for the transfer of work among its network of over 50 client service
centers. A Technical Call Center provides for around-the-clock technical
support. These capabilities enable MRC to manage fluctuations in demand and
provide prompt turnaround services on a cost-effective, 24-hours-a-day,
seven-days-a-week basis.
MRC's operational infrastructure is designed to maximize client
satisfaction and minimize costs. MRC has developed a technical platform, along
with an organizational structure which focuses and motivates its managers to
maintain close relationships with clients. MRC's proprietary technical platform,
ACCESS+, was specifically developed to facilitate reliability and prompt
turnaround time. ACCESS+, which operates in an open architecture environment,
automates demographic input, document tracking, transmission, reporting and
storage. ACCESS+ allows MRC to control and monitor the entire medical
transcription process from dictation through the delivery of the transcribed
medical report to the client. The ACCESS+ platform has benefitted from numerous
enhancements based on MRC's years of experience. The ACCESS+ software package
includes a state-of-the-art local area network, a commercially available
document management package developed specifically for medical transcription, a
customized menu system, and a variety of proprietary transmission protocols
which integrate MRC's systems with its clients' systems. The hardware components
of this system include computers and servers, high-speed modems and laser
printers. MRC's client service centers allow MRC's client management teams to
provide sales, client services and technical services to MRC's clients in an
efficient and personalized manner.
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Electronic Medical Transcription and Document Management
Medical transcription and document management is the process by which
clinical and medical information is dictated by a health care provider,
transcribed by a medical transcriptionist and returned to the health care
provider for verification, signing and incorporation into the patient's medical
record. These services are generally utilized by medical records, radiology,
emergency medicine, pathology and cardiology departments. The most commonly
transcribed reports for medical records departments are history and physical
reports, consultations, surgical reports and discharge summaries. Specialized
reports for the radiology, pathology, emergency medicine and cardiology
departments are also commonly transcribed.
The emergence of computerized patient records and the evolution of
computerized digital dictation systems, among other factors driving client
expectations, have increased the complexity and technological sophistication of
the medical transcription process. The entire process may take as short as one
hour or as long as 72 hours depending on the length of the dictation and the
type of report.
Step 1. Capture of Dictated Reports and Patient Demographics. MRC
provides a state-of-the-art digital dictation system with features specifically
oriented to provide the physicians both reliability and turn-key operability.
Physicians are able to dictate 24 hours a day, seven days a week. To provide
this reliability, MRC's client service centers are equipped with fault tolerant
dictation systems and temporary electrical backup systems. MRC also maintains a
national backup dictation system that allows dictation and transcription even if
a client service center experiences a complete and extended loss of power or
telephone service. MRC also electronically captures demographic information
(such as hospital name, patient name and physician identification), which
requires an interface with the client's health information system. Given the
complexities of interface development, clients are especially interested in
outsourcing to medical transcription companies, such as MRC, that have
substantial technical expertise. MRC's Interface Department has developed
interfaces for virtually all major health information systems. Since ACCESS+ has
an open architecture, it can accept a wide variety of client data formats and
structures.
Step 2. Transmission of Voice and Demographics to Medical
Transcriptionists. After the physician has completed the dictation, the digital
voice file and the appropriate patient demographic data are transmitted using
ACCESS+. Medical transcriptionists in MRC's client service centers access
demographic data directly from the ACCESS+ network and MRC's at-home medical
transcriptionists automatically receive demographic data through a proprietary
transmission protocol. The protocol is designed to ensure that all medical
transcriptionists have up-to-date information. This is important for both
clients and medical transcriptionists since it minimizes the chance of
demographic errors. The transmission protocol also allows MRC to update
executable files automatically, thereby allowing MRC to disseminate software
enhancements and format changes quickly and efficiently to all its medical
transcriptionists.
Step 3. Creating the Transcribed Report and Populating the Medical
Report's Demographic Fields. MRC's standard operating platform allows medical
transcriptionists to create medical reports using commercially available
third-party software specifically developed or modified for medical
transcription. This software allows MRC's medical transcriptionists to create
customized glossaries that automatically expand abbreviated text and correct
common typographical errors. In addition, the medical transcriptionists can
access and automatically populate the report with critical information,
including patient demographics and report routing and distribution preferences.
The automation of this
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feature improves the quality of the document, minimizes the number of errors
that occur when the document is uploaded into the client's health information
system, and improves medical transcriptionists' productivity.
Step 4. Quality Assurance. After the medical transcriptionist has
completed transcribing reports, the reports are transmitted to quality
assurance. For at-home medical transcriptionists, this transfer of reports is
accomplished through a proprietary transmission protocol which virtually
eliminates the possibility of lost reports even if a telephone connection is
interrupted. This system also generates verification reports to assist both MRC
and its clients with document tracking and monitoring (see Step 6).
The quality assurance program provides the capability for both the
content and the demographic data in the reports to be checked for accuracy by
client service center managers or quality service personnel. New medical
transcriptionists have 100% of their work checked and more seasoned medical
transcriptionists have a sampling of their reports checked. In addition, ACCESS+
allows medical transcriptionists to flag reports with any problems or questions
and will not allow flagged reports to be sent to the client until they have been
reviewed and released by MRC's quality assurance personnel.
Step 5. Transmission and Uploading of Report. After reports have
cleared MRC's quality assurance program, they are automatically batched and
transmitted to the client. MRC uses proprietary transmission protocols, which,
if necessary, recover from disconnected phone lines without the loss of
information and which facilitate the transmission and verification process.
Reports are usually sent to the client's health information management
department where they are stored electronically and can then be uploaded into
the client's computerized patient record system.
Step 6. Tracking and Verification. Clients can review the status of
particular patient data and transcribed reports at any point in time and can use
MRC's systems as an internal management tool to monitor timeliness of
physicians' dictation. ACCESS+ also allows MRC to verify the transmission of all
reports and allows the client and MRC to monitor MRC's on-time performance.
Step 7. Report Management. ACCESS+ provides report management
capabilities for MRC and its clients. Users can search for reports based on any
fields maintained in the system database or any words contained in a report. For
example, every report during a defined time period with the word "cardiac" can
be recalled in a matter of seconds. Summary information is also available on
ACCESS+ system for clients' internal management purposes. These reports can be
printed on a prearranged schedule to meet the client's reporting needs. In
addition, users can easily edit or append reports after they have been
transcribed.
Product Development
Product development by MRC focuses on the application of
state-of-the-art technology to MRC's core business or to opportunities closely
related to its core business. Investments in product development by MRC have
often involved alliances with carefully selected technology partners. These
third parties provide critical technological skills and minimize MRC's up-front
investments.
PowerScribe, the result of one of MRC's product development efforts, is
a continuous speech recognition product combining medical lexicons, language
models and customized interfaces and workflow applications. MRC has jointly
funded the development and obtained a right to use and
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distribute in the United States and Canada certain PowerScribe continuous speech
recognition software applications for the medical transcription service business
for radiology, emergency medicine and one other field to be agreed upon.
Sales and Marketing
MRC's transcription services sales staff consists of 11 sales
personnel, with an average of 10 years of experience in the medical
transcription or medical equipment industry. MRC's sales and marketing force is
structured to promote internal growth by cross-selling to MRC's existing client
base and by attracting new clients. Sales personnel target their efforts on new
business within existing customers and larger potential clients in regions where
client service centers are already located.
MRC's sales personnel use a consultative sales and marketing approach
by establishing working relationships with MRC's prospective clients through a
series of direct meetings with the health information manager or medical records
director, chief financial officer, chief information officer and other key
individuals at the client's organization and establishing a clear dialogue
regarding MRC's and the client's shared expectations. In this manner, MRC
obtains information concerning the particular needs of the client and educates
the client as to how MRC's services can be customized to meet those needs. The
sales process typically averages from several weeks to six months, depending on
technology requirements and whether medical transcription is being outsourced
for the first time or the potential client is changing medical transcription
service providers.
As part of its marketing efforts, MRC advertises in national health
care trade publications, including those sponsored by the American Health
Information Management Association, participates in industry conventions, and
sends direct mail solicitations to potential clients.
Clients
MRC's diversified client base includes more than 500 hospitals and
other health care organizations, such as outpatient clinics and physician
practice groups. Approximately 80% of MRC's revenues are derived from the
medical records departments of hospitals, including large metropolitan hospitals
and major teaching hospitals. Radiology and emergency departments each account
for approximately 9% of MRC's revenues. MRC's clients are located throughout the
United States.
The typical term of MRC's contracts with its clients for medical
transcription services ranges from three to five years. Client contracts specify
the services to be performed by MRC, the price thereof, and the particular
requirements of the client, such as turnaround times and technical services to
be provided. Revenues per individual client vary based upon individual client
demands for MRC's services.
Competition
MRC competes in markets that are competitive and highly fragmented. The
industry is predominately populated by small regional or local companies, with a
limited number of national companies. MRC also competes against approximately a
dozen national and regional firms.
For new clients that currently outsource, MRC competes on the basis of
its reputation for quality and turnaround time performance, size and resources,
technical capabilities, personal client attention and relationships and price.
MRC believes that its size and its technical resources have diminished the
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<PAGE>
importance of price as a competitive factor. The basis for competition for
medical transcription business that is currently being performed in-house
includes additional factors, such as the ability to provide a smooth transition
toward outsourcing and the willingness of the medical transcription service
provider to hire in-house transcriptionists.
Employees
As of September 30, 1998, MRC employed approximately 3,115 persons,
consisting of approximately 2,500 trained, professional medical
transcriptionists (approximately 70% of whom work out of their homes and
approximately 30% of whom work at client service centers), approximately 470
managers and clerical staff at MRC's client service centers, and approximately
145 corporate employees. None of MRC's employees is represented by a labor
union. MRC considers its relations with its employees to be good. In addition,
as a result of an acquisition, MRC retains 47 medical transcriptionists as
independent contractors at one of its client service centers.
Government Regulations
The health care industry is subject to changing political, economic and
regulatory influences that may affect the outsourcing arrangements of health
care providers. Federal and state legislators have from time to time proposed
programs to reform the United States health care system and other proposals may
be made in the future. In general, these programs and proposals tend to
emphasize managed care, seek to lower reimbursement rates and otherwise attempt
to control the environment in which health care providers operate. In providing
its services, MRC is subject to certain contractual, statutory, regulatory and
common law requirements regarding the confidentiality of medical information.
MRC requires its personnel to agree to keep all medical information confidential
and monitors compliance with applicable confidentiality requirements. Federal
and state regulators are making increasing efforts to investigate claims of
false billing for government reimbursement and have obtained substantial
payments from health care providers to resolve these claims. Because these
claims often result from a lack of appropriate documentation to support billing,
these government efforts may stimulate a need for more comprehensive
transcription services. Additionally, health care accreditation organizations
and governmental authorities have begun to require more extensive transcription
of patient medical records as part of the requirements for hospitals or other
health care providers to receive and maintain accreditation.
Intellectual Property
MRC considers the name "MRC" and MRC logo to be important to the
operation of its business and the marketing of its services. MRC regards the
application of its ACCESS+ software underlying its services as proprietary, and
relies primarily on a combination of contract, copyright and trademark law,
trade secrets, confidentiality agreements and contractual provisions to protect
its proprietary rights. MRC has no patents or patent applications pending, and
relies on existing trade secrets and copyright laws to afford it protection
against unauthorized use. MRC is not aware that any of its software, trademarks
or other proprietary rights infringe the proprietary rights of third parties.
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Properties
MRC leases all of its client service centers and its corporate
headquarters. The client service centers range in size from 624 square feet to
6,569 square feet, and its corporate headquarters, located in Cleveland, Ohio,
consists of 11,297 square feet.
Legal Proceedings
Although MRC from time to time is involved in various legal proceedings
or claims arising in the ordinary course of its business, MRC is not currently a
party to any material pending legal proceeding nor, to the knowledge of MRC, is
any material legal proceeding currently threatened.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF MRC
The following discussion is qualified in its entirety by the more
detailed information and the Consolidated Financial Statements and the related
Notes thereto appearing elsewhere in this Joint Proxy Statement/Prospectus.
Overview
MRC is a leading national provider of electronic medical transcription
and document management services to the health care industry. MRC currently
operates more than 50 client service centers in 24 states and employs more than
2,400 experienced medical transcriptionists, approximately 70% of whom work from
their homes. MRC serves more than 500 clients, primarily hospitals and medical
centers, as well as other non-hospital health care providers, such as managed
care providers, surgical centers, outpatient clinics and physician practice
groups. Within hospitals and medical centers, MRC primarily serves the medical
records departments. Increasingly, MRC is providing its services to other
hospital departments that seek to outsource their medical transcription needs,
including radiology, emergency medicine, pathology and cardiology departments
and outpatient surgical units.
The significant growth in MRC's revenues has resulted from
acquisitions, increased penetration of its large base of medical institutions
and the addition of new clients. MRC became one of the country's largest
providers, based on revenues, of medical transcription services in July 1996
when it acquired Medical Records Corp., a national medical transcription service
company. The consummation of this acquisition by MRC resulted in the
consolidation into The MRC Group of two of the three largest providers of
electronic medical transcription services in the nation.
Operating results for 1996 and 1997 were adversely impacted as MRC
allocated a significant amount of resources toward the integration of the
technical, operational and administrative infrastructures of MRC and Medical
Records Corp. Additionally, MRC had restructuring charges associated with the
closure and consolidation of less profitable or redundant client service centers
and other non-recurring acquisition and integration costs in 1996 and 1997 in
connection with the acquisition of Medical Records Corp. MRC believes that as a
result of these actions, future results of operations and liquidity will be
enhanced due to lower overhead costs and capital resource requirements. MRC
believes it has substantially completed this process and absent the impact of
the proposed Merger does not anticipate significant additional client service
center closures and therefore does not expect future restructuring charges
impacting operating results, liquidity and capital resource requirements.
MRC has continued to acquire additional medical transcription companies
in 1997 and 1998. In 1997, MRC acquired three medical transcription companies
with combined annual revenues of approximately $4.6 million. In 1998, MRC
acquired two medical transcription companies with annual revenues of
approximately $2.3 million. The five companies were acquired for an aggregate
consideration of approximately $4.7 million, excluding earn-out provisions, and
were accounted for as purchases.
In 1996, MRC began funding a portion of the development costs of
PowerScribe, a speech recognition product distributed by MRC. Although
PowerScribe is generating revenues, current revenues are insufficient to cover
overhead costs related to PowerScribe.
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In 1998, MRC has increased revenues and capitalized on the integration
and restructuring of 1996 and 1997. As a result, operating margins have improved
as MRC leveraged its infrastructure of client service centers and other
predominantly fixed operational, technical and administrative costs against the
increased revenue base.
Sources of Revenue
MRC's electronic medical transcription revenues tend to be recurring as
a result of the multi-year nature of its client contracts. Revenues per
individual client vary based upon individual client demands for MRC's services.
MRC charges its clients on a per-unit basis (most commonly for each line or word
transcribed). These services are provided primarily to hospitals and medical
centers and other health care providers that outsource all or part of their
medical transcription needs.
Although MRC's net revenues are derived primarily from electronic
medical transcription services provided to hospital health information
management departments (approximately 80% of revenues), MRC also provides its
services to other hospital departments. Radiology (approximately 9% of revenues)
and emergency medicine (approximately 9% of revenues) also significantly
contribute to MRC's revenues. PowerScribe, the speech recognition software
product distributed by MRC, currently generates less than 1% of MRC's revenues.
Results of Operations
The following table presents, for the periods indicated, certain
financial information expressed as a percentage of net revenues. Such
information has been derived from the Consolidated Financial Statements and the
Notes thereto of MRC included elsewhere in this Joint Proxy
Statement/Prospectus:
<TABLE>
<CAPTION>
Years Ended Six Months
December 31, Ended June 30,
--------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- --------- ---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............. 81.6 80.0 80.4 80.1 79.6
---------- --------- ---------- ---------- -----------
Gross profit........................... 18.4 20.0 19.6 19.9 20.4
Selling, general and administrative
expenses............................... 8.9 11.6 9.0 9.0 8.7
Depreciation and amortization.......... 7.9 9.0 9.5 9.1 7.4
Restructuring charges.................. 0.7 0.9 1.9 -- --
---------- --------- ---------- ---------- -----------
Operating income (loss)................ 0.9 (1.5) (0.8) 1.8 4.3
Interest income (expense), net......... (1.1) (0.5) (0.3) (0.3) (0.1)
---------- --------- ---------- ---------- -----------
Income (loss) before income taxes...... (0.2) (2.0) (1.1) 1.5 4.2
(Provision) for income taxes........... (0.1) -- -- (1.0) (1.9)
---------- --------- ---------- ---------- -----------
Net income (loss)...................... (0.3)% (2.0)% (1.1)% (0.5)% 2.3%
========== ========= ========== ========== ===========
</TABLE>
Revenues derived from MRC's services and products are net of customary
client adjustments and credits, which historically have not been significant as
a percentage of revenues.
Cost of revenues include client service related costs, such as payroll,
associated taxes and benefits and telecommunications costs. Medical
transcriptionist payroll, MRC's largest single cost, is
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variable because transcriptionists are paid based upon the amount of
transcription they generate (on a per unit basis). Additionally, a significant
portion of MRC's telecommunication costs is variable.
Selling, general and administrative costs include payroll, associated
taxes and benefits and other costs related to the sales and marketing, finance,
human resources and administrative functions of MRC. Depreciation expense
relates to the depreciation of fixed assets used at client service centers and
corporate locations. Amortization expense relates to the amortization of
acquired intangible assets, including the customer base and employee lists of
acquired companies, and goodwill.
Six Months Ended June 30, 1998 and 1997
Net Revenues. Net revenues for the six months ended June 30, 1998 were
$60.2 million, an increase of $6.9 million, or approximately 12.9%, over net
revenues of $53.3 million for the six months ended June 30, 1997. Of the
increase, $1.5 million resulted from revenues generated from four acquisitions,
three in 1997 and one in the first quarter of 1998. The remaining $5.4 million
of increased net revenues resulted from increased revenues from the existing
client base (consisting of both higher prices and increased services) and
revenues from new clients.
Gross Profit. Gross profit during the six months ended June 30, 1998
was $12.3 million, an increase of $1.7 million, or approximately 16.0%, over
gross profit of $10.6 million for the six months ended June 30, 1997. Gross
profit as a percentage of net revenues increased from approximately 19.9% in the
first six months of 1997 to approximately 20.4% in the first six months of 1998.
The 0.5% increase in gross profit as a percentage of net revenues is primarily a
result of leveraging fixed costs incurred at MRC's client service centers
against increasing client revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the six months ended June 30, 1998 were $5.3 million,
an increase of $500,000, or approximately 10.4%, over selling, general and
administrative expenses of $4.8 million for the six months ended June 30, 1997.
Selling, general and administrative expenses as a percentage of net revenues
decreased from approximately 9.0% in the six months ended June 30, 1997 to
approximately 8.7% in the six months ended June 30, 1998. This 0.3% decrease as
a percentage of net revenues is primarily attributable to management controlling
expenses while client revenues increased.
Depreciation and Amortization. Depreciation and amortization expenses
in the six months ended June 30, 1998 were $4.4 million, a decrease of $400,000
or approximately 8.3%, from $4.8 million in the six months ended June 30, 1997.
This decrease is a result of certain intangible assets becoming fully amortized
in 1997.
Operating Income. Principally as a result of the above, operating
income in the six months ended June 30, 1998 was $2.6 million, an increase of
$1.7 million, or approximately 179%, over operating income of $949,000 for the
first six months of 1997. Operating income as a percentage of net revenues
increased to approximately 4.3% in the first six months of 1998 from
approximately 1.8% in the prior year period.
Income Taxes. MRC's effective tax rate was approximately 45% in the
first six months of 1998. The provision for income taxes was $1.1 million
compared to $522,000 in the first six months of 1997. The effective tax rate
exceeds the statutory rate due primarily to non-deductible goodwill
amortization.
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Net Income. As a result of the above, MRC recorded net income for the
six months ended June 30, 1998 of $1.4 million, an increase of $1.1 million, or
approximately 397% over net income of $277,000 for the six months ended June 30,
1997. Net income as a percentage of net revenues increased to approximately 2.3%
in the first six months of 1998 from approximately 0.5% in the prior year
period.
Years Ended December 31, 1997 and 1996
Net Revenues. Net revenues for the year ended December 31, 1997 were
$108.1 million, an increase of $36.4 million, or approximately 50.8%, over net
revenues of $71.7 million for the year ended December 31, 1996. The increase was
primarily a result of an increase of $27.6 million attributable to a full year
of revenues from the acquired Medical Records Corp. clients, an increase of $2.7
million attributable to revenues from other businesses acquired in 1997, and an
increase of $6.1 million attributable to additional revenues from existing and
new clients.
Gross Profit. Gross profit in 1997 was $21.1 million, an increase of
$6.7 million, or approximately 46.5%, over gross profit of $14.4 million in
1996. The increase in gross profit is a result of increased revenues, primarily
related to the acquisitions and internal growth outlined in net revenues above.
Gross profit as a percentage of net revenues remained relatively stable at
approximately 20.0% in 1996 and approximately 19.6% in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1997 were $9.7 million, an increase of $1.4 million,
or approximately 16.9%, compared to $8.3 million in 1996. The increase in
selling, general and administrative expenses was primarily related to additional
non-recurring costs of approximately $764,000. The $764,000 includes $550,000 of
research and development expenses. The balance is primarily due to test market
advertising. Selling, general and administrative expenses as a percentage of net
revenues decreased to approximately 9.0% in 1997 from approximately 11.6% in
1996. The decrease as a percentage of net revenues is a result of leveraging its
sales and marketing, finance, human resources and other administrative costs
against increasing revenues.
Depreciation and Amortization. Depreciation and amortization expenses
in 1997 were $10.2 million, an increase of $3.8 million or approximately 59%,
from $6.4 million in 1996. This increase was a result of a $1.6 million increase
in depreciation of fixed assets and a $2.2 million increase in amortization of
intangible assets, primarily attributable to a full year's costs related to the
acquisition of Medical Records Corp.
Restructuring Charges. MRC incurred restructuring charges of $2.1
million in 1997 and $644,000 in 1996 related to the closure and consolidation of
less profitable or redundant client service centers in 1997 and 1996 and other
non-recurring acquisition and integration costs incurred in 1997 in connection
with the acquisition of Medical Records Corp.
Operating Loss. Principally as a result of the above, the loss from
operations in 1997 totaled $915,000, a decrease in losses of $85,000 over the
1996 level of $1.0 million. The loss from operations as a percentage of net
revenues decreased to approximately 0.8% in 1997 from approximately 1.5% in
1996.
Income Taxes. MRC did not provide for income taxes in 1996 and 1997 as
a result of reporting net losses for these years.
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<PAGE>
Net Loss. As a result of the above, MRC recorded a net loss in 1997 of
$1.2 million compared to a net loss of $1.4 million in 1996.
Years Ended December 31, 1996 and 1995
Net Revenues. Net revenues for the year ended December 31, 1996 were
$71.7 million, an increase of $22.5 million, or approximately 45.7%, over net
revenues of $49.2 million for the year ended December 31, 1995. The increase was
primarily a result of additional revenues from the acquisition of Medical
Records Corp. in July 1996.
Gross Profit. Gross profit in 1996 increased by $5.4 million to $14.4
million, or approximately 60.0%, over the 1995 level of $9.0 million. The
increase in gross profit is a result of increased revenues, primarily related to
the acquisition of Medical Records Corp. Gross profit as a percentage of net
revenues increased from approximately 18.4% in 1995 to approximately 20.0% in
1996 as a result of higher gross profit margins provided by the Medical Records
Corp. client service centers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1996 increased $3.9 million to $8.3 million, or
approximately 88.6%, compared to approximately $4.4 million in 1995. Selling,
general and administrative expense as a percentage of net revenues increased to
approximately 11.6% in 1996 from approximately 8.9% in 1995. The increase in
expense was primarily a result of additional overhead and assumed expenses
incurred as a result of the acquisition of Medical Records Corp.
Depreciation and Amortization. Depreciation and amortization expenses
in 1996 were $6.4 million, an increase of 64.1%, from $3.9 million in 1995. This
increase is primarily related to fixed assets and intangible assets acquired
related to the acquisition of Medical Records Corp.
Operating Income (Loss). Principally as a result of the above, loss
from operations in 1996 totaled $1.0 million, compared to income from operations
of $420,000 in 1995. As a percentage of net revenues, there was an approximate
1.5% operating loss in 1996, compared to an approximate 0.9% operating income in
1995.
Income Taxes. MRC effectively did not provide for income taxes in 1996
and 1995 as a result of reporting net losses for these years.
Net Loss. As a result of the above, MRC recorded a net loss in 1996 of
$1.4 million, compared to a net loss of $126,000 in 1995.
Selected Quarterly Operating Results
The following table sets forth unaudited quarterly results of
operations of MRC for each of the quarters in the year ended December 31, 1997
and the six months ended June 30, 1998. This information has been prepared on
the same basis as the consolidated financial statements and, in the opinion of
MRC's management, reflects all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the periods presented. The unaudited quarterly operating results are not
necessarily indicative of future results of operation. This data should be read
in conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Joint Proxy Statement/Prospectus.
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<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------
1997 1998
----------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30
-------- ------- -------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net revenues $26,095 $27,172 $27,259 $27,591 $29,410 $30,762
Cost of revenues 21,040 21,646 21,995 22,294 23,620 24,249
------ ------ ------- ------ ------ ------
Gross profit 5,055 5,526 5,264 5,297 5,790
6,513
Selling, general
and administrative expenses 2,621 2,163 1,940 3,019 2,623 2,653
Depreciation and
amortization 2,345 2,503 2,570 2,821 2,179 2,245
Restructuring charges -- -- -- 2,075 -- --
------- ------- ------- ----- ------- -----
Operating income (loss) 89 860 754 (2,618) 988 1,615
Interest income
(expense), net (78) (72) (73) (87) (63) (35)
------- ------- ------- ------- ------- -------
Income (loss) before
income taxes 11 788 681 (2,705) 925 1,580
(Provision) benefit
for income taxes (107) (415) (374) 896 (431) (696)
------- ------- ------- ----- ----- -------
Net income (loss) $ (96) $ 373 $ 307 $(1,809) $ 494 $ 884
======= ======= ======= ======== ======= =======
</TABLE>
The following table sets forth certain unaudited consolidated quarterly
statement of operations data expressed as a percentage of net revenue:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------
1997 1998
--------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues 80.6 79.7 80.7 80.8 80.3 78.8
----- ---- ---- ---- ---- -----
Gross profit 19.4 20.3 19.3 19.2 19.7 21.2
Selling, general
and administrative expenses 10.1 7.9 7.1 11.0 8.9 8.6
Depreciation and
amortization 9.0 9.2 9.4 10.2 7.4 7.3
Restructuring charges -- -- -- 7.5 -- --
----- ----- ----- ----- ----- -----
Operating income (loss) 0.3 3.2 2.8 (9.5) 3.4 5.3
Interest income
(expense), net (0.3) (0.3) (0.3) (0.3) (0.2) (0.1)
----- ----- ----- ----- ----- -----
Income (loss) before
income taxes 0.0 2.9 2.5 (9.8) 3.2 5.2
(Provision) benefit
for income taxes (0.4) (1.5) (1.4) 3.2 (1.5) (2.3)
----- ----- ----- ----- ----- -----
Net income (loss) (0.4)% 1.4% 1.1% (6.6)% 1.7% 2.9%
===== ===== ===== ===== ===== =====
</TABLE>
Selling, general and administrative expenses for the three months ended
December 31, 1997 increased as a result of non-recurring charges of
approximately $514,000, primarily for research and development.
Liquidity and Capital Resources
MRC's consolidated working capital at June 30, 1998 was $12.3 million,
and cash and short-term investments were approximately $8.0 million. MRC's cash
resources and available borrowings were satisfactory to meet its obligations
during the year ended December 31, 1997, and the six months ended June 30, 1998.
It is anticipated that MRC's cash from operations, cash resources and available
borrowings will meet MRC's capital requirements for at least the next 18 months.
MRC's total debt at June 30, 1998, including a current portion of $2.0
million, was $7.3 million. Such indebtedness included $4.6 million of a term
note payable to a bank, $2.0 million of seller notes from acquisitions and
$700,000 of capital lease obligations.
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The bank term note is being amortized in monthly principal amounts of
$117,000 plus interest at LIBOR plus 1.65% and will mature September 2001. This
facility is collateralized by substantially all of MRC's assets. The agreement
relating to the note contains various financial covenants. All or a portion of
the outstanding loan balance may be repaid at any time and commitments may be
terminated in whole or in part at the option of MRC without premium or penalty,
at the end of the applicable 90-day interest period.
In connection with the acquisition of Medical Records Corp. by MRC in
July 1996, MRC issued seven-year, 8% unsecured notes payable to former
shareholders in the aggregate principal amount of $2.0 million. The notes
require MRC to pay interest quarterly with annual principal payments of $500,000
beginning in July 2000.
MRC also has a line of credit agreement with a bank under which it can
borrow up to $10.0 million with an interest rate of LIBOR plus 1.25%. The line
of credit is secured by substantially all of MRC's assets. This line expires
June 30, 1999. MRC utilizes this line of credit on a periodic basis for working
capital. No amounts were outstanding at June 30, 1998.
For the years ended December 31, 1995, 1996 and 1997, cash flows
provided by operating activities were $3.6, $4.0 and $7.3 million, respectively.
Cash from operating activities are generated primarily from non-cash
depreciation and amortization added back to MRC's operating results which has
increased as a result of the acquisition of Medical Records Corp. in 1996, and
depreciation on increased capital expenditures necessary to support increased
revenues.
For the years ended December 31, 1995, 1996 and 1997, cash flows used
for investing activities were $2.5, $30.1 and $8.5 million, respectively. The
increases were a result of increased capital expenditures for computer and
digital recording equipment necessary to upgrade systems to MRC's standard
platforms and support increased revenues. Additionally in 1996, $21.4 million of
cash flows were used for the acquisition of Medical Records Corp.
For the years ended December 31, 1995, 1996 and 1997, cash flows
provided by (used for) financing activities were $0.2, $27.1 and $(2.7) million,
respectively. The fluctuation in cash flows from financing activities is
reflective of normal borrowing trends and the net proceeds of $29.3 million
related to the sale of Series VI Preferred Stock in 1996 used to consummate the
acquisition of Medical Records Corp. and to provide working capital.
Other
Inflation has not had a significant effect on MRC's historical
operations, as increased costs to MRC have generally been offset by increased
prices of services provided to its clients.
Year 2000
MRC is assessing its computer systems to determine their compliance
with the Year 2000. Based on this assessment, MRC has upgraded or replaced
certain of its internal information systems and is in the process of upgrading
or replacing other systems with Year 2000 compliant systems. MRC will use
internal and external resources to replace, reprogram and test software and
hardware, where necessary, to ensure Year 2000 compliance. MRC is also
communicating with its customers, suppliers and others to coordinate the Year
2000 conversion. Given the information known at this time about its systems,
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coupled with MRC's ongoing efforts to upgrade or replace business critical
systems as necessary, the total cost of the project is not expected to have a
material effect on MRC's business, financial condition or results of operations.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statements of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. This Statement is not expected to impact MRC's financial
statements at this time.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. MRC currently operates in two business
segments, electronic medical transcription services and PowerScribe. PowerScribe
currently generates less than 1% of MRC's revenues and does not warrant
financial statement segmentation at this time.
In November 1997, the American Institute of Certified Public
Accountants (the "AICPA") issued Statement of Position ("SOP") No. 97-2,
Software Revenue Recognition. MRC believes its current accounting policies are
materially compliant with this SOP.
In March 1998, the AICPA issued SOP No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. MRC believes its
current accounting policies are materially compliant with this SOP.
In April 1998, the AICPA issued SOP No. 98-5 Reporting on the Cost of
Start-up Activities. MRC believes its current accounting policies are materially
compliant with this SOP.
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MANAGEMENT OF MRC
The following table sets forth certain information concerning MRC's
executive officers and directors who will serve as an executive officer or
director of MedQuist after the Merger:
Executive Officers and Directors
<TABLE>
<CAPTION>
Proposed Position with
Name Age Position with MRC MedQuist After the Merger
- ---------------------------------- -------- --------------------------------------- ------------------------------
<S> <C> <C> <C>
Edward L. Samek 61 Chairman of the Board, Chief Vice Chairman of the Board
Executive Officer and a Director and Director
Bruce K. Anderson 58 Director Director
Richard H. Stowe 54 Director Director
</TABLE>
Mr. Samek has been a director of MRC since 1994 and Chairman of the
Board of MRC since June 1998. Since February 1997, Mr. Samek served as the Chief
Executive Officer of MRC. From July 1996 to June 1998, Mr. Samek also served as
President of MRC, and from July 1996 until February 1997, as a member of the
Office of the Chief Executive of MRC. From October 1995 until July 1996, Mr.
Samek served as Chairman of the Board and President of MRC, and, from December
1994 until October 1995, as Vice Chairman of the Board and Executive Vice
President of MRC. From July 1982 through December 1994, Mr. Samek served as
Chairman of the Board, President and Chief Executive Officer of SecrePhone,
Ltd., a provider of medical transcription services. SecrePhone Ltd. was acquired
by MRC in December 1994. Mr. Samek has been President of The Medical
Transcription Industry Alliance, the medical transcription trade association,
since 1996.
Mr. Anderson has been a director of MRC since July 1993. Since 1979,
Mr. Anderson has been a partner of Welsh, Carson, Anderson & Stowe, an
investment firm specializing in the acquisition of companies in the information
services and health care industries. Mr. Anderson is also Chairman, Chief
Executive Officer and a director of AMDOCS Limited, a software and services
company focused on the telephone industry, and a director of SEER Technologies,
Inc., a software development company.
Mr. Stowe has been a director of MRC since July 1993. Mr. Stowe has
been a partner of Welsh, Carson, Anderson & Stowe since 1979. Mr. Stowe serves
on the Board of Directors of The Cerplex Group, Inc., which provides repair and
parts distribution services for electronic equipment, and Health Management
Systems, Inc., a provider of revenue enhancement services to health care
providers and payors and New American Health Care Corporation, which owns
hospitals in non-urban areas.
Compensation Committee Interlocks and Insider Participation
Mr. Edward Samek served as a member of the Compensation Committee of
the MRC Board until July 1998. During 1997, Mr. Samek was a director, President
and Chief Executive Officer of MRC. No member of the Compensation Committee of
MRC nor any executive officer of MRC serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of MRC's Board of Directors or Compensation
Committee.
78
<PAGE>
Directors Compensation
Members of the Board of Directors of MRC do not receive any
compensation for serving as directors of MRC. MRC reimburses out-of-pocket
expenses incurred by all directors in connection with attending Board and
committee meetings.
Executive Compensation
The following table summarizes the compensation paid by MRC in 1997 to
Mr. Samek, MRC's chief executive officer:
<TABLE>
<CAPTION>
Summary Compensation Table
- ------------------------------------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation Awards
----------------------- -------------------------
All Other
Name and Principal Positions Salary Bonus Options(#) Compensation
- -------------------------------------------- ----------- ----------- ------------------------- -------------------
<S> <C> <C> <C> <C>
Edward L. Samek
President and Chief Executive Officer $200,000 $50,000 -- --
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth information concerning each exercise of
options during 1997 by Mr. Samek and the fiscal year-end value of unexercised
in-the-money options:
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at 1997 In-the-Money Options at
Shares Year-End(#)(2) 1997 Year-End ($)(1)
Acquired on Value --------------------------- ---------------------------
Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------- -------------- --------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Edward L. Samek -- -- 701,016 497,500 $454,849 $67,200
</TABLE>
- ----------------------------
(1) Represents the total gain which would be realized if all in-the-money
options held at December 31, 1997 were exercised, determined by
multiplying the number of shares underlying the options by the
difference between the per share option exercise price and the assumed
fair market value per share at December 31, 1997. An option is
in-the-money if the assumed fair market value of the underlying shares
exceeds the exercise price of the option.
(2) Includes options to purchase 1,078,516 shares of Common Stock granted
outside MRC's Amended and Restated 1992 Employee Stock Option Plan.
79
<PAGE>
PRINCIPAL SHAREHOLDERS OF MRC
The following table sets forth certain information regarding the
beneficial ownership of MRC's capital stock as of October 30, 1998 by: (i) each
person who is known by MRC to own beneficially 5% or more of each class of MRC's
capital stock, (ii) each of MRC's directors, (iii) MRC's Chief Executive Officer
and each of the other four most highly compensated executive officers, and (iv)
all of MRC's directors and executive officers as a group:
<TABLE>
<CAPTION>
Shares Beneficially Owned
-----------------------------------------------------------------------
Series IV Series V Series VI
Common Stock (1) Preferred Stock Preferred Stock Preferred Stock
------------------ ---------------- --------------- -----------------
Name Number Percent Number Percent Number Percent Number Percent
- ------------------------------------------- ---------- ------- ---------------- --------- ---------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bruce K. Anderson (2) 6,381,643 51.8% -- -- 44,494 96.9% 113,946 38.0%
John H. Dayani, Sr. Ph.D. (3) 1,198,705 18.6 -- -- -- -- 3,200 1.0
Martin H. Marcus (4) 2,128,999 34.3 -- -- -- -- -- --
Herbert L. Marcus (5) 1,258,882 20.3 -- -- -- -- -- --
Mark McManigal -- -- -- -- -- -- -- --
Timothy M. Murray (6) 2,173,304 26.0 -- -- -- -- 117,525 39.1
Edward L. Samek (7) 1,489,524 20.0 -- -- -- -- 5,000 1.6
Derace L. Schaffer, M.D. (8) 141,629 2.3 131 1.2 -- -- 1,000 *
Richard H. Stowe (9) 6,356,255 51.7 -- -- 44,320 96.5 113,476 37.9
Philip M. Cohen (10) 519,485 8.4 -- -- -- -- -- --
Steven Bell (11) 78,000 1.2 -- -- -- -- -- --
Wellmark, Inc. (12) 87,003 1.4 1,312 12.6 -- -- -- --
Mutual Ventures of South Dakota, Inc. (13) 87,003 1.4 1,312 12.6 -- -- -- --
Edgewater Private Equity Fund, L.P. (14) 174,006 2.7 2,624 25.3 -- -- -- --
NF Nordiska Fondkommission AB (15) 130,505 2.1 1,968 18.9 -- -- -- --
Ventana Partnership III, L.P. (16) 87,003 1.4 1,312 12.6 -- -- -- --
M. and L. Marcus Family Limited 2,128,999 34.3 -- -- -- -- -- --
Partnership (17)
H. and R. Marcus Family Limited 1,258,882 20.3 -- -- -- -- -- --
Partnership (18)
Welsh Carson Anderson & Stowe, VI, 6,344,915 51.6 -- -- 44,241 96.3 113,273 37.7
L.P. (19)
William Blair Capital Partners V, L.P.(20) 2,173,304 26.0 -- -- -- -- 117,525 39.1
National City Capital Corporation (21) 924,614 13.0 -- -- -- -- 50,000 16.6
All executive officers and directors of
MRC as a group 15,702,912 95.3 131 1.2 44,573 97.1 240,874 80.2
</TABLE>
- --------------------------------
* Less than 1%.
(1) The number of shares and percent of MRC Common Stock set forth in the
table as being held by each beneficial holder includes the number of
shares of MRC Common Stock issuable upon conversion of such holder's MRC
Preferred Stock and the number of shares of MRC Common Stock issuable
pursuant to options that have vested, will vest within the next 60 days or
will vest upon consummation of the Merger. The percent of MRC Common Stock
held by each holder is calculated by dividing (a) the number of shares of
MRC Common Stock attributed to such holder in the table by (b) the sum of
the total current number of outstanding shares of MRC Common Stock plus
the number of shares of MRC Common Stock issuable to such holder upon
conversion of such holder's MRC Preferred Stock and the number of shares
of MRC Common Stock issuable to such holder upon exercise of such holder's
options that have vested, will vest in the next 60 days or will vest upon
consummation of the Merger. The percent for each holder is not
representative of the percent of MRC Common Stock such holder would hold
upon conversion of all of the outstanding MRC Preferred Stock and is not
representative of such holder's voting power in the Merger.
(2) Includes 260,419 shares of MRC Common Stock, 44,241 shares of Series V
Preferred Stock and 113,273 shares of Series VI Preferred Stock held by
Welsh, Carson, Anderson & Stowe VI, L.P. ("WCAS VI"), over which Mr.
Anderson may be deemed to share voting and investment power. Mr.
Anderson's address is 320 Park Avenue, Suite 2500, New York, New York
10022.
80
<PAGE>
(3) Includes 175,000 shares of Common Stock issuable pursuant to an option
which is presently exercisable. Mr. Dayani's address is 1029 Menley Lane,
Brentwood, Tennessee 57027.
(4) Consists of 2,128,999 shares held by M. and L. Marcus Family Limited
Partnership of which the 1991 L.W. Marcus Living Trust is the general
partner. Lois W. Marcus is the sole trustee of the 1991 L.W. Marcus Living
Trust. Mrs. Marcus is the wife of Martin H. Marcus. Mr. Marcus' address is
23240 Chagrin Boulevard, Suite 400, Cleveland, Ohio 44122.
(5) Consists of 1,258,882 shares of MRC Common Stock held by H. and R. Marcus
Family Limited Partnership of which Herbert L. Marcus Living Trust is the
general partner. Herbert L. Marcus is the sole trustee of the Herbert L.
Marcus Living Trust. Mr. Marcus' address is 3637 Green Road, Cleveland,
Ohio 44122.
(6) Consists of 117,525 shares of Series VI Preferred Stock held by William
Blair Capital Partners V, L.P., over which Mr. Murray may be deemed to
share voting and investment power. Mr. Murray disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein. Mr. Murray's address is 222 West Adams Street, Chicago, Illinois
60606.
(7) Includes 1,168,516 shares of MRC Common Stock issuable pursuant to options
that have vested, will vest within the next 60 days or will vest upon
consummation of the Merger. Excludes 30,000 shares of MRC Common Stock
subject to unvested options. Mr. Samek's address is 23240 Chagrin
Boulevard, Suite 400, Cleveland, Ohio 44122.
(8) Includes 28,000 shares of MRC Common Stock issuable pursuant to options
that have vested or will vest within the next 60 days. Excludes 7,000
shares of MRC Common Stock subject to unvested options.
(9) Includes 260,419 shares of MRC Common Stock, 44,241 shares of Series V
Preferred Stock and 113,273 shares of Series VI Preferred Stock held by
WCAS VI, over which Mr. Stowe may be deemed to share voting and investment
power. Includes 463 shares of MRC Common Stock and 79 shares of Series V
Preferred Stock held in trust for the benefit of Mr. Stowe, over which he
may be deemed to have voting and investment power. Mr. Stowe's address is
320 Park Avenue, Suite 2500, New York, New York 10022.
(10) Includes 20,000 shares of MRC Common Stock issuable pursuant to options
that have vested or will vest within the next 60 days. Excludes 55,000
shares of Common Stock subject to unvested options. Mr. Cohen's address is
23240 Chagrin Boulevard, Suite 400, Cleveland, Ohio 44122.
(11) Consists of 78,000 shares issuable pursuant to options that have vested or
will vest upon consummation of the Merger. Excludes 22,000 shares of MRC
Common Stock subject to unvested options. Mr. Bell's address is 23240
Chagrin Boulevard, Suite 400, Cleveland, Ohio 44122.
(12) The address of Wellmark, Inc. is 636 Grand Avenue, Des Moines, Iowa 50309
(13) The address of Mutual Ventures of South Dakota, Inc. is c/o Stephanie P.
Johnson, CFA, MABSCO Capital, Inc., 400 Locust, 160 Capital Square, Des
Moines, Iowa 50309
(14) The address of Edgewater Private Equity Fund, L.P. is 666 Grand Avenue,
Suite 200, Des Moines, Iowa, 50309.
81
<PAGE>
(15) The address of NF Nordiska Fondkommission AB is Stureplan 19, Box 7362,
Stockholm, Sweden 5-10390.
(16) The address of Ventana Partnership III, L.P. is Rio Vista Towers, Suite
500, 8880 Rio San Diego Drive, San Diego, California 92108. (17) The
address of the M. and L. Marcus Family Limited Partnership is 23240
Chagrin Boulevard, Suite 400, Cleveland, Ohio 44122.
(18) The address of the H. and R. Marcus Family Limited Partnership is 3637
Green Road, Cleveland, Ohio 44122.
(19) The general partners of WCAS VI are Patrick J. Welsh, Russell L. Carson,
Andrew M. Paul, Thomas E. McInerney, Laura Van Buren, James B. Hoover,
Bruce K. Anderson, Robert A. Minicucci, Anthony J. de Nicola, Paul B.
Queally and Richard H. Stowe. The address of Welsh, Carson, Anderson &
Stowe is 320 Park Avenue, Suite 2500, New York, New York 10022.
(20) The general partner of William Blair Capital Partners V, L.P. is William
Blair Capital partners LLC. The members of William Blair Capital Partners
LLC are William Blair & Company, L.L.C., Wilblairco, Ellen Carnahan, David
G. Chandler, James M. Denny, Samuel B. Guren, Edgar D. Jannotta, Edgar D.
Jannotta, Jr., Ian M. Larkin, Timothy M. Murray, Gregg S. Newmark,
Lawrence I. Shagrin, and Thomas C. Theobold. The address of William Blair
Capital Partners V, L.P. and William Blair Capital Partners LLC is 222
West Adams Street, Chicago, Illinois 60606.
(21) The address of National City Capital Corporation is 1965 East 6th Street,
Cleveland, Ohio 44114. National City Capital Corporation is a subsidiary
of National City Corporation.
82
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(In thousands, except per share amounts)
The following unaudited pro forma combined financial information
combines the supplemental consolidated statements of operations of MedQuist with
the historical consolidated statements of operations of MRC (MedQuist and MRC
are collectively referred to as the "Combined Company") after giving effect to
the Merger, as if the Merger had occurred on January 1, 1995, and the
supplemental consolidated balance sheet of MedQuist with the historical balance
sheet of MRC as if the Merger had occurred on June 30, 1998, in each case using
the "pooling-of-interests" method of accounting. MedQuist's financial statements
are supplemental to reflect their August 18, 1998 acquisition of Signal, which
will be accounted for using the "pooling-of-interests" method. Accordingly,
MedQuist's supplemental consolidated financial statements are retroactively
restated to reflect the combination with Signal.
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 June 30, 1998 or of the future results of
operations or financial condition of the Combined Company. The pro forma
statements of operations do not reflect (i) the estimated transaction costs of
$8.0 million related to the Merger and the costs associated with known bonus and
severance arrangements of approximately $1.6 million, which will be charged to
expense in the quarter which includes the Closing Date and (ii) the estimated
transaction costs of $750,000 related to MedQuist's August 18, 1998 acquisition
of Signal and estimated transaction costs related to MRC's withdrawn initial
public offering of $675,000, which will be charged to expense in the quarter
ended September 30, 1998. The following pro forma balance sheet does not include
(i) the estimated transaction costs related to MedQuist's Signal acquisition and
(ii) a deferred tax asset of approximately $4.6 million related to MedQuist's
Signal acquisition. In addition, the unaudited pro forma combined financial
statements do not include a restructuring charge expected to be recorded by the
Combined Company upon consummating the Merger for certain costs associated with
combining the companies. The following unaudited pro forma information should be
read in conjunction with the supplemental financial statements of MedQuist and
the historical financial statements of MRC included elsewhere in this Joint
Proxy Statement/Prospectus.
83
<PAGE>
The Combined Company
Unaudited Pro Forma Combined Statement of Operations
For The Six Months Ended June 30, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
----------------------------
MedQuist MRC Adjustments Combined
------------ ------------ -------------- -------------
<S> <C> <C> <C> <C>
Revenues $68,200 $60,173 $ -- $128,373
Cost and expenses:
Cost of revenues 51,741 47,870 -- 99,611
Selling, general and administrative 2,775 5,276 -- 8,051
Depreciation 2,635 3,450 -- 6,085
Amortization 885 974 -- 1,859
Non recurring merger costs 750 -- -- 750
------------ ------------ -------------- -------------
Total operating expenses 58,786 57,570 -- 116,356
------------ ------------ -------------- -------------
Operating income 9,414 2,603 -- 12,017
Interest expense (income), net (105) 98 -- (7)
------------ ------------ -------------- -------------
Income before income taxes 9,519 2,505 -- 12,024
Income tax provision(1) 3,441 1,127 -- 4,568
-- ----------- ----------- ------------- -------------
Net income(1) $6,078 $1,378 $ -- $7,456
============ ============ ============== =============
Net income per share(1):
Basic $0.26 $ -- $ -- $0.23
Diluted $0.25 -- -- $0.22
Weighted average shares outstanding(2):
Basic(2) 23,472 -- 8,390 31,862
Diluted 24,812 -- 8,973 33,785
</TABLE>
- -------------------------------
(1) Prior to its acquisition by MedQuist, Signal was an "S" corporation and
therefore had no provision for income taxes. Had Signal been a "C"
corporation during the period, the pro forma income tax provision would
increase and pro forma net income would decrease by approximately $217
and diluted earnings per share would decrease by approximately $0.01.
(2) The weighted average shares outstanding used to calculate basic earnings
per share include MRC's convertible preferred stock on an as-converted
basis.
84
<PAGE>
The Combined Company
Unaudited Pro Forma Combined Statement of Operations
For The Six Months Ended June 30, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
----------------------------
MedQuist MRC Adjustments Combined
------------ ------------ -------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 47,618 $ 53,268 $ -- $ 100,886
Cost and expenses:
Cost of revenues 36,111 42,686 -- 78,797
Selling, general and administrative 2,188 4,783 -- 6,971
Depreciation 1,828 2,870 -- 4,698
Amortization 710 1,980 -- 2,690
----------- ----------- ------ -----------
Total operating expenses 40,837 52,319 -- 93,156
----------- ----------- ------ -----------
Operating income 6,781 949 -- 7,730
Interest expense, net 112 150 -- 262
----------- ----------- ------ -----------
Income before income taxes 6,669 799 -- 7,468
Income tax provision(1) 2,329 522 -- 2,851
----------- ----------- ------ -----------
Net income(1) $ 4,340 $ 277 $ -- $ 4,617
=========== =========== ====== ===========
Net income per share(1):
Basic $0.20 -- -- $0.15
Diluted $0.18 -- -- $0.14
Weighted average shares outstanding(2):
Basic(2) 22,082 -- 8,385 30,467
Diluted 23,817 -- 8,385 32,202
</TABLE>
- -------------------------------
(1) Prior to its acquisition by MedQuist, Signal was an "S" corporation and
therefore had no provision for income taxes. Had Signal been a "C"
corporation during the period, the pro forma income tax provision would
increase and pro forma net income would decrease by approximately $259
and diluted earnings per share would decrease by approximately $0.01.
(2) The weighted average shares outstanding used to calculate basic earnings
per share include MRC's convertible preferred stock on an as-converted
basis.
85
<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 MRC Adjustments Combined
------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 103,910 $ 108,117 $ -- $212,027
Cost and expenses:
Cost of revenues 78,955 86,975 -- 165,930
Selling, general and administrative 4,620 9,743 -- 14,363
Depreciation 4,121 6,104 -- 10,225
Amortization 1,517 4,135 -- 5,652
Restructuring charge -- 2,075 -- 2,075
----------- --------- ------ --------
Total operating expenses 89,213 109,032 -- 198,245
----------- --------- ------ --------
Operating income (loss) 14,697 (915) -- 13,782
Interest expense, net 158 310 -- 468
----------- --------- ------ --------
Income (loss) before income taxes 14,539 (1,225) -- 13,314
Income tax provision(1) 5,192 -- 101(3) 5,293
----------- --------- ------ --------
Net income (loss)(1) $ 9,347 $ (1,225) $ (101) $ 8,021
=========== ========= ====== ========
Net income per share(1):
Basic $0.41 -- -- $0.26
Diluted $0.39 -- -- $0.25
Weighted average shares outstanding(2):
Basic(2) 22,541 -- 8,385 30,926
Diluted 24,173 -- 8,385 32,558
</TABLE>
- -------------------------------
(1) Prior to its acquisition by MedQuist, Signal was an "S" corporation and
therefore had no provision for income taxes. Had Signal been a "C"
corporation during the period, the pro forma income tax provision would
increase and pro forma net income would decrease by approximately $440
and diluted earnings per share would decrease by approximately $0.01.
(2) The weighted average shares outstanding used to calculate basic
earnings per share include MRC's convertible preferred stock on an
as-converted basis.
(3) To adjust the income tax provision to reflect estimated income taxes on
a combined basis.
86
<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 MRC (4) Adjustments Combined
------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 76,475 $ 71,700 $ -- $ 148,175
Cost and expenses:
Cost of revenues 58,631 57,330 -- 115,961
Selling, general and administrative 3,579 8,329 -- 11,908
Depreciation 2,872 4,467 -- 7,339
Amortization 1,176 1,973 -- 3,149
Restructuring charge -- 644 -- 644
----------- ----------- ------ ------
Total operating expenses 66,258 72,743 -- 139,001
----------- ----------- ------ ------
Operating income (loss) 10,217 (1,043) -- 9,174
Interest expense, net 1,665 382 -- 2,047
----------- ----------- ------ ------
Income (loss) before income taxes 8,552 (1,425) -- 7,127
Income tax provision(1) 3,086 -- (365)(3) 2,721
----------- ----------- ------ ------
Net income (loss)(1)(5) $ 5,466 $ (1,425) $ 365 $4,406
=========== =========== ====== ======
Net income per share(1)(5):
Basic $0.31 -- -- $0.19
Diluted $0.28 -- -- $0.17
Weighted average shares outstanding(2):
Basic(2) 17,649 -- 5,689 23,338
Diluted 19,555 -- 5,689 25,244
</TABLE>
- -------------------------------
(1) Prior to its acquisition by MedQuist, Signal was an "S" corporation and
therefore had no provision for income taxes. Had Signal been a "C"
corporation during the period, the pro forma income tax provision would
increase and pro forma net income would decrease by approximately $337 and
diluted earnings per share would decrease by approximately $0.01.
(2) The weighted average shares outstanding used to calculate basic earnings
per share include MRC's convertible preferred stock on an as-converted
basis.
(3) To adjust the income tax provision to reflect estimated income taxes on a
combined basis.
(4) In July 1996, MRC acquired all of the outstanding capital stock of Medical
Records Corp. in a purchase transaction. Medical Records Corp. generated
revenues and an operating loss of $27.6 million and $(4.0) million,
respectively, from January 1, 1996 through the acquisition date.
87
<PAGE>
(5) Net income and net income per share do not include MedQuist's $707
non-recurring deduction from net income available to common shareholders.
See Note 7 of Notes to Supplemental Consolidated Financial Statements of
MedQuist.
88
<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 MRC(3) Adjustments Combined
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 57,305 $ 49,180 $ -- $ 106,485
Cost and expenses:
Cost of revenues 44,062 40,154 -- 84,216
Selling, general and administrative 4,325 4,352 -- 8,677
Depreciation 2,236 3,507 -- 5,743
Amortization 496 400 -- 896
Restructuring charge -- 347 -- 347
-------- --------- ------ ----------
Total operating expenses 51,119 48,760 -- 99,879
-------- --------- ------ ----------
Operating income 6,186 420 -- 6,606
Interest expense, net 3,707 539 -- 4,246
-------- --------- ------ ----------
Income (loss) before income taxes 2,479 (119) -- 2,360
Income tax provision(1) 633 7 -- 640
-------- --------- ------ ----------
Net income (loss)(1)(4) $ 1,846 $ (126) $ -- $ 1,720
======== ========= ====== ==========
Net income per share(1)(4):
Basic $0.22 -- -- $0.14
Diluted $0.20 -- -- $0.14
Weighted average shares outstanding(2):
Basic(2) 8,505 -- 3,430 11,935
Diluted 9,057 -- 3,430 12,487
</TABLE>
- -------------------------------
(1) Prior to its acquisition by MedQuist, Signal was an "S" corporation and
therefore had no provision for income taxes. Had Signal been a "C"
corporation during the period, the pro forma income tax provision would
increase and pro forma net income would decrease by approximately $217 and
diluted earnings per share would decrease by approximately $0.01.
(2) The weighted average shares outstanding used to calculate basic earnings
per share include MRC's convertible preferred stock on an as-converted
basis.
(3) In July 1996, MRC acquired all the outstanding capital stock of Medical
Records Corp. in a purchase transaction. Medical Records Corp. generated
revenues and operating income of $42.6 million and $0.6 million,
respectively, for the year ended December 31, 1995.
89
<PAGE>
(4) Net income and net income per share do not include MedQuist's loss from
discontinued operations of $(1,729). See Note 3 of Notes to Supplemental
Consolidated Financial Statements of MedQuist.
90
<PAGE>
The Combined Company
Unaudited Pro Forma Combined Balance Sheet
June 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Pro Forma
------------------------------
MedQuist MRC Adjustments Combined
------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,010 $ 6,008 $ -- $ 20,018
Accounts receivable, net 24,594 18,508 -- 43,102
Prepaid expenses and other 1,000 4,304 -- 5,304
---------- ---------- --------- ----------
Total current assets 39,604 28,820 -- 68,424
Property and equipment, net 12,864 12,951 -- 25,815
Intangible assets, net 47,697 35,087 -- 82,784
Other assets 2,116 1,712 -- 3,828
---------- ---------- --------- ----------
$ 102,281 $ 78,570 $ -- $ 180,851
========== =========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 322 $ 2,014 $ -- $ 2,336
Accounts payable 1,722 3,803 -- 5,525
Accrued payroll 3,622 4,611 -- 8,233
Accrued expenses 3,131 6,073 10,225(1) 19,429
---------- ---------- --------- ----------
Total current liabilities 8,797 16,501 10,225 35,523
---------- ---------- --------- ----------
Long-term debt 28 5,256 -- 5,284
Other liabilities 499 439 -- 938
Deferred income taxes 3,200(3) 3,231 -- 6,431
Mandatory redeemable preferred stock -- 47,493 (47,493)(2) --
Shareholders' equity:
Preferred Stock -- 10 (10)(2) --
Common Stock -- 62 (62)(2) --
Additional paid-in capital 62,629(3) 13,594 47,565(2) 123,788
Retained earnings 26,218 (8,016) (10,225)(1) 7,977
Unrealized gain on marketable security 910 -- -- 910
---------- ---------- --------- ----------
Total shareholders' equity 89,757 5,650 37,268 132,675
---------- ---------- --------- ----------
$ 102,281 $ 78,570 $ -- $ 180,851
========== =========== ========= ==========
</TABLE>
- -------------------------------
(1) To record the estimated expenses related to (i) transaction costs in the
Merger of $8,000, (ii) severance agreements executed in connection with the
Merger of $1,550, (iii) transaction costs associated with MRC's withdrawn
initial public offering of approximately $675. The Combined Company expects
to record a restructuring charge upon the consummation of the Merger for
certain
91
<PAGE>
costs associated with combining the companies, which is not included above,
because it cannot currently be estimated.
(2) To reflect (i) the exchange of MRC Preferred Stock and MRC Common Stock for
MedQuist Common Stock at exchange rates based on the MedQuist Stock Value
being greater than or equal to $16.28, and (ii) the elimination of the MRC
Preferred Stock and MRC Common Stock.
(3) Does not reflect an increase in deferred tax assets and additional paid-in
capital of approximately $4,600 that will be recorded in the period ended
September 30, 1998, to reflect the goodwill recognized for income tax
purposes as a result of MedQuist's acquisition of Signal. See Note 9 of
Notes to Supplemental Consolidated Financial Statements of MedQuist.
92
<PAGE>
COMPARISON OF SHAREHOLDERS' RIGHTS
The rights of MedQuist shareholders are governed by MedQuist's Amended
and Restated Certificate of Incorporation, as amended (the "MedQuist Certificate
of Incorporation"), its By-laws, as amended (the "MedQuist By-laws") and the New
Jersey Business Corporation Act ("NJBCA"). The rights of MRC shareholders are
governed by the MRC Articles of Incorporation, as amended (the "MRC Articles of
Incorporation"), the MRC Amended and Restated By-laws (the "MRC By-laws") and
the MGBCL. After the Effective Time, the rights of MRC shareholders who become
MedQuist shareholders will be governed by the MedQuist Certificate of
Incorporation, the MedQuist By-laws and the NJBCA.
The following is a summary of the material differences between the
rights of MedQuist shareholders and the rights of MRC shareholders. This summary
is not intended to be complete and is qualified in its entirety by reference to
applicable provisions of the NJBCA, the MGBCL, and to the MedQuist Certificate
of Incorporation, the MedQuist By-laws the MRC Articles of Incorporation and the
MRC By-laws.
Preferences
The holders of MRC Series IV Preferred Stock, Series V Preferred Stock
and Series VI Preferred Stock are entitled to certain preferences over the MRC
Common Stock in connection with the liquidation, dissolution and winding up of
MRC. Such holders are also entitled to certain preferences with respect to the
declaration and payment of dividends before dividends may be declared and paid
on the MRC Common Stock. In addition, the MRC Articles of Incorporation grant
the holders of Series IV Preferred Stock, Series V Preferred Stock and Series VI
Preferred Stock certain (i) preferential approval rights over significant
corporate transactions, (ii) board representation and (iii) the right to have
their shares redeemed under certain circumstances. In the Merger, each share of
MRC Preferred Stock will be converted into the right to receive MedQuist Common
Stock. MedQuist has only one outstanding class of capital stock. As a result of
the Merger, the current holders of MRC Series IV Preferred Stock, Series V
Preferred Stock and Series VI Preferred Stock will not retain any of their
preferential rights following the Effective Time of the Merger.
Size and Classification of the Board of Directors
MedQuist. The MedQuist Certificate of Incorporation provides that the
total number of MedQuist directors will be not less than five nor more than 20
as determined by the MedQuist Board from time to time. MedQuist currently has 10
directors. The MedQuist Board is divided into three classes as nearly equal in
number as possible. Directors of each class serve for a term of three years and
until their successors have been elected and qualified. Any vacancy may be
filled by the affirmative vote of a majority of the remaining directors. A
director so elected by the board shall hold office until the next succeeding
annual meeting of shareholders and until his successor shall have been elected
and qualified.
MRC. The MRC By-laws provide that the total number of MRC directors
shall be 10. The MRC directors are elected at the annual meeting of MRC
shareholders. MRC currently has nine directors with one vacancy. Directors
elected by the shareholders and the directors chosen to fill vacancies hold
offices until the next election of directors and until their successors are
elected and qualified, or until their earlier death, resignation or removal.
Under the MRC Articles of Incorporation, holders of MRC Preferred Stock have the
right to designate and elect certain board members. These rights will be
eliminated upon consummation of the Merger.
93
<PAGE>
Removal of Directors
MedQuist. The NJBCA provides that directors of MedQuist may be removed,
with cause, by a majority of the votes cast by the holders of shares entitled to
vote for the election of directors.
MRC. The MGBCL provides that directors of MRC may be removed at any
time, with or without cause, by a majority vote of the holders entitled to elect
such directors.
Meeting of Shareholders; Action by Written Consent
MedQuist. Under the MedQuist By-laws, a special meeting of the
shareholders may be called at any time by the Chairman of the MedQuist Board,
the President or the MedQuist Board and may be held on such business day and at
such time and at such place within or without the State of New Jersey as is
stated in the notice of the meeting or in a duly executed waiver of notice.
Pursuant to the NJBCA, any action required or permitted to be taken at
a meeting of the MedQuist shareholders generally may be taken without a meeting
if all the shareholders entitled to vote thereon consent thereto in writing.
MRC. Under the MRC By-laws, a special meeting of the MRC shareholders
may be called at any time by the Board of Directors or by the holders of not
less than one-fifth of all the outstanding shares of stock of MRC entitled to
vote at such meeting.
Pursuant to the MGBCL, any action which may be taken at a meeting of
the shareholders may be taken without a meeting if consents in writing are
signed by all shareholders entitled to vote with respect to the subject matter
thereof.
Shareholder Inspection Rights; Shareholder Lists
MedQuist. Pursuant to the NJBCA, a shareholder who has been a
shareholder for at least six months or who holds, or is authorized in writing by
holders of, at least five percent of the outstanding shares of any class or
series of stock of MedQuist upon at least five days written demand has the right
for any proper purpose to inspect in person or by agent or attorney the minutes
of the proceedings of MedQuist's shareholders and MedQuist's record of
shareholders. Irrespective of the period a shareholder has held his or her stock
or the amount of stock such shareholder holds, a court is empowered, upon proof
of proper purpose, to compel production for examination by such shareholder of
the books and records of account, minutes and record of shareholders of
MedQuist.
MRC. Pursuant to the MGBCL, a shareholder may at all proper times have
access to the books of MRC to examine the same.
Amendment of Governing Documents
MedQuist. Under the NJBCA, a proposed amendment to a corporation's
certificate of incorporation requires approval by the board of directors and an
affirmative vote of a majority of the votes cast by the holders of shares
entitled to vote thereon, and in addition, if any class or series of shares is
entitled to vote thereon as a class the affirmative vote of a majority of the
votes cast in each class vote, unless a specific provision of the NJBCA or the
certificate of incorporation provides otherwise.
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Pursuant to the NJBCA and the MedQuist By-laws, the provisions of the
MedQuist By-laws generally may be altered, amended, repealed or new by-laws may
be adopted by the MedQuist Board at a regular or special meeting of the MedQuist
Board; however, by-laws made by the MedQuist Board may be altered or repealed,
and new by-laws made, by the shareholders.
MRC. Pursuant to the MGBCL, amendments to articles of incorporation may
be made in the following manner: (a) the Board of Directors must adopt a
resolution setting forth the proposed amendment and submit the resolution to a
vote at a meeting of the shareholders, or submit the resolution without first
adopting it; and (b) the shareholders must adopt the resolution by an
affirmative vote of a majority of the outstanding shares entitled to vote,
unless any class of shares is entitled to vote thereon as a class, in which
event the approval of the amendment will also require the affirmative vote of
the majority of the outstanding shares of that class.
Subject to the power vested in the shareholders, the Board of Directors
is authorized to amend the MRC By-laws, however, such amendment may be altered
or repealed by the shareholders.
The MRC Articles of Incorporation also provide that MRC will not amend,
alter, or repeal the MRC Articles of Incorporation or the MRC By-Laws in any
manner so as to adversely affect the respective relative rights and preferences
of any series of the MRC Preferred Stock or adversely affect any series of the
MRC Preferred Stock or the holders thereof, without first obtaining the prior
consent of the holders of at least (a) a majority of the outstanding shares of
Series IV Preferred Stock, (b) two-thirds of the outstanding shares of Series V
Preferred Stock and (c) 75% of the outstanding shares of Series VI Preferred
Stock, each voting separately as a class and only to the extent such holders'
rights are affected by any such proposed amendment or modification.
Corporation's Best Interest
MedQuist. Under the NJBCA, the director of a New Jersey corporation, in
discharging his or her duties to the corporation and in determining what he or
she reasonably believes to be is the best interest of the corporation may, in
addition to considering the effects of any action on shareholders, consider any
of the following: (i) the effects of the action on the corporation's employees,
suppliers, creditors and customers, (ii) the effects of the action on the
community in which the corporation operates and (iii) the long-term as well as
the short-term interests of the corporation and its shareholders, including the
possibility that these interests may best be served by the continued
independence of the corporation. If, on the basis of the foregoing factors, the
Board of Directors determines that any proposal or offer to acquire the
corporation is not in the best interest of the corporation, it may reject such
proposal or offer, in which event the Board of Directors will have no obligation
to facilitate, remove any barriers to, or refrain from impeding such proposal or
offer.
MRC. Under the MGBCL, the directors of a Missouri corporation, in
exercising their business judgment concerning an acquisition proposal, may
consider, among other factors, the social, legal and economic effects on
employees, suppliers, customers and others having similar relationships with the
corporation, and the communities in which the corporation conducts its
businesses.
Required Vote for Authorization of Certain Actions
MedQuist. Under the NJBCA, the consummation of a merger or
consolidation of a New Jersey corporation requires the approval of such
corporation's Board of Directors and the affirmative vote of a majority of the
votes cast by the holders of shares of the corporation entitled to vote thereon,
and in
95
<PAGE>
addition, if any class or series is entitled to vote thereon as a class, the
affirmative vote of a majority of the votes cast in each class vote, unless such
corporation is the surviving corporation and (i) such corporation's certificate
of incorporation will not be amended; (ii) the shareholders of the surviving
corporation whose shares were outstanding immediately before the effective date
of the merger will hold the same number of shares, with identical designations,
preferences, limitations, and rights, immediately after; and (iii) the number of
voting shares and participation shares outstanding after the merger plus the
number of voting shares and participating shares issuable upon conversion of
other securities or on exercise of rights and warrants issued pursuant to the
merger, will not exceed by 40% the total number of voting or participating
shares of the surviving corporation before the merger. Similarly a sale of all
or substantially all of a New Jersey corporation's assets other than in the
ordinary course of business, or a voluntary dissolution of a New Jersey
corporation, requires the approval of such corporation's Board of Directors and
the affirmative vote of a majority of the votes cast by the holders of shares of
the corporation entitled to vote thereon, and in addition, if any class or
series is entitled to vote thereon as a class, the affirmative vote of a
majority of the votes cast in each class vote.
MRC. Pursuant to the MGBCL, the consummation of a merger of a Missouri
corporation or the consolidation of two or more Missouri corporations requires
the approval of such corporations' Boards of Directors. The Board of Directors
of the corporation must submit the plan of merger or consolidation to a vote at
a meeting of the shareholders of the corporation. At the meeting, the plan of
merger or consolidation must be approved by the affirmative vote of the holders
of at least two-thirds of the outstanding shares entitled to vote at such
meeting. In the case of MRC, each holder of Common Stock is entitled to one vote
per share and each holder of the Preferred Stock is entitled to one vote for
each share of Common Stock which would be issuable to such holder upon the
conversion of such shares of Preferred Stock held on the record date for the
determination of shareholders entitled to vote. In addition to the approval
required under the MGBCL, MRC's Articles of Incorporation also requires the
approval of a merger of the affirmative vote of at least (i) a majority of the
outstanding shares of Series IV Preferred Stock, (ii) two-thirds of the
outstanding shares of the Series V Preferred Stock and (iii) 75% of the
outstanding shares of Series VI Preferred Stock. The voluntary dissolution of a
Missouri corporation requires the affirmative vote of at least two-thirds of the
votes entitled to vote thereon.
Business Combinations
MedQuist. The NJBCA provides that no corporation organized under the
laws of New Jersey with its principal executive offices or significant
operations located in New Jersey (a "resident domestic corporation") may engage
in any "business combination" (as defined in the NJBCA) with any interested
shareholder (generally, a 10% or greater shareholder) of such corporation for a
period of five years following such interested shareholder's stock acquisition,
unless such business combination is approved by the Board of Directors of such
corporation prior to the stock acquisition. A resident domestic corporation,
such as MedQuist, cannot opt out of the foregoing provisions of the NJBCA.
In addition, no resident domestic corporation may engage, at any time,
in any business combination with any interested shareholder of such corporation
other than: (i) a business combination approved by the Board of Directors of
such corporation prior to the stock acquisition, (ii) a business combination
approved by the affirmative vote of the holders of two-thirds of the voting
stock not beneficially owned by such interested shareholder at a meeting called
for such purpose, or (iii) a business combination in which the interested
shareholder pays a formula price designed to ensure that all other shareholders
receive at least the highest price per share paid by such interested
shareholder.
96
<PAGE>
MRC. The MGBCL contains certain provisions applicable to Missouri
corporations that may be deemed to have an anti-takeover effect. Such provisions
include Missouri's business combination statute and control share acquisition
statute. The Missouri "Business Combination Statute" protects "resident domestic
corporations" after hostile takeovers by prohibiting certain transactions once
an acquiror has gained control. The MGBCL also contains a "Control Share
Acquisition Statute" that provides for certain shareholder approvals in
connection with certain acquisitions.
However, because MRC currently does not have more than one hundred
shareholders of record; the Business Combination Statute and the Control Share
Acquisition Statute do not currently apply to MRC.
LEGAL MATTERS
The validity of the shares of MedQuist Common Stock offered hereby will
be passed upon for MedQuist by Blank Rome Comisky & McCauley LLP. A. Fred
Ruttenberg, a partner in Blank Rome Comisky & McCauley LLP, is the beneficial
owner of 93,570 shares of MedQuist Common Stock and is a director of MedQuist.
EXPERTS
The audited supplemental consolidated financial statements of MedQuist
Inc. and Subsidiaries included in this Joint Proxy Statement/Prospectus and the
audited consolidated financial statements of MedQuist Inc. and Subsidiaries
incorporated by reference in this Joint Proxy Statement/Prospectus and elsewhere
in this Registration Statement of which this Joint Proxy Statement/Prospectus is
a part, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein and incorporated by reference, respectively, in reliance upon the
authority of said firm as experts in giving said reports.
The audited financial statements of The MRC Group, Inc. and Subsidiary
and Medical Records Corp. included in this Joint Proxy Statement/Prospectus and
elsewhere in this Registration Statement of which this Joint Proxy
Statement/Prospectus is a part, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The combined restated financial statements of Medical Records Corp. and
Affiliate, included in this Joint Proxy Statement/Prospectus and elsewhere in
the Registration Statement of which this Joint Proxy Statement/Prospectus is a
part, have been audited by Skoda, Minotti, Reeves & Co., independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
97
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
MEDQUIST INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................... F-2
Supplemental Consolidated Balance Sheets, December 31, 1996
and 1997.................................................. F-3
Supplemental Consolidated Statements of Operations for the
years ended December 31, 1995, 1996 and 1997.............. F-4
Supplemental Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1995, 1996 and 1997...... F-5
Supplemental Consolidated Statements of Cash Flows for the
years ended December 31, 1995, 1996 and 1997.............. F-6
Notes to Supplemental Consolidated Financial Statements..... F-7
Supplemental Consolidated Balance Sheets, December 31, 1997
and June 30, 1998 (unaudited)............................. F-20
Supplemental Unaudited Consolidated Statements of Operations
for the six months ended June 30, 1997 and 1998........... F-21
Supplemental Unaudited Consolidated Statements of
Shareholders' Equity for the six months ended June 30,
1998...................................................... F-22
Supplemental Unaudited Consolidated Statements of Cash Flows
for the six months ended June 30, 1997 and 1998........... F-23
Notes to Supplemental Unaudited Consolidated Financial
Statements................................................ F-24
THE MRC GROUP, INC. AND SUBSIDIARY
Report of Independent Public Accountants.................... F-27
Consolidated Balance Sheets, December 31, 1996 and 1997..... F-28
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997.......................... F-29
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997.............. F-30
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... F-31
Notes to Consolidated Financial Statements, December 31,
1995, 1996 and 1997....................................... F-32
Report of Independent Public Accountants.................... F-45
Schedule II -- Valuation and Qualifying Accounts............ F-46
Consolidated Balance Sheets, December 31, 1997 and June 30,
1998 (Unaudited).......................................... F-47
Unaudited Consolidated Statements of Operations for the six
months ended June 30, 1997 and 1998....................... F-48
Consolidated Statements of Stockholders' Equity for the year
ended December 31, 1997 and the six months ended June 30,
1998 (Unaudited).......................................... F-49
Unaudited Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1997 and 1998........... F-50
Notes to Condensed Consolidated Financial Statements, June
30, 1997 and 1998 (Unaudited)............................. F-51
MEDICAL RECORDS CORP. AND AFFILIATE
Independent Auditors' Report................................ F-53
Combined Statement of Income (As Restated) for the year
ended December 31, 1995................................... F-54
Combined Statement of Stockholders' Equity (As Restated) for
the year ended December 31, 1995.......................... F-55
Combined Statement of Cash Flows (As Restated) for the year
ended December 31, 1995................................... F-56
Notes to Combined Financial Statements for the year ended
December 31, 1995......................................... F-57
MEDICAL RECORDS CORP.
Report of Independent Public Accountants.................... F-60
Statement of Operations for the Period January 1, 1996 to
July 19, 1996............................................. F-61
Statement of Stockholders' Equity for the Period January 1,
1996 to July 19, 1996..................................... F-62
Statement of Cash Flows for the Period January 1, 1996 to
July 19, 1996............................................. F-63
Notes to Financial Statements for the Period January 1, 1996
to July 19, 1996.......................................... F-64
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MedQuist Inc.:
We have audited the accompanying supplemental consolidated balance sheets
of MedQuist Inc. (a New Jersey corporation) and Subsidiaries as of December 31,
1996 and 1997, and the related supplemental consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. The supplemental consolidated statements
give retroactive effect to the merger with Signal Transcriptions Network, Inc.
on August 18, 1998, which has been accounted for as a pooling-of-interests as
described in Note 1. These supplemental financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental consolidated financial statements based on our
audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
MedQuist Inc. and its subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, after giving retroactive effect to the
merger with Signal Transcriptions Network, Inc. as described in Note 1, all in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
September 18, 1998
F-2
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL 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
SUPPLEMENTAL 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
SUPPLEMENTAL 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
SUPPLEMENTAL 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 SUPPLEMENTAL 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).
Basis of Presentation
On May 28, 1998, the Company consummated the acquisition of Digital
Dictation, Inc. ("DDI"). The acquisition was accounted for using the
pooling-of-interests method of accounting and the Company's historical financial
statements were retroactively restated to reflect the combination with DDI. The
restated financial statements were issued in Item 5 of the Company's June 30,
1998 quarterly report on Form 10-Q.
On August 18, 1998, the Company consummated the acquisition of Signal
Transcription Network, Inc. ("Signal"), which will be accounted for using the
pooling-of-interests method. Accounting Principles Board Opinion No. 16
precludes the restatement of financial statements for a pooling-of-interests
transaction prior to the issuance of financial statements covering a period
encompassed by the transaction. Accordingly, the accompanying consolidated
financial statements set forth a supplemental presentation of the Company's
financial statements retroactively restated to reflect the combination with
Signal (see Note 11). The accompanying consolidated financial statements do not
include the estimated transaction costs related to the Signal acquisition of
$750, which will be charged to expense in the quarter ended September 30, 1998.
Signal and the Company have elected to treat their merger as an asset purchase
for income tax purposes. The accompanying consolidated balance sheets do not
include a deferred tax asset of approximately $4,600 that will be credited
directly to shareholders' equity in the quarter ended September 30, 1998, to
reflect the tax effect of goodwill that will be recorded for tax purposes (see
Note 9).
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
supplemental financial statements related to Signal's income. The following pro
forma presentation sets forth the Company's supplemental 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 SUPPLEMENTAL 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 SUPPLEMENTAL 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 SUPPLEMENTAL 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 SUPPLEMENTAL 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 SUPPLEMENTAL 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 SUPPLEMENTAL 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 SUPPLEMENTAL 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 SUPPLEMENTAL 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 SUPPLEMENTAL 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 supplemental 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 will record 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 SUPPLEMENTAL 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.
The acquisition was accounted for using the pooling-of-interests method of
accounting. Accordingly, the Company's historical financial statements were
retroactively restated to reflect the combination with DDI.
On August 18, 1998, the Company completed the acquisition of Signal, which
will be accounted for using the pooling-of-interests method. The Company issued
619 shares of its Common stock and $l.5 million in cash in exchange for all
Signal capital stock. Accordingly, the Company's supplemental financial
statements have been restated to reflect the combination with Signal. The
accompanying consolidated financial statements do not include the estimated
transaction costs related to the Signal acquisition of $750, which will be
charged to expense in the quarter ended September 30, 1998. Signal and the
Company have elected to treat their merger as an asset purchase for income tax
purposes. The accompanying consolidated balance sheets do not include a deferred
tax asset of approximately $4,600 that will be credited directly to
shareholders' equity in the quarter ended September 30, 1998 to reflect the tax
effect of goodwill that will be recorded for tax purposes (see Note 9).
F-17
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL 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, 1995, 1996 and 1997, 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 $454, $337 and $440 for the
years ended December 31, 1995, 1996 and 1997, 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.
F-18
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
12. QUARTERLY SUPPLEMENTAL 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>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 13,169 $ 14,010
Accounts receivable, net of allowance of $479 and $527.... 22,901 24,594
Prepaid expenses and other current assets................. 953 1,000
---------- --------
Total current assets................................ 37,023 39,604
Property and equipment, net................................. 11,790 12,864
Other assets................................................ 587 730
Marketable security......................................... -- 1,400
Intangible assets, net...................................... 47,489 47,683
---------- --------
$ 96,889 $102,281
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 3,935 $ 322
Accounts payable.......................................... 1,457 1,722
Accrued payroll........................................... 3,481 3,622
Accrued expenses.......................................... 3,029 3,131
---------- --------
Total current liabilities........................... 11,902 8,797
---------- --------
Long-term debt.............................................. 1,405 28
---------- --------
Other liabilities........................................... 544 499
---------- --------
Deferred income taxes....................................... 2,710 3,200
---------- --------
Commitments and Contingencies
Shareholders' equity:
Common stock, no par value, 60,000 shares authorized,
22,953 and 23,653 shares issued and outstanding........ -- --
Additional paid-in capital................................ 59,834 62,629
Retained earnings......................................... 20,494 26,218
Unrealized gain on marketable securities.................. -- 910
---------- --------
Total shareholders' equity.......................... 80,328 89,757
---------- --------
$ 96,889 $102,281
========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1998
-------- --------
<S> <C> <C>
Revenues................................................. $47,618 $68,200
------- -------
Costs and expenses:
Cost of revenues....................................... 36,111 51,741
Selling, general and administrative.................... 2,188 2,775
Depreciation........................................... 1,828 2,635
Amortization of intangible assets...................... 710 885
Nonrecurring merger costs.............................. -- 750
------- -------
Total operating expenses......................... 40,837 58,786
------- -------
Operating income......................................... 6,781 9,414
Interest income (expense), net........................... (112) 105
------- -------
Income before income taxes............................... 6,669 9,519
Income tax provision..................................... 2,329 3,441
------- -------
Net income............................................... $ 4,340 $ 6,078
======= =======
Basic net income per share............................... $ 0.20 $ 0.26
======= =======
Diluted net income per share............................. $ 0.18 $ 0.25
======= =======
Pro forma amounts (Note 1):
Income before income taxes, as reported................ $ 6,669 $ 9,519
Income tax provision................................... 2,588 3,658
------- -------
Net income............................................. $ 4,081 $ 5,861
======= =======
Basic net income per share............................. $ 0.18 $ 0.25
======= =======
Diluted net income per share........................... $ 0.17 $ 0.24
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL GAIN ON
PAID-IN RETAINED MARKETABLE
SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
------ ------ ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997....... 22,953 $ -- $ 59,834 $ 20,494 $ -- $80,328
Net income..................... -- -- -- 6,078 -- 6,078
Exercise of Common stock
options..................... 510 -- 1,225 -- -- 1,225
Conversion of subordinated
note........................ 172 -- 1,288 -- -- 1,288
Other.......................... 18 -- 282 -- -- 282
Distributions.................. -- -- -- (354) -- (354)
Unrealized gain on marketable
securities, net of tax...... -- -- -- -- 910 910
------ ----- --------- -------- ------- -------
BALANCE, JUNE 30, 1998........... 23,653 $ -- $ 62,629 $ 26,218 $ 910 $89,757
====== ===== ========= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 4,340 $ 6,078
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization....................... 2,538 3,520
Changes in assets and liabilities, excluding the
effect of acquisitions --
Accounts receivable, net......................... (2,623) (1,651)
Prepaid expenses and other current assets........ (356) (47)
Other assets..................................... 41 (144)
Accounts payable................................. (211) 265
Accrued payroll.................................. 107 261
Accrued expenses................................. 194 162
Other liabilities................................ (43) (45)
------- -------
Net cash provided by operating activities...... 3,987 8,399
------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment, net.................. (2,625) (3,626)
Acquisitions, net of cash acquired........................ (972) (1,101)
------- -------
Net cash used in investing activities.......... (3,597) (4,727)
------- -------
FINANCING ACTIVITIES:
Net borrowings on revolving line of credit................ (62) --
Repayments of long-term debt.............................. (135) (3,463)
Repayments of obligations under capital leases............ (149) (239)
Net proceeds from issuance of Common stock................ 739 --
Proceeds from exercise of Common stock options............ -- 1,225
Distributions............................................. (165) (354)
Repurchase of Common stock................................ (467) --
------- -------
Net cash used in financing activities.......... (239) (2,831)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 151 841
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 9,620 13,169
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 9,771 $14,010
======= =======
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest.................................................. $ 128 $ 26
======= =======
Income taxes.............................................. $ 1,411 $ 2,928
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED -- IN THOUSANDS)
NOTE 1. BASIS OF PRESENTATION
The information set forth in these statements is unaudited. The information
reflects all adjustments, consisting of normal recurring adjustments, that, in
the opinion of management, are necessary for a fair presentation. Results of
operations for the period ended June 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 May 28, 1998, the Company consummated the acquisition of Digital
Dictation, Inc. ("DDI"). The acquisition was accounted for using the
pooling-of-interests method of accounting and the Company's historical financial
statements were retroactively restated to reflect the combination with DDI. The
restated financial statements were issued in Item 5 of the Company's June 30,
1998 quarterly report on Form 10-Q.
On August 18, 1998, the Company consummated the acquisition of Signal
Transcription Network, Inc. ("Signal"), which will be accounted for using the
pooling-of-interests method. Accounting Principles Board Opinion No. 16
precludes the restatement of financial statements for a pooling-of-interests
transaction prior to the issuance of financial statements covering a period
encompassed by the transaction. Accordingly, the accompanying consolidated
financial statements set forth a supplemental presentation of the Company's
financial statements, restated to reflect the combination of Signal.
Prior to its merger with the Company, Signal was an "S" Corporation. The
supplemental consolidated statements of operations include a pro forma
presentation to reflect Signal as a "C" corporation for the periods presented.
The accompanying financial statements do not include approximately $750 of
transaction costs incurred in connection with the Signal acquisition, which will
be charged to expense in the quarter ended September 30, 1998. In addition,
Signal and the Company have elected to treat their merger as an asset purchase
for income tax purposes. Accordingly, the Company will record a deferred tax
asset and an increase in additional paid-in capital of approximately $4,600 in
the quarter ended September 30, 1998, to reflect the tax effect of goodwill that
will be recorded for income tax purposes. This is not reflected on the June 30,
1998 supplemental balance sheet.
NOTE 2. ACQUISITIONS
During 1997, the Company completed five acquisitions, 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 DDI and on July 31, 1998, acquired the remaining 6%.
The Company issued approximately 912 shares of its Common stock in exchange for
all DDI capital stock. The acquisition has been accounted for under the
pooling-of-interests method. Accordingly, the Company's historical financial
statements were restated to reflect the pooling with DDI.
On August 18, 1998, the Company completed the acquisition of Signal which
will be accounted for using the pooling-of-interests method. The Company issued
619 shares of its Common stock and $l.5 million in cash in exchange for all
Signal capital stock. The Company's supplemental financial statements have been
restated to reflect the pooling with Signal.
F-24
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(UNAUDITED -- IN THOUSANDS)
NOTE 2. ACQUISITIONS -- (CONTINUED)
Revenues and net income as previously reported for the six months ended
June 30, 1997 and 1998 and as restated for both the DDI and Signal pooling of
interests is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
--------------------- ---------------------
REVENUES NET INCOME REVENUES NET INCOME
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Medquist............................... $38,810 $3,427 $56,754 $5,282
DDI.................................... 4,352 266 6,165 253
Signal................................. 4,456 647 5,281 543
------- ------ ------- ------
Restated............................... $47,618 $4,340 $68,200 $6,078
======= ====== ======= ======
</TABLE>
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 $259 and $217 for the six
months ended June 30, 1997 and 1998, 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.
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 established 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 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.
F-25
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(UNAUDITED -- IN THOUSANDS)
NOTE 3. NET INCOME PER COMMON SHARE -- (CONTINUED)
The table below sets forth the reconciliation of the numerators and
denominators of the basic and diluted net income per share computations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------
1997 1998
--------------------------- ---------------------------
NET PER SHARE NET PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic....................... $4,340 22,083 $0.20 $6,078 23,472 $0.26
Effect of dilutive
securities................ -- 1,734 (0.02) -- 1,340 (0.01)
------ ------ ----- ------ ------ -----
Diluted..................... $4,340 23,817 $0.18 $6,078 24,812 $0.25
====== ====== ===== ====== ====== =====
</TABLE>
NOTE 4. NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
and 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 shares and per share amounts
have been restated for the stock splits.
F-26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of The MRC Group, Inc.:
We have audited the accompanying consolidated balance sheets of The MRC
Group, Inc. (a Missouri corporation) and Subsidiary as of December 31, 1996 and
1997 and the related consolidated statements of operations, stockholders' equity
and cash flows for the three years in the period ended December 31, 1997. 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 The MRC Group, Inc. and
Subsidiary as of December 31, 1996 and 1997 and the results of their operations
and their cash flows for the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Cleveland, Ohio,
March 3, 1998 (except with respect to the matters discussed in Note 11,
as to which the date is September 18, 1998).
F-27
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 5,050,856 $ 1,192,959
Short-term investments................................... 3,001,737 4,003,094
Trade accounts receivable, less allowance for doubtful
accounts of $714,370 and $819,218 in 1996 and 1997,
respectively.......................................... 15,374,391 18,305,630
Deferred tax asset....................................... 2,248,936 1,792,176
Prepaid expenses and other current assets................ 441,702 91,435
----------- -----------
Total current assets............................... 26,117,622 25,385,294
----------- -----------
Property and equipment, net................................ 11,708,170 13,306,013
----------- -----------
Other assets:
Goodwill and other intangible assets, net................ 37,094,577 34,893,978
Long-term investments.................................... 2,973,517 --
Preferred stock investment............................... -- 1,200,000
Other.................................................... 413,133 362,972
----------- -----------
Total other assets................................. 40,481,227 36,456,950
----------- -----------
Total assets....................................... $78,307,019 $75,148,257
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................ $ 3,694,254 $ 2,852,198
Accounts payable......................................... 3,616,075 4,288,695
Accrued liabilities...................................... 6,688,996 7,980,270
----------- -----------
Total current liabilities.......................... 13,999,325 15,121,163
----------- -----------
Long-term liabilities:
Long-term debt........................................... 8,208,841 6,184,212
Deferred tax liability................................... 4,505,921 3,478,161
Other.................................................... 588,167 585,000
----------- -----------
Total long-term liabilities........................ 13,302,929 10,247,373
----------- -----------
Commitments and contingencies
Mandatorily redeemable preferred stock:
Convertible preferred stock, $1.00 par value;
345,902 shares authorized in 1996 and 1997:
Series V convertible and mandatorily redeemable
preferred stock, 45,902 shares issued and
outstanding (liquidation preference $17,493,252)... 17,493,252 17,493,252
Series VI convertible and mandatorily redeemable
preferred stock, 300,000 shares issued and
outstanding (liquidation preference $30,000,000)... 30,000,000 30,000,000
Stockholders' equity:
Convertible preferred stock, $1.00 par value; 10,362
shares authorized in 1996 and 1997:
Series IV convertible preferred stock, 10,362 shares
issued and outstanding (liquidation preference
$3,948,958)........................................ 10,362 10,362
Common stock, $.01 par value; 30,000,000 shares
authorized, 5,866,219 shares issued and outstanding in
1996 and 1997......................................... 58,662 58,662
Additional paid-in capital............................... 11,611,460 11,611,460
Accumulated deficit...................................... (8,168,971) (9,394,015)
----------- -----------
Total stockholders' equity......................... 3,511,513 2,286,469
----------- -----------
Total liabilities and stockholders' equity......... $78,307,019 $75,148,257
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-28
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Net revenues.................................. $49,179,660 $71,699,888 $108,117,494
Cost of revenues.............................. 40,153,549 57,329,739 86,975,531
----------- ----------- ------------
Gross profit.................................. 9,026,111 14,370,149 21,141,963
Selling, general and administrative
expenses.................................... 4,352,860 8,329,470 9,742,462
Depreciation and amortization................. 3,906,758 6,440,652 10,239,099
Restructuring charges......................... 346,877 643,724 2,075,458
----------- ----------- ------------
Operating income (loss)....................... 419,616 (1,043,697) (915,056)
----------- ----------- ------------
Other income (expense):
Investment income........................... 167,826 422,679 465,714
Interest expense............................ (706,473) (804,399) (775,702)
----------- ----------- ------------
Total other (expense)................. (538,647) (381,720) (309,988)
----------- ----------- ------------
Loss before provision for income taxes........ (119,031) (1,425,417) (1,225,044)
Provision for income taxes.................... (7,160) -- --
----------- ----------- ------------
Net loss...................................... $ (126,191) $(1,425,417) $ (1,225,044)
=========== =========== ============
Basic and diluted net loss per share.......... $ (0.07) $ (0.39) $ (0.21)
=========== =========== ============
Weighted average common shares outstanding.... 1,817,212 3,683,458 5,866,219
=========== =========== ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-29
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK
SERIES IV COMMON STOCK ADDITIONAL TOTAL
---------------- ------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------- --------- ------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994...... 10,362 $10,362 1,788,045 $17,880 $ 6,169,466 $(6,617,363) $ (419,655)
Common stock issued for
exercise of stock options... -- -- 70,000 700 295,100 -- 295,800
Net loss...................... -- -- -- -- -- (126,191) (126,191)
------ ------- --------- ------- ----------- ----------- ----------
Balance, December 31, 1995...... 10,362 10,362 1,858,045 18,580 6,464,566 (6,743,554) (250,046)
Issuance costs of Series VI
convertible and mandatorily
redeemable preferred
stock....................... -- -- -- -- (228,252) -- (228,252)
Common stock issued for
acquisitions................ -- -- 4,078,174 40,782 5,670,246 -- 5,711,028
Common stock repurchased and
retired..................... -- -- (70,000) (700) (295,100) -- (295,800)
Net loss...................... -- -- -- -- -- (1,425,417) (1,425,417)
------ ------- --------- ------- ----------- ----------- ----------
Balance, December 31, 1996...... 10,362 10,362 5,866,219 58,662 11,611,460 (8,168,971) 3,511,513
Net loss...................... -- -- -- -- -- (1,225,044) (1,225,044)
------ ------- --------- ------- ----------- ----------- ----------
Balance, December 31, 1997...... 10,362 $10,362 5,866,219 $58,662 $11,611,460 $(9,394,015) $2,286,469
====== ======= ========= ======= =========== =========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-30
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $ (126,191) $ (1,425,417) $(1,225,044)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization............. 3,906,758 6,440,652 10,239,099
Deferred tax provision (benefit).......... 7,160 (40,855) (571,000)
(Gain) loss on disposal of property....... (871) -- 222,950
Changes in operating assets and
liabilities, net of acquisitions:
Trade accounts receivable.............. 1,366,169 (498,438) (2,291,426)
Prepaid expenses and other assets...... (217,430) 696,325 400,428
Accounts payable....................... (441,968) (645,485) 545,912
Accrued and other liabilities.......... (960,339) (585,607) 177,180
Other.................................. 104,384 69,686 (178,846)
----------- ------------ -----------
Total adjustments................... 3,763,863 5,436,278 8,544,297
----------- ------------ -----------
Net cash from operating
activities........................ 3,637,672 4,010,861 7,319,253
----------- ------------ -----------
Cash flows from investing activities:
Capital expenditures......................... (3,174,985) (2,779,615) (7,547,628)
Proceeds from sale of property............... 68,410 -- --
Sale of investments.......................... 2,399,928 156,542 3,173,006
Purchase of investments...................... -- (6,050,000) (1,000,000)
Preferred stock investment................... -- -- (1,200,000)
Acquisition of businesses, net of stock
issued and acquired....................... (1,825,000) (21,394,551) (1,921,389)
----------- ------------ -----------
Net cash from investing
activities........................ (2,531,647) (30,067,624) (8,496,011)
----------- ------------ -----------
Cash flows from financing activities:
Proceeds from short-term borrowings.......... 1,306,821 -- --
Repayments of short-term borrowings.......... (3,596,821) -- --
Common stock repurchased..................... -- (295,800) --
Proceeds from sale of mandatorily redeemable
preferred stock........................... -- 29,271,748 --
Proceeds from exercise of stock options...... 295,800 -- --
Proceeds from long-term debt................. 5,000,000 7,000,000 --
Repayments of long-term debt................. (2,822,121) (8,885,086) (2,681,139)
----------- ------------ -----------
Net cash from financing
activities........................ 183,679 27,090,862 (2,681,139)
----------- ------------ -----------
Net change in cash and cash equivalents........ 1,289,704 1,034,099 (3,857,897)
Cash and cash equivalents, beginning of year... 2,727,053 4,016,757 5,050,856
----------- ------------ -----------
Cash and cash equivalents, end of year......... $ 4,016,757 $ 5,050,856 $ 1,192,959
=========== ============ ===========
Supplemental cash flow information:
Cash paid for interest....................... $ 650,165 $ 688,034 $ 830,485
=========== ============ ===========
Cash paid for income taxes................... $ 42,665 $ -- $ 631,856
=========== ============ ===========
Supplemental disclosures of noncash investing
and financing activities:
Common stock issued in connection with
acquisitions.............................. $ -- $ 5,711,028 $ --
=========== ============ ===========
Notes issued in connection with
acquisition............................... $ -- $ 2,000,000 $ --
=========== ============ ===========
Exchange of debt for preferred stock......... $ -- $ 500,000 $ --
=========== ============ ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-31
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The MRC Group, Inc., formerly MEDIFAX, Inc., and Subsidiary (collectively,
the "Company") provides electronic medical transcription and document management
services to the health care industry. The primary customers are hospitals,
medical centers and other health care providers across the United States.
Significant accounting and reporting policies are described below.
The Company operates in an environment with many financial and operational
risks including, but not limited to, a history of losses, intense competition,
rapid technology changes, dependence on the health care industry and the ability
to attract and retain qualified personnel.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary from the date of acquisition. All
significant intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Since actual results could differ from those estimates,
revisions to estimates are made as better information becomes available.
Cash Equivalents
The Company considers all highly liquid short-term investments, including
money market funds, with an original maturity of three months or less to be cash
equivalents. Cash equivalents are stated at cost, which approximates fair value.
Investments
Investments held by the Company at December 31, 1996 and 1997 consisted
primarily of investments in high-quality, fixed-income bonds with varying
maturities and rates. At December 31, 1996 and 1997, these investments totaled
$5,975,254, and $4,003,094, respectively, and are included in short-term and
long-term investments in the accompanying consolidated balance sheets. In
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," debt securities that the
Company has both the intent and ability to hold to maturity are carried at
amortized cost.
Financial Instruments
Financial instruments held by the Company include cash and cash
equivalents, accounts receivable, accounts payable and long-term debt. The book
value of cash and cash equivalents, accounts receivable and accounts payable are
considered to be representative of fair value because of the short maturity of
these instruments. The fair values of the borrowings of long-term debt
approximate book value based on the contractual fixed interest rates currently
in effect and due to a considerable portion of the debt being subject to
fluctuating market interest rates.
F-32
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the following
estimated useful lives of the assets:
Equipment........................................... Two to five years
Leasehold improvements... Lesser of lease term or useful life of asset
Furniture and fixtures............................ Five to seven years
Automobiles....................................... Three to five years
Depreciation expense for the years ended December 31, 1995, 1996 and 1997
was approximately $3,507,000, $4,467,000 and $6,104,000, respectively.
Goodwill and Other Intangibles
The Company has capitalized certain costs associated with various
acquisitions, including goodwill, non-compete agreements and other intangible
assets. Management regularly evaluates its accounting for goodwill. Impairment
of goodwill would be recognized when events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Measurement of the
amount of 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 asset. As of December 31, 1997, no revision to the remaining
useful lives or write-down of intangible assets has been recorded.
Preferred Stock Investment
During 1997, the Company invested $1,200,000 for an approximate 10%
preferred stock equity interest in Articulate Systems, Inc. The investment has
been accounted for under the cost method of accounting.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." In 1996, the Company adopted the disclosure option of Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation."
Revenue Recognition
Fees for transcription-related services are based on contract rates, and
revenue is recognized upon the rendering of services.
Research and Development Costs
Research and development costs are expensed as incurred. There were no
research and development costs in 1995. Total research and development costs
were approximately $450,000 and $550,000 in 1996 and 1997, respectively.
F-33
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Income Taxes
The Company accounts for income taxes, using the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts. Future tax benefits are recognized to the extent that
realization of such benefits is more likely than not.
Per Share Data
The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128") "Earnings per Share" in 1997. SFAS 128 requires the presentation of
basic earnings per share and diluted earnings per share. Basic earnings per
share is computed by dividing net income by the weighted average number of
common shares outstanding. Diluted earnings per share is calculated by dividing
net income by all potential dilutive common shares that were outstanding during
the period.
For the purposes of the Company's diluted per share calculation, the
effects of stock options, warrants, and convertible preferred stock are
antidilutive and have been excluded. Weighted average common shares outstanding
for the years ended December 31, 1995, 1996, and 1997 were 1,817,212, 3,683,458,
and 5,866,219, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. ACQUISITIONS
In July 1996, the Company acquired all the outstanding stock of Medical
Records Corp. The total purchase price of approximately $27,700,000 was financed
with cash from debt, the issuance of Series VI Preferred Stock and the issuance
of Common Stock. The former shareholders of Medical Records Corp. received cash,
notes and only shares of Common Stock, totaling 4,077,547, in conjunction with
the acquisition. The acquisition has been accounted for as a purchase, and the
results of Medical Records Corp., a wholly owned subsidiary of the Company, were
included in the accompanying consolidated financial statements from the date of
the acquisition. In connection with the acquisition, the Company assumed certain
acquisition-related liabilities from Medical Records Corp. The cost of the
acquisition has been allocated on the basis of the estimated fair market value
of the assets acquired and liabilities assumed. The allocation resulted in
goodwill and other intangible assets of approximately $33,014,800, which are
being amortized over lives of 1.5 to 30 years.
The unaudited results of operations of the Company for the year ended
December 31, 1996 on a pro forma basis as though Medical Records Corp. had been
acquired as of the beginning of 1996 are as follows:
<TABLE>
<S> <C>
Revenues............................................... $99,273,800
Operating loss......................................... (4,186,400)
Net loss............................................... (4,913,500)
Net loss per share..................................... $ (0.84)
</TABLE>
During 1997, the Company acquired the assets of two entities and the stock
of one entity for cash of approximately $1.9 million plus the assumption of
certain liabilities.
F-34
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
2. ACQUISITIONS -- (CONTINUED)
Each of the 1997 acquisitions was accounted for as a purchase, and the
results of operations are included in the accompanying consolidated financial
statements from the date of acquisition. The allocation of the purchase prices
resulted in approximately $1,797,600 of intangibles, primarily non-compete
covenants, customer lists and goodwill. The intangibles are being amortized over
periods ranging from four to 30 years.
Several of the Company's purchase contracts contain contingent purchase
price adjustments. These contracts provide for additional consideration to be
paid by the Company if net future billings to defined customers exceed specified
contractual levels. These contracts expire in 2000 and 2001, and are generally
payable on a quarterly basis. When the contingency is resolved and additional
consideration is due, the Company accounts for the payment as additional
purchase price and amortizes the additional amount paid over the remaining life
of the asset.
Pro forma information is not presented for the 1997 acquisitions, as these
acquisitions are not significant.
3. PROPERTY AND EQUIPMENT
Property and equipment and related accumulated depreciation are summarized
as follows:
1996 1997
----------- -----------
Equipment.................................. $20,149,055 $22,624,014
Leasehold improvements..................... 754,643 1,005,699
Furniture and fixtures..................... 802,233 1,399,557
Automobiles................................ 49,415 56,451
----------- -----------
21,755,346 25,085,721
Less accumulated depreciation.............. (10,047,176) (11,779,708)
----------- -----------
$11,708,170 $13,306,013
=========== ===========
Included in equipment is property under capital leases of $2,377,786 at
December 31, 1996 and 1997 with accumulated depreciation of $496,391 and
$1,607,476 at December 31, 1996 and 1997, respectively.
In 1995, the Company evaluated the remaining estimated useful lives of
certain equipment, including dictation equipment and related software. As a
result, the remaining lives of these assets were shortened which resulted in an
increase in depreciation expense of $740,735 in 1995.
Maintenance and repair expenditures which are not considered betterments
and do not extend the useful life of the property are charged to expense as
incurred.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
In connection with the acquisitions discussed in Note 2, the Company
recorded goodwill and other intangible assets. The components of these amounts
at December 31, 1996 and 1997 are as follows:
F-35
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
4. GOODWILL AND OTHER INTANGIBLE ASSETS -- (CONTINUED)
LIVES 1996 1997
---------- ----------- -----------
(IN YEARS)
Noncompete agreements............. 1.5-4 $ 3,305,000 $ 3,405,000
Software.......................... 3 37,800 37,800
Employee base..................... 5 2,439,000 2,514,000
Customer lists.................... 10-15 4,908,300 5,033,300
Goodwill.......................... 30 28,778,152 30,413,259
----------- -----------
Total............................. 39,468,252 41,403,359
Less accumulated amortization..... (2,373,675) (6,509,381)
----------- -----------
$37,094,577 $34,893,978
=========== ===========
Amortization expense totaled approximately $400,000, $1,974,000 and
$4,135,000 in 1995, 1996 and 1997, respectively.
5. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1996 and 1997 consists of the
following:
1996 1997
---------- ----------
Accrued payroll and related taxes............ $3,310,546 $3,693,813
Acquisition costs............................ 2,136,197 1,294,732
Accrued restructuring costs.................. 869,874 1,733,249
Other........................................ 372,379 1,258,476
---------- ----------
$6,688,996 $7,980,270
========== ==========
Restructuring Costs
In 1995, the Company's board of directors approved a management plan to
close certain client service centers (CSC's) in order to reduce costs and
improve operating efficiencies. The cost of implementing the plan totaled
approximately $347,000 and was primarily related to long-term non-cancelable
leases. The charge was recognized in 1995 in accordance with the criteria set
forth in EITF 94-3; Liability Recognition For Costs To Exit An Activity
(Including Certain Costs Incurred In A Restructuring) and is reflected in the
Consolidated Statement of Operations as restructuring charges.
In 1996, the board of directors approved a separate management plan to
close and or merge several redundant CSC's as well as certain corporate offices
in order to reduce costs and improve operating efficiencies. The plan was
essentially completed during 1997 and included the cost of exiting certain
facilities, primarily related to non-cancelable leases, and employee severance
costs. Costs associated with the plan of approximately $644,000 have been
recognized in 1996 in accordance with EITF 94-3 and are reflected in the
Consolidated Statement of Operations as restructuring charges.
In 1997, the board of directors approved a separate management plan to
close and/or merge several redundant CSC's in order to further reduce costs and
improve operating efficiencies. The plan anticipated completion during 1998 and
included the cost of exiting certain facilities, primarily related to
non-cancelable leases and the disposition of fixed assets, and employee
severance costs. Costs associated with the plan of approximately $2,075,000 have
been recognized in 1997 in accordance with EITF 94-3 and are reflected in the
Consolidated Statement of Operations as restructuring charges. Included in this
amount is approximately $705,000 for the disposal of assets and approximately
$800,000 in severance and employee contract buy outs. The balance is primarily
related to non-
F-36
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
5. ACCRUED LIABILITIES -- (CONTINUED)
cancelable lease costs. The severance costs are attributable to eight
individuals from various levels of operational and senior management.
As of December 31, 1996 and 1997, approximately $870,000 and $1,733,000 of
these activities had not been completed and are included in accrued liabilities
in the Consolidated Balance Sheet. All other costs have been paid or charged to
the accrual.
6. LONG-TERM DEBT AND LINE OF CREDIT
Total long-term debt at December 31, 1996 and 1997 consists of the
following:
1996 1997
----------- ----------
Note payable repaid in January 1998......... $ 979,375 $ 500,000
Note payable to bank (a).................... 6,650,000 5,250,000
Capital lease obligations (Note 8).......... 2,138,045 1,210,163
Note payable to former shareholders of
Medical Records Corp. (b)................. 2,000,000 2,000,000
Other....................................... 135,675 76,247
----------- ----------
11,903,095 9,036,410
Less current portion........................ 3,694,254 2,852,198
----------- ----------
$ 8,208,841 $6,184,212
=========== ==========
- ------------------
(a) In connection with the acquisition of Medical Records Corp., the Company
entered into a note agreement with a bank. The note was for $7,000,000 with
an interest rate of LIBOR plus 1.65%, which totals approximately 7.3% at
December 31, 1997. The note is secured by substantially all of the Company's
assets. The agreement requires that the Company pay interest quarterly along
with equal monthly principal payments of $117,000 through September 2001.
The note requires the Company to maintain certain financial covenants,
including a minimum net income covenant. The Company was either in
compliance or had obtained the necessary waivers relating to the restrictive
covenants at December 31, 1997.
(b) In connection with the acquisition of Medical Records Corp., the Company
issued seven year, 8% unsecured notes to former shareholders of Medical
Records Corp. for $2,000,000. The notes require the Company to pay interest
quarterly, with annual principal payments of $500,000 beginning in July
2000.
Future maturities of long-term debt as of December 31, 1997 are as follows:
1998.................................................... $2,852,198
1999.................................................... 1,636,541
2000.................................................... 1,964,004
2001.................................................... 1,576,758
2002.................................................... 506,909
2003.................................................... 500,000
----------
$9,036,410
==========
At December 31, 1997, the Company has a line of credit agreement which
expires on June 30, 1998 with the same bank under which it can borrow up to
$10,000,000 with an interest rate of LIBOR
F-37
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
6. LONG-TERM DEBT AND LINE OF CREDIT -- (CONTINUED)
plus 1.25%. The line of credit is secured by substantially all of the Company's
assets. No amounts were outstanding under the line of credit at December 31,
1996 and 1997.
7. MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Convertible and Mandatorily Redeemable Preferred Stock
The Company has authorized 345,902 shares of $1.00 par value, convertible
and mandatorily redeemable preferred stock.
Series V Convertible and Mandatorily Redeemable Preferred Stock
The Company issued 45,902 shares of Series V Preferred Stock at $381.10 per
share to an investment limited partnership and several related purchasers in
1993 for total consideration of $17,493,252, before deducting stock issuance
expenses, which were accounted for as reductions of additional paid-in capital.
Each share is convertible into 90.18 shares of Common Stock.
If not previously converted, the Company is required to redeem one-fourth
of the shares of the Series V Preferred Stock in July 2001, one-third of the
remaining outstanding shares in July 2002, one-half of the remaining shares in
July 2003, and all remaining outstanding shares in July 2004. However, the
Company may redeem any or all Series V Preferred Stock at any time after July 1,
2000 by paying $381.10 per share.
The holders of Series V Preferred Stock vote together with the holders of
all series of preferred stock and Common Stock and are entitled to one vote for
each share of Common Stock which would be issuable upon conversion.
In the event of liquidation, the Series V Preferred Stockholders are
entitled to receive $381.10 for each share on parity with the Series IV and
Series VI Preferred Stockholders.
In the event of a sale of the Company or a merger in which the present
shareholders control less than 50% of the resulting company, the Company is
required to redeem the shares of any Series V Preferred Stockholders so
requesting at a redemption price of $381.10 per share.
In the event of any initial public offering with gross proceeds to the
Company equal to or in excess of $10,000,000 and a per share initial public
offering price equal to or in excess of five times the Series V conversion
price, the Company may require the conversion of all Series V Preferred Stock at
the conversion ratio then in effect.
Series VI Convertible and Mandatorily Redeemable Preferred Stock
The Company issued 300,000 shares of Series VI Preferred Stock at $100 per
share in 1996 for total consideration of $30,000,000, before deducting stock
issuance expenses, which were accounted for as reductions of additional paid-in
capital. Each share is convertible into 18.49 shares of Common Stock.
If not previously converted, the Company is required to redeem one-fourth
of the shares of the Series VI Preferred Stock in July 2001, one-third of the
remaining outstanding shares in July 2002, one-half of the remaining shares in
July 2003, and all remaining outstanding shares in July 2004. However, the
Company may redeem any or all Series VI Preferred Stock at any time after July
1, 2000 by paying $100 per share.
F-38
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
7. MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY -- (CONTINUED)
The holders of Series VI Preferred Stock vote together with the holders of
all series of preferred stock and Common Stock and are entitled to one vote for
each share of Common Stock which would be issuable upon conversion.
In the event of liquidation, the Series VI Preferred Stockholders are
entitled to receive $100 for each share on parity with the Series IV and Series
V Preferred Stockholders.
In the event of a sale of the Company or a merger in which the present
shareholders control less than 50% of the resulting company, the Company is
required to redeem the shares of any Series VI Preferred Stockholders so
requesting at a redemption price of $100 per share.
In the event of any initial public offering with gross proceeds to the
Company equal to or in excess of $25,000,000 and a per share initial public
offering price equal to or in excess of 3.733 times the Series VI conversion
price, the Company may require the conversion of all Series VI Preferred Stock
at the conversion ratio then in effect.
Convertible Preferred Stock
The Company has authorized 10,362 shares of $1.00 par value convertible
preferred stock.
Series IV Convertible Preferred Stock
The Company has issued 10,362 shares of Series IV Preferred Stock in 1991
and 1992 for total consideration of $3,948,936. Each outstanding share of this
preferred stock issue is convertible into 66.31 shares of Common Stock.
The holders of Series IV Preferred Stock vote together with holders of all
series of preferred stock and Common Stock and are entitled to one vote for each
share of Common Stock which would be issuable upon conversion.
In the event of liquidation, the Series IV Preferred Stockholders are
entitled to receive $381.10 for each share on parity with the Series V and
Series VI Preferred Stockholders.
In the event of a sale of the Company or a merger in which the present
shareholders control less than 50% of the resulting company, the Company is
required to redeem the shares of any Series IV Preferred Stockholders so
requesting at a redemption price of $381.10 per share.
The Company may redeem any or all Series IV Preferred Stock at any time
after July 1, 2000 by paying $381.10 per share.
In the event of an initial public offering with gross proceeds to the
Company equal to or in excess of $10,000,000 and a per share initial public
offering price equal to or in excess of five times the Series IV conversion
price, the Company may require the conversion of all Series IV Preferred Stock
at the conversion ratio then in effect.
Common Stock
During 1996, the Company issued 4,077,547 shares of Common Stock as part of
the acquisition of Medical Records Corp. and repurchased 70,000 shares at $4.22
per share from a stockholder under an agreement reached in 1995. The purchase
price was at the estimated fair value at the time of the agreement. Under the
provisions of the agreement for a previous acquisition, 627 shares were also
issued to the former sole shareholder of the acquired company during 1996.
F-39
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
7. MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY -- (CONTINUED)
Common Stock Warrants
In connection with the sale of equity securities to certain investors in
1992 and 1993, warrants to purchase Common Stock were issued by the Company to
these investors. The warrants were fully vested and exercisable at the date of
issuance and have terms which permit conversion into Common Stock at specified
prices during periods ranging from four to five years. The fair value of the
warrants at the date of grant was de minimis and therefore no compensation
expense has been recorded in the accompanying financial statements.
Information relating to the Company's outstanding warrants is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
TOTAL EXERCISE EXERCISE
SHARES PRICE PRICE
-------- ----------- --------
<S> <C> <C> <C>
Shares under warrant at December 31, 1994...... 600,035 $4.78-$7.00 $5.91
======== =========== =====
Shares under warrant at December 31, 1995...... 600,035 $4.78-$7.00 $5.91
Expired........................................ (224,850) $4.78 $4.78
--------
Shares under warrant at December 31, 1996...... 375,185 $6.35-$7.00 $6.55
======== =========== =====
Shares under warrant at December 31, 1997...... 375,185 $6.35-$7.00 $6.55
======== =========== =====
</TABLE>
All of the warrants outstanding at December 31, 1997 are exercisable. All
of the warrants expire in July 1998.
Common Stock Options
The Company has reserved 2,500,000 shares of Common Stock for issuance
under its Amended and Restated 1992 Employee Stock Option Plan (the "Plan"). The
options have been granted at amounts equal to or in excess of the fair market
value of the Company's Common Stock as determined by the board of directors. The
options vest over periods ranging from the date of grant to five years as
determined by the board of directors at the date of grant. As of December 31,
1997, the Company had 1,499,445 shares outstanding under the Plan and 930,555
shares available for grant.
The board of directors also has issued options in addition to those issued
under the Plan. The number of shares that may be granted under this arrangement
has not been limited. These options have been granted at amounts equal to or in
excess of the fair market value of the Company's Common Stock as determined by
the board of directors. The options vest over periods ranging from the date of
grant to ten years as determined by the board of directors at the date of grant.
As of December 31, 1997, the board of directors had granted 1,253,516 shares
under this arrangement.
F-40
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
7. MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY -- (CONTINUED)
Information relating to the Company's outstanding option plans is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
TOTAL OPTION EXERCISE
OPTIONS PRICE PRICE
---------- ----------- --------
<S> <C> <C> <C>
Shares under option at December 31, 1994..... 1,265,565 $4.23-$7.00 $6.59
Granted...................................... 1,276,260 4.23-6.43 4.49
Forfeited/canceled........................... (1,222,065) 6.43-7.00 6.44
Exercised.................................... (70,000) 4.23 4.23
----------
Shares under option at December 31, 1995..... 1,249,760 4.23-6.43 4.46
Granted...................................... 1,373,501 4.29-5.41 5.21
Forfeited/canceled........................... (127,250) 4.29-6.43 4.36
----------
Shares under option at December 31, 1996..... 2,496,011 4.23-6.43 4.88
Granted...................................... 448,600 5.41 5.41
Forfeited/canceled........................... (191,650) 4.29-6.43 4.84
----------
Shares under option at December 31, 1997..... 2,752,961 4.23-6.43 4.95
==========
Options exercisable at December 31, 1997..... 1,434,911 $4.23-$6.43 $4.70
==========
</TABLE>
The weighted average grant date fair value of options granted during 1995,
1996 and 1997 was $4.49, $5.21 and $5.41, respectively.
The weighted average remaining contractual life of the stock options
outstanding at December 31, 1997 was 8.05 years.
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which defines a fair value-based method of accounting for an
employee stock option plan or similar equity instrument. However, it also allows
an entity to continue to measure compensation cost for those plans using the
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities electing to remain with the accounting in APB
Opinion No. 25 must make pro forma disclosures of net income and earnings per
share, as if the fair value-based method of accounting defined in the statement
had been applied.
The Company has elected to account for its stock-based compensation plan
under APB Opinion No. 25. The Company has computed for pro forma disclosure
purposes the value of all options granted during 1995 to 1997 using the
Black-Scholes option pricing model using the following weighted average
assumptions for grants in 1996 and 1997:
Risk-free interest rate................................ 5.5%-7.0%
Expected dividend yield................................ 0%
Expected lives......................................... 7-10 years
Expected volatility.................................... 0%
F-41
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
7. MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY -- (CONTINUED)
The total value of the options granted during the years ended December 31,
1995, 1996, and 1997 was computed as approximately $792,000, $2,203,600 and
$704,000 respectively, which would be amortized over the vesting period of the
options. If the Company had accounted for these plans in accordance with SFAS
123, the Company's reported pro forma net loss and pro forma net loss per share
for the years ended December 31, 1995, 1996 and 1997 would have been as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- ----------- -----------
<S> <C> <C> <C>
Pro forma net loss:
As reported in the financial
statements.......................... $(126,191) $(1,425,417) $(1,225,044)
In accordance with SFAS 123............ (646,919) (2,400,261) (2,050,557)
Pro forma basic and diluted net loss per
share:
As reported in the financial
statements.......................... $ (0.07) $ (0.39) $ (0.21)
In accordance with SFAS 123............ (0.36) (0.65) (0.35)
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under noncancellable operating leases for office
space and equipment. Total rental expense under operating leases was
approximately $1,542,000, $3,612,000 and $2,768,000 for the years ended December
31, 1995, 1996 and 1997, respectively. The Company also has certain equipment
under capital leases with initial terms ranging from 46 to 60 months. Future
minimum payments under capital and operating leases are as follows:
CAPITAL OPERATING
LEASES LEASES
---------- ----------
Year ending December 31:
1998....................................... $1,011,000 $2,991,000
1999....................................... 241,000 2,586,000
2000....................................... 52,000 1,952,000
2001....................................... 7,163 1,104,000
2002....................................... -- 435,000
2003 and thereafter........................ -- 10,000
---------- ----------
Total minimum lease payments................. 1,311,163 $9,078,000
==========
Less-Portion representing interest......... 101,000
----------
Present value of future minimum lease
payments................................... $1,210,163
==========
Litigation Contingencies
The Company is subject to legal proceedings and claims which have arisen in
the ordinary course of business. The amount of potential liability with respect
to these actions is not expected to materially affect the financial position or
results of operations of the Company.
9. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." SFAS 109 requires, among other things, the determination of deferred
income taxes using the liability method, under which deferred tax
F-42
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
9. INCOME TAXES -- (CONTINUED)
assets and liabilities are determined based on the differences between the
financial accounting and tax bases of assets and liabilities. Deferred tax
assets or liabilities at the end of each period are determined using the
currently enacted tax rates to apply to taxable income in the period in which
the deferred tax asset or liability is expected to be settled or realized.
The Company's net operating loss carryforwards for tax purposes total
approximately $441,200 at December 31, 1997 and expire through 2011 unless
utilized. The Company also has alternative minimum tax credit carryforwards of
$161,855 at December 31, 1997.
The net deferred taxes recorded in the consolidated balance sheets are as
follows at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------------------------ ------------------------
CURRENT NONCURRENT CURRENT NONCURRENT
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Deferred tax assets:
Restructuring and acquisition
costs........................... $ 119,354 $ -- $ 602,365 $ --
Accruals not currently
deductible...................... 763,874 -- 1,068,872 196,708
Net operating loss carryforwards... 1,000,000 964,204 176,494 --
Alternative minimum tax credit
carry-forwards.................. 40,855 -- 161,855 --
Other.............................. 324,853 146,437 120,590 109,270
---------- ----------- ---------- -----------
Subtotal..................... 2,248,936 1,110,641 2,130,176 305,978
---------- ----------- ---------- -----------
Deferred tax liabilities:
Depreciation....................... -- (499,773) -- (315,434)
Intangible amortization............ -- (3,424,200) -- (2,297,651)
Other.............................. -- (1,253,589) -- (1,171,054)
---------- ----------- ---------- -----------
Subtotal..................... -- (5,177,562) -- (3,784,139)
---------- ----------- ---------- -----------
Net deferred tax assets
(liabilities)
before valuation allowance...... 2,248,936 (4,066,921) 2,130,176 (3,478,161)
Valuation allowance.................. -- (439,000) (338,000) --
---------- ----------- ---------- -----------
Net deferred tax assets.............. $2,248,936 $(4,505,921) $1,792,176 $(3,478,161)
========== =========== ========== ===========
</TABLE>
The Company's provision (benefit) for income taxes for the years ended
December 31, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
Federal -- current................................... $ -- $ 40,855 $ 116,000
-- deferred.................................. 7,160 (40,855) (571,000)
State and local...................................... -- -- 455,000
-------- --------- ---------
$ 7,160 $ -- $ --
======== ========= =========
</TABLE>
F-43
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
9. INCOME TAXES -- (CONTINUED)
The Company's consolidated income tax provision (benefit) for the years
ended December 31, 1995, 1996 and 1997 differs from that computed based strictly
on the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
Income tax benefit at federal statutory income tax
rate............................................... $(40,471) $(484,642) $(416,515)
State income taxes, net of federal income tax
benefit............................................ (4,761) (57,017) (61,252)
Permanent differences and other...................... 52,392 176,200 578,767
Change in valuation allowance........................ -- 365,459 (101,000)
-------- --------- ---------
Income tax provision................................. $ 7,160 $ -- $ --
======== ========= =========
</TABLE>
10. EMPLOYEE BENEFIT PLANS
The Company has two defined contribution 401(k) plans, covering
substantially all employees. Eligible employees of the Company may contribute
certain amounts of their annual compensation. During 1995, 1996 and 1997 the
Company made matching contributions to the plans of $142,000, $171,000 and
$117,000, respectively.
The Company does not provide any other retirement, postretirement or
postemployment benefits to its employees.
11. SUBSEQUENT EVENTS
In March 1998, the Company acquired the assets and assumed certain
liabilities of Transcription Concepts, Inc. for an aggregate consideration of
$1,420,000 which was funded from operations. The acquisition was accounted for
as a purchase.
In June 1998, the Company filed a Registration Statement relating to the
initial public offering of its Common Stock (the "Offering"). In September 1998,
the Company elected not to pursue the Offering. Consequently, all costs incurred
related to the Offering, totaling approximately $675,000 will be charged to
expense in the third quarter statement of operations.
In September 1998, the Company signed a definitive merger agreement (the
"Agreement") providing for the combination of the Company with MedQuist Inc.
("MedQuist") in a stock transaction valued in excess of $200 million. Pursuant
to the Agreement, each share of the Company's Common Stock and Preferred Stock
will be converted into shares of MedQuist's 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 the Company and MedQuist.
In September 1998, the Company acquired the assets and assumed certain
liabilities of Creative Impulses, Inc. dba Medical Records Transcription for
aggregate consideration of approximately $1.4 million which was funded from
operations. The acquisition will be accounted for as a purchase.
F-44
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
The MRC Group, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of The MRC Group, Inc. and Subsidiary
included in this Registration Statement, and have issued our report thereon
dated March 3, 1998. Our audits were made for the purpose of forming an opinion
on those financial statements taken as a whole. The schedule on page F-46 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Cleveland, Ohio,
March 3, 1998.
F-45
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND CHARGED TO END OF
OF PERIOD EXPENSES OTHER ACCOUNTS WRITE-OFFS PERIOD
---------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1. Allowance for doubtful accounts
Year ended December 31, 1995................. $321,934 $ 425,082 $ -- $297,268 $ 449,748
Year ended December 31, 1996................. 449,748 364,812 64,000(a) 164,190 714,370
Year ended December 31, 1997................. 714,370 539,000 -- 434,152 819,218
2. Accrued Restructuring Costs
Year ended December 31, 1995................. $ -- $ 346,877 $ -- $ -- $ 346,877
Year ended December 31, 1996................. 346,877 643,724 -- 120,727 869,874
Year ended December 31, 1997................. 869,874 2,075,458 (289,000)(b) 923,083 1,733,249
</TABLE>
(a) Related to purchase accounting adjustment in connection with the Medical
Records Corp. acquisition.
(b) Reclassified to other long term liabilities.
F-46
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30, 1998
<TABLE>
<CAPTION>
ACTUAL ACTUAL
DEC. 31, 1997 JUNE 30, 1998
------------- -------------
(AUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 1,192,959 $ 6,007,740
Short-term investments................................... 4,003,094 1,990,944
Trade accounts receivable, less allowance for doubtful
accounts of $819,218 and $981,581 in 1997 and 1998,
respectively........................................... 18,305,630 18,508,344
Deferred tax asset....................................... 1,792,176 1,710,463
Prepaid expenses and other current assets................ 91,435 602,506
----------- -----------
Total current assets................................... 25,385,294 28,819,997
----------- -----------
Property and equipment, net................................ 13,306,013 12,950,990
Other assets:
Goodwill and other intangible assets, net................ 34,893,978 35,087,116
Preferred stock investment............................... 1,200,000 1,200,000
Other.................................................... 362,972 511,581
----------- -----------
Total other assets..................................... 36,456,950 36,798,697
----------- -----------
Total assets........................................... $75,148,257 $78,569,684
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................ $ 2,852,198 $ 2,014,092
Accounts payable......................................... 4,288,695 3,802,828
Accrued liabilities...................................... 7,980,270 10,683,655
----------- -----------
Total current liabilities.............................. 15,121,163 16,500,575
----------- -----------
Long-term liabilities:
Long-term debt........................................... 6,184,212 5,256,085
Deferred tax liability................................... 3,478,161 3,231,406
Other.................................................... 585,000 438,750
----------- -----------
Total long-term liabilities............................ 10,247,373 8,926,241
----------- -----------
Commitments and contingencies
Mandatorily redeemable preferred stock:
Convertible preferred stock, $1.00 par value; 345,902
shares authorized in 1997
and 1998:
Series V convertible and mandatorily redeemable
preferred stock, 45,902 shares issued and outstanding
(liquidation preference $17,493,252)................. 17,493,252 17,493,252
Series VI convertible and mandatorily redeemable
preferred stock, 300,000 shares issued and
outstanding (liquidation preference $30,000,000)..... 30,000,000 30,000,000
Stockholders' equity:
Convertible preferred stock, $1.00 par value; 10,362
shares authorized in 1997
and 1998:
Series IV convertible preferred stock, 10,362 shares
issued and outstanding (liquidation preference
$3,948,958).......................................... 10,362 10,362
Common Stock, $.01 par value; 30,000,000 shares
authorized; 5,866,219 and 6,136,404 issued and
outstanding in 1997 and 1998........................... 58,662 61,364
Additional paid-in capital............................... 11,611,460 13,593,938
Accumulated deficit...................................... (9,394,015) (8,016,048)
----------- -----------
Total stockholders' equity............................. 2,286,469 5,649,616
----------- -----------
Total liabilities and stockholders' equity............. $75,148,257 $78,569,684
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
F-47
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net revenues............................................... $53,267,568 $60,172,857
Cost of revenues........................................... 42,685,489 47,869,544
----------- -----------
Gross profit............................................... 10,582,079 12,303,313
Selling, general and administrative expenses............... 4,782,960 5,276,904
Depreciation and amortization.............................. 4,849,653 4,423,665
----------- -----------
Operating income........................................... 949,466 2,602,744
Other (expense):
Interest (expense), net.................................. (150,575) (97,777)
----------- -----------
Total other (expense)................................. (150,575) (97,777)
----------- -----------
Income before provision for income taxes................... 798,891 2,504,967
Provision for income taxes................................. 522,265 1,127,000
----------- -----------
Net income................................................. $ 276,626 $ 1,377,967
=========== ===========
Basic net income per share................................. $ 0.05 $ 0.23
=========== ===========
Diluted net income per share............................... $ 0.02 $ 0.08
=========== ===========
Basic weighted average common shares outstanding........... 5,866,219 5,873,683
=========== ===========
Diluted weighted average common shares outstanding......... 17,136,755 17,380,062
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
F-48
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997, AND
THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK
SERIES IV COMMON STOCK ADDITIONAL TOTAL
---------------- ------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------- --------- ------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996...... 10,362 $10,362 5,866,219 $58,662 $11,611,460 $(8,168,971) $3,511,513
Net loss...................... -- -- -- -- -- (1,225,044) (1,225,044)
------ ------- --------- ------- ----------- ----------- ----------
Balance, December 31, 1997...... 10,362 10,362 5,866,219 58,662 11,611,460 (9,394,015) 2,286,469
Compensation expense for stock
options (unaudited)......... -- -- -- -- 269,506 -- 269,506
Common stock issued for
exercise of warrants
(unaudited)................. -- -- 270,185 2,702 1,712,972 -- 1,715,674
Net income (unaudited)........ -- -- -- -- -- 1,377,967 1,377,967
------ ------- --------- ------- ----------- ----------- ----------
Balance, June 30, 1998
(unaudited)................... 10,362 $10,362 6,136,404 $61,364 $13,593,938 $(8,016,048) $5,649,616
====== ======= ========= ======= =========== =========== ==========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
F-49
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 276,626 $ 1,377,967
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization......................... 4,849,653 4,423,665
Compensation expense for stock options................ -- 269,506
Deferred tax provision (benefit)...................... 647,732 (165,042)
Loss on disposal of property.......................... 59,876 1,479
Changes in operating assets and liabilities, net of
acquisitions:
Trade accounts receivable.......................... (1,640,481) (87,250)
Prepaid expenses and other assets.................. 115,483 (641,498)
Accounts payable................................... 283,641 (485,868)
Accrued and other liabilities...................... (51,474) 2,736,176
----------- -----------
Total adjustments............................... 4,264,430 6,051,168
----------- -----------
Net cash from operating activities.............. 4,541,056 7,429,135
----------- -----------
Cash flows from investing activities:
Capital expenditures..................................... (4,431,823) (3,234,177)
(Sale) purchases of investments, net..................... (1,019,404) 2,012,150
Acquisition of businesses, net of stock issued and
acquired.............................................. (1,921,389) (1,838,018)
----------- -----------
Net cash from investing activities.............. (7,372,616) (3,060,045)
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt, net........................ (1,241,910) (1,269,983)
Proceeds from exercise of warrants....................... -- 1,715,674
----------- -----------
Net cash from financing activities......................... (1,241,910) 445,691
----------- -----------
Net change in cash and cash equivalents.................... (4,073,470) 4,814,781
Cash and cash equivalents, beginning of year............... 5,050,856 1,192,959
----------- -----------
Cash and cash equivalents, end of year..................... $ 977,386 $ 6,007,740
=========== ===========
Supplemental cash flow information:
Cash paid for interest................................... $ 460,621 $ 302,103
=========== ===========
Cash paid for income taxes............................... $ 112,627 $ 892,654
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
F-50
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The MRC Group, Inc., formerly MEDIFAX, Inc. and Subsidiary (collectively,
the "Company") provides electronic medical transcription and document management
services to the health care industry. The primary customers are hospitals and
medical centers across the United States. Significant accounting and reporting
policies are described below.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All significant intercompany
transactions and balances have been eliminated.
The accompanying interim consolidated financial statements included herein
have been prepared in accordance with generally accepted accounting principles.
In the opinion of management, the accompanying consolidated financial statements
have been prepared on the same basis as the audited consolidated financial
statements and all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation have been incorporated herein.
For purposes of these interim consolidated financial statements, certain
information and disclosures normally included in annual consolidated financial
statements have been omitted. These unaudited consolidated financial statements
should be read in conjunction with the audited Consolidated Financial Statements
and Notes thereto at December 31, 1995, 1996 and 1997.
Restructuring Costs
In 1995, 1996 and 1997, the Company's board of directors approved various
management plans which resulted in restructuring charges in the amounts of
$347,000, $644,000 and $2,075,000, respectively. The charges were recorded in
accordance with the criteria set forth in EITF 94-3; Liability Recognition For
Costs To Exit An Activity (Including Certain Costs Incurred In A Restructuring).
Refer to Note 5 of the Consolidated Financial Statements and Notes thereto at
December 31, 1995, 1996 and 1997 for a detailed description of these charges.
During the first six months of 1998, non-cancelable lease costs of $118,000,
asset disposal costs of $278,000 and severance costs of $110,000 were paid and
charged against the restructuring accrual. At June 30, 1998, the remaining
accrued restructuring costs balance in accrued liabilities is $1,227,000. The
components of this balance include $634,000 for non-cancelable lease costs,
$427,000 for asset disposal costs and $166,000 for severance and employee
contract buy-outs. The Company anticipates that the restructuring will be
completed during 1998, however, certain accrued restructuring costs will remain
outstanding until all obligations are paid.
2. ACQUISITIONS
During 1997, the Company acquired the assets of two entities and the stock
of one entity for cash of approximately $1.9 million plus the assumption of
certain liabilities.
In March 1998, the Company acquired the assets and assumed certain
liabilities of Transcription Concepts, Inc. for an aggregate consideration of
approximately $1.4 million, which was funded from operations.
All of the above acquisitions were accounted for as purchases, and the
results of operations are included in the accompanying consolidated financial
statements from the date of acquisition.
All of these acquisitions, excluding the 1998 acquisition, contain certain
contingent purchase price agreements which are payable based upon the results of
the operations of the Company.
F-51
<PAGE>
THE MRC GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1997 AND 1998
(UNAUDITED)
3. RECONCILIATION OF BASIC EARNINGS PER SHARE TO DILUTED EARNINGS PER SHARE
The following is a reconciliation of historical basic earnings per share
(EPS) to pro forma basic and diluted EPS for the six months ended June 30, 1997
and 1998:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 1997 ENDED JUNE 30, 1998
--------------------------------------- ---------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS.................... $276,626 5,866,219 $0.05 $1,377,967 5,873,683 $0.23
===== =====
Convertible mandatorily
redeemable stock........... -- 9,687,297 -- 9,687,297
Convertible preferred
stock...................... -- 687,140 -- 687,140
Options and warrants......... -- 896,099 -- 1,131,942
-------- ---------- ---------- ----------
Diluted EPS.................. $276,626 17,136,755 $0.02 $1,377,967 17,380,062 $0.08
======== ========== ===== ========== ========== =====
</TABLE>
4. SIGNIFICANT SUBSEQUENT EVENTS
In June 1998, the Company filed a Registration Statement relating to the
initial public offering of its Common Stock (the "Offering"). In September 1998,
the Company elected not to pursue the Offering. Consequently, all costs incurred
related to the Offering, totaling approximately $675,000 will be charged to
expense in the third quarter statement of operations.
In September 1998, the Company signed a definitive merger agreement (the
"Agreement") providing for the combination of the Company with MedQuist Inc.
("MedQuist") in a stock transaction valued in excess of $200 million. Pursuant
to the Agreement, each share of the Company's Common Stock and Preferred Stock
will be converted into shares of MedQuist's 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 the Company and MedQuist.
In September 1998, the Company acquired the assets and assumed certain
liabilities of Creative Impulses, Inc. dba Medical Records Transcription for
aggregate consideration of approximately $1.4 million which was funded from
operations. The acquisition will be accounted for as a purchase.
F-52
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO MEDICAL RECORDS CORP. AND AFFILIATE
We have audited the accompanying restated combined statements of income,
stockholders' equity, and cash flows of Medical Records Corp. and Affiliate for
the year ended December 31, 1995. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined 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 audit provides a reasonable basis
for our opinion.
In our opinion, the accompanying restated combined financial statements
referred to above present fairly, in all material respects, the results of
operations, stockholders' equity, and cash flows for Medical Records Corp. and
Affiliate for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.
SKODA, MINOTTI, REEVES & CO.
Mayfield Village, Ohio
February 16, 1996
(except for Note 2, as to which the date is May 26, 1998)
F-53
<PAGE>
MEDICAL RECORDS CORP. AND AFFILIATE
COMBINED STATEMENT OF INCOME (AS RESTATED)
FOR THE YEAR ENDED DECEMBER 31, 1995
Net revenues ............................................... $42,602,194
Cost of revenues............................................ 27,191,643
-----------
Gross profit................................................ 15,410,551
Selling, general and administrative expenses................ 13,024,066
Depreciation and amortization............................... 1,765,625
-----------
Operating income............................................ 620,860
Interest expense (net of interest income of $9,544)......... 307,679
-----------
Net income.................................................. $ 313,181
===========
The accompanying notes are an integral part of these combined statements.
F-54
<PAGE>
MEDICAL RECORDS CORP. AND AFFILIATE
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY (AS RESTATED)
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NO PAR NON-
NO PAR VOTING VOTING
COMMON STOCK, COMMON STOCK,
STATED AT STATED AT ADDITIONAL TOTAL
--------------- ----------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- ------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995............ 278.45 $1,432 -- $ -- $178,840 $4,598,936 $4,779,208
Capital contributions............... -- -- -- -- 400,000 -- 400,000
Issuance of shares.................. -- -- 5290.55 -- -- -- --
Stockholders' distributions......... -- -- -- -- -- (409,121) (409,121)
Net income.......................... -- -- -- -- -- 313,181 313,181
------ ------ ------- ------- -------- ---------- ----------
Balance, December 31, 1995.......... 278.45 $1,432 5290.55 $ -- $578,840 $4,502,996 $5,083,268
====== ====== ======= ======= ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-55
<PAGE>
MEDICAL RECORDS CORP. AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS (AS RESTATED)
FOR THE YEAR ENDED DECEMBER 31, 1995
Cash flows from operating activities:
Net income................................................ $ 313,181
Adjustments to reconcile net income to net cash from
operating activities:
Addback: Items not affecting cash
Depreciation and amortization....................... 1,765,625
Write-off of software development costs............. 307,500
Cash provided from (used in) changes in the following
items:
Increase in accounts receivable..................... (1,995,002)
Decrease in prepaid expenses........................ 31,018
Increase in deposits................................ (6,652)
Increase in accounts payable -- trade............... 917,106
Increase in accrued and other liabilities........... 183,783
----------
Total Adjustments................................ 1,203,378
----------
Net cash from operating activities............... 1,516,559
Cash flows from investing activities:
Acquisitions of businesses................................ (795,653)
Additional amounts paid for business acquisitions......... (643,988)
Acquisitions of property and equipment.................... (613,633)
----------
Net cash from investing activities............... (2,053,274)
Cash flows from financing activities:
Proceeds from note payable -- bank........................ 1,350,000
Proceeds from long-term obligations....................... 580,583
Repayment of long-term obligations principal.............. (649,974)
Stockholders' distributions............................... (659,121)
----------
Net cash from financing activities............... 621,488
----------
Net increase in cash and cash equivalents................... 84,773
Cash and cash equivalents -- beginning of year.............. 156,302
----------
Cash and cash equivalents -- end of year.................... $ 241,075
==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................... $ 316,239
==========
Income taxes........................................... $ 26,611
==========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 1995, the Company acquired $2,442,040 of equipment through capital
lease obligations. In addition, during 1995, certain stockholders contributed
$400,000 of loans to additional paid-in capital.
The accompanying notes are an integral part of these combined statements.
F-56
<PAGE>
MEDICAL RECORDS CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Combined in these financial statements is Transcription Specialists, Inc.,
an affiliate through common ownership of Medical Records Corp. Management
believes this inclusion of the five branches of Transcription Specialists, Inc.
is useful for the clear reflection of the Company's combined results of
operations.
Nature of Business
Medical Records Corp. and Transcription Specialists, Inc. transcribe
medical records for hospitals throughout the United States.
Depreciation and Amortization
Depreciation and amortization of property and equipment, including assets
held under capital leases, are provided by the use of accelerated and
straight-line methods over the estimated useful lives of the assets as follows:
Equipment............................................ five years
Equipment held under capital leases................. three years
Computer software........................... three to five years
Furniture and fixtures.............................. seven years
Automobiles.......................................... five years
Depreciation expense for the year ended December 31, 1995, was $1,476,165.
In addition, during 1995, the Company wrote off software development costs.
Revenue Recognition
Fees for transcription-related services are based on contract rates, and
revenue is recognized upon the rendering of services.
Income Taxes
The Companies, with the consent of their stockholders, have elected under
the Internal Revenue Code to be taxed as S Corporations. In lieu of corporation
income and franchise taxes, the stockholders of an S Corporation are taxed on
their proportionate share of each Company's taxable income. Therefore, no
provision or liability for federal or state income taxes has been included in
these combined financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
F-57
<PAGE>
MEDICAL RECORDS CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Combined Statement of Cash Flows
For purposes of the combined statement of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
2. CHANGE IN METHOD OF ACCOUNTING FOR BUSINESS COMBINATIONS
The 1995 statements of income, stockholders' equity, and cash flows have
been restated to capitalize costs related to non-compete agreements and payments
related to revenues generated by certain acquired companies, incurred in
connection with business combinations. These costs were recorded as period
expenses in previously issued financial statements. The Company has recorded
these non-compete and revenue-related costs as identifiable intangible assets
and goodwill, which are being amortized over 7 and 30 years, respectively. The
new method of accounting for business combinations was adopted in order for the
Company to be consistent in its accounting policies with a company with whom
they merged on July 19, 1996. The effects of the accounting change are an
increase to retained earnings at January 1, 1995 of $1,255,952 and an increase
to net income for the year ended December 31, 1995 of $696,888.
3. RELATED PARTY TRANSACTIONS
During 1995, administrative service fees of $440,969 were paid to a
partnership owned by certain officers/stockholders of the Company.
4. BUSINESS COMBINATIONS
During the year ended December 31, 1995, the Company acquired certain
assets of Stat Transcription Services, Inc., Medi-Transcriptions, LTD. and
Transcribe, Inc. in business combinations accounted for as purchases. These
companies transcribe medical records. The results of operations are included in
the accompanying financial statements since the dates of acquisition. The total
purchase price of these acquisitions was $1,086,441, including $795,653 of cash
paid and $290,788 of liabilities assumed.
In connection with the acquisition of certain businesses, the Company has
capitalized additional obligations related to covenants not to compete and
obligations based on revenues generated by the acquired businesses. These
obligations have been recorded as identifiable intangible assets and goodwill
and are amortized over 7 and 30 years, respectively. The obligations are
recorded in the year they are incurred and amortized over their remaining
respective lives, based on the original acquisition date.
Amortization expense, related principally to goodwill, for the year ended
December 31, 1995, was $289,460.
Management regularly evaluates its accounting for goodwill. Impairment of
goodwill would be recognized when events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. As of December 31,
1995, no revision to the remaining useful lives or write-down of intangible
assets has been recorded.
F-58
<PAGE>
MEDICAL RECORDS CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
5. FINANCING ARRANGEMENTS
At December 31, 1995, the Company has a line of credit agreement with a
bank, due April 1996 that bears interest at the bank's prime rate (8.5% at
December 31, 1995). Borrowings under the line are secured by accounts receivable
and equipment.
Under the terms of specific loan agreements with a bank, the Company is
required to maintain and meet certain loan covenant requirements pertaining to
such items as net worth, debt to net worth ratio, cash flow coverage and minimum
working capital levels. At December 31, 1995, the Company was in compliance with
or received bank waivers for the above mentioned covenants.
6. LEASING ARRANGEMENTS
The Company leases its facilities under operating leases which expire
through October 2000. The Company also leases equipment under capital and
operating leases which expire through September 1999. Total rental expense under
operating leases was $1,424,390 for the year ended December 31, 1995.
7. PROFIT SHARING PLAN
The Company sponsors the Medical Records Corp. Profit Sharing and Savings
Plan and Trust, which covers substantially all employees. Participating
employees may elect to contribute, on a tax-deferred basis, a portion of their
compensation, in accordance with Section 401(k) of the Internal Revenue Code.
The Company matches 20% of employee contributions for participants with less
than 10 years of service and 40% for those participants with 10 or more years of
service. Additional contributions may be made to the plan at the discretion of
the employer. Company matching contributions for the year ended December 31,
1995 were $231,778.
8. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
There are 178.45 shares of Common Stock of Medical Records Corp. and 100
shares of Common Stock of Transcription Specialists, Inc. issued and outstanding
at December 31, 1995, with a combined stated value of $1,432. During 1995, each
of the Companies issued shares of Class B Common Non-Voting Stock by way of a
stock dividend. There are 3,390.55 shares of Common Non-Voting Stock of Medical
Records Corp. and 1,900 shares of Common Non-Voting Stock of Transcription
Specialists, Inc. issued and outstanding at December 31, 1995. The total
authorized shares are 500 shares of Common Stock for both Medical Records Corp.
and Transcription Specialists, Inc., and 3,400 and 1,900 shares of Class B
Common Non-Voting Stock, respectively. Additional paid-in capital is for Medical
Records Corp. only, and at December 31, 1995, totaled $578,840, which includes
$400,000 of loans from stockholders which were contributed to capital during
1995.
F-59
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
The MRC Group, Inc.:
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of the Medical Records Corp. (the "Acquired Company"), as
described in Note 1, for the period January 1, 1996 to July 19, 1996. These
financial statements are the responsibility of the Acquired Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
The statements of operations, stockholders' equity and cash flows of the
Acquired Company were prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission as described in Note 1.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the operations and cash flows of the Acquired Company,
for the period January 1, 1996 to July 19, 1996 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Cleveland, Ohio,
May 1, 1998.
F-60
<PAGE>
MEDICAL RECORDS CORP.
STATEMENT OF OPERATIONS
FOR THE PERIOD JANUARY 1, 1996 TO JULY 19, 1996
Net revenues. $27,573,883
Cost of revenues............................................ 21,053,795
-----------
Gross profit................................................ 6,520,088
Selling, general and administrative expenses................ 5,391,300
Depreciation and amortization............................... 1,259,311
Compensation expense from stock issuance.................... 3,912,047
-----------
Operating loss.............................................. (4,042,570)
-----------
Other expense:
Interest expense............................................ (250,716)
Other....................................................... (5,527)
-----------
Total other expense......................................... (256,243)
-----------
Net loss.................................................... $(4,298,813)
===========
The accompanying notes to financial statements are an integral part of this
statement.
F-61
<PAGE>
MEDICAL RECORDS CORP.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1996 TO JULY 19, 1996
<TABLE>
<CAPTION>
NO PAR VOTING NO PAR NON-VOTING
COMMON STOCK, COMMON STOCK,
STATED AT STATED AT ADDITIONAL RETAINED TOTAL
--------------- ------------------ PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ -------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995........ 278.45 $1,432 5,290.55 $ -- $ 578,840 $ 4,502,996 $ 5,083,268
Capital contributions............. -- -- -- -- 1,250,000 -- 1,250,000
Issuance of shares, including
compensation expense from stock
issuance (Note 2)............... -- -- 916.00 -- 3,912,047 -- 3,912,047
Stockholders' distributions....... -- -- -- -- -- (1,225,898) (1,225,898)
Net loss.......................... -- -- -- -- -- (4,298,813) (4,298,813)
------ ------ -------- ------- ---------- ----------- -----------
Balance, July 19, 1996............ 278.45 $1,432 6,206.55 $ -- $5,740,887 $(1,021,715) $ 4,720,604
====== ====== ======== ======= ========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-62
<PAGE>
MEDICAL RECORDS CORP.
STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1996 TO JULY 19, 1996
Cash flows from operating activities:
Net loss.................................................. $(4,298,813)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization.......................... 1,259,311
Compensation expense for stock issuance................ 3,912,047
Changes in operating assets and liabilities:
Trade accounts receivable........................... (778,768)
Prepaid expenses.................................... (123,661)
Other assets........................................ (1,915,350)
Accounts payable.................................... 1,460,133
Accrued and other liabilities....................... 953,001
-----------
Total adjustments................................ 4,766,713
-----------
Net cash from operating activities............... 467,900
-----------
Cash flows from investing activities:
Capital expenditures...................................... (310,451)
-----------
Net cash from investing activities............... (310,451)
-----------
Cash flows from financing activities:
Repayments of long-term debt, net......................... (422,626)
Stockholders' distributions............................... (1,225,898)
Capital contributions..................................... 1,250,000
-----------
Net cash from financing activities............... (398,524)
-----------
Net change in cash and cash equivalents..................... (241,075)
Cash and cash equivalents, beginning of year................ 241,075
-----------
Cash and cash equivalents, end of year...................... $ --
===========
Supplemental cash flow information:
Cash paid for interest.................................... $ 257,211
===========
Cash paid for taxes....................................... $ --
===========
Supplemental statement of non-cash investing and financing
activities: The Acquired Company entered into equipment
lease obligations totaling $560,872, which were accounted
for as capital leases.
The accompanying notes to financial statements are an integral part of this
statement.
F-63
<PAGE>
MEDICAL RECORDS CORP.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD JANUARY 1, 1996 TO JULY 19, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Medical Records Corp., an Ohio corporation, transcribes medical records for
hospitals throughout the United States.
Organization
Effective May 28, 1996, Transcription Specialists, Inc., was merged into
Medical Records Corp. Since Medical Records Corp. and Transcription Specialists,
Inc. shared common ownership, the merger of these entities was accounted for as
a related party pooling-of-interests. The accompanying financial statements
include the results of both entities.
Effective July 19, 1996, all of the outstanding stock of Medical Records
Corp. (the "Acquired Company") was acquired by The MRC Group, Inc. (formerly
MEDIFAX, Inc.) for a total purchase price of approximately $27,700,000.
Basis of Presentation
The accompanying statements of operations, stockholders' equity and cash
flows are presented to comply with the requirements under Rule 3-05 of
Securities and Exchange Commission Regulation S-X.
Depreciation and Amortization
Depreciation and amortization of property and equipment, including assets
held under capital leases, are provided by the use of accelerated and
straight-line methods over the estimated useful lives of the assets as follows:
Equipment............................................ five years
Equipment held under capital leases................. three years
Computer software........................... three to five years
Furniture and fixtures.............................. seven years
Automobiles.......................................... five years
Depreciation expense for the period January 1, 1996 to July 19, 1996 was
$1,030,138.
Goodwill and Other Intangibles
The Acquired Company has capitalized certain costs associated with various
acquisitions including goodwill and non-compete agreements. Management regularly
evaluates its accounting for goodwill and other intangible assets. Impairment of
goodwill and other intangible assets would be recognized when events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. As of July 19, 1996, no revision to the remaining useful lives or
write-down of intangible assets has been recorded.
Goodwill is being amortized on the straight-line method over 30 years.
Other intangible assets are being amortized over the seven year life of the
non-compete agreements. Amortization expense for the period of January 1, 1996
to July 19, 1996 was $229,173.
F-64
<PAGE>
MEDICAL RECORDS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD JANUARY 1, 1996 TO JULY 19, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Income Taxes
The Acquired Company, with the consent of their stockholders, elected under
the Internal Revenue Code to be taxed as an S Corporation. In lieu of
corporation income and franchise taxes, the stockholders of an S Corporation are
taxed on their proportionate share of the Acquired Company's taxable income.
Therefore, no provision or liability for federal or state income taxes has been
included in these financial statements.
Revenue Recognition
Fees for transcription-related services are based on contract rates, and
revenue is recognized upon the rendering of services.
Research and Development Costs
Research and development costs are expensed as incurred. There were no
research and development costs during the period January 1, 1996 to July 19,
1996.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
reporting period. Since actual results could differ from those estimates,
revisions to estimates are made as better information becomes available.
2. RELATED PARTY TRANSACTIONS
Administrative service fees of $244,350 were paid to a partnership owned by
certain officers and shareholders of the Acquired Company. These fees are
included in other operating expenses in the accompanying statement of
operations.
Stock compensation expense of $3,912,047 was recognized in 1996 for the
issuance of 916 shares of non-voting common stock to several employees for past
services. These shares were issued at no cost to these employees. The offset to
the charge was recorded as additional paid-in capital.
A special cash bonus in the amount of $350,000 was paid in 1996 to a
director and the expense is included as a part of other operating expenses in
the accompanying statement of operations.
3. COMMITMENTS AND CONTINGENCIES
The Acquired Company entered into various non-compete and consulting
agreements with stockholders of its acquired companies. The following is a
summary of these agreements:
Non-Competition Agreements
The Acquired Company has entered into non-competition agreements with
former stockholders of acquired entities for terms ending October 1997 through
July 2000. These costs are being amortized on a straight-line basis over the
life of the agreements and are included in amortization expense.
F-65
<PAGE>
MEDICAL RECORDS CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD JANUARY 1, 1996 TO JULY 19, 1996
3. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Consulting Fees
The Acquired Company has entered into consulting agreements with former
stockholders of acquired entities for terms ending November 1996 through
February 2000. Expense is charged in the year services are rendered. Total costs
for the period January 1, 1996 to July 19, 1996 was $143,818.
4. LEASING ARRANGEMENTS
The Acquired Company leases certain of its facilities under operating
leases, which expire through October 2000. The Acquired Company also leases
certain equipment under capital and operating leases, which expire through
September 1999.
Total rental expense under operating leases was $1,044,667 for the period
January 1, 1996 to July 19, 1996.
5. PROFIT SHARING PLAN
The Acquired Company sponsors the Medical Records Corp. Profit Sharing and
Savings Plan and Trust, which covers substantially all employees. Participating
employees may elect to contribute, on a tax-deferred basis, a portion of their
compensation, in accordance with Section 401(k) of the Internal Revenue Code.
The Company matches 20% of employee contributions for participants with less
than 10 years of service and 40% for those participants with 10 or more years of
service. Additional contributions may be made to the plan at the discretion of
the employer. Total matching contributions for the period January 1, 1996 to
July 19, 1996 were $144,127.
F-66
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
<PAGE>
Annex A
================================================================================
AGREEMENT AND PLAN OF MERGER
AMONG
MERCURY ACQUISITION CORP.,
MEDQUIST INC.
AND
THE MRC GROUP, INC.
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AGREEMENT AND PLAN OF MERGER..........................................................................1
BACKGROUND............................................................................................1
ARTICLE 1
DEFINED TERMS................................................................................2
1.1. Certain Defined Terms...............................................................2
ARTICLE 2
PLAN OF MERGER...............................................................................7
2.1. The Merger..........................................................................7
2.2. Effective Time......................................................................7
2.3. Effect of Merger; Officers and Directors............................................7
2.4. Conversion of Capital Stock.........................................................7
2.5 Exchange of Certificates............................................................9
2.6. Options Conversion.................................................................10
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF MRC......................................................................................11
3.1. Organization and Good Standing.....................................................11
3.2. Power and Authority................................................................12
3.3. Consents and Approvals; No Violations..............................................12
3.4. Capitalization.....................................................................13
3.5. Financial Statements; Reports......................................................13
3.6. No Undisclosed Liabilities.........................................................13
3.7. Absence of Certain Changes.........................................................14
3.8. No Default.........................................................................14
3.9. Litigation; Compliance with Laws; Permits..........................................14
3.10. Intellectual Property..............................................................15
3.11. Contracts..........................................................................15
3.12. Employee and Management Agreements.................................................15
3.13. Taxes..............................................................................15
3.14. Employee Benefit Matters...........................................................16
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
3.15. Labor Relations....................................................................17
3.16. Brokers or Finders.................................................................18
3.17. Insurance..........................................................................18
3.18. Bank Accounts......................................................................18
3.19. Real Property......................................................................18
3.20. Accounts Receivable................................................................19
3.21. Loans to Officers, Employees and Others............................................19
3.22. Accounting Matters.................................................................19
3.23. Registration Statement.............................................................19
3.24. Statements True and Correct........................................................19
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF MEDQUIST AND SUB..........................................20
4.1. Organization and Good Standing.....................................................20
4.2. Power and Authority................................................................20
4.3. Consents and Approvals; No Violations..............................................20
4.4. Validity of Shares to be Issued....................................................21
4.5. Capitalization of MedQuist........................................................21
4.6. Financial Statements; Reports......................................................21
4.7. Brokers or Finders.................................................................22
4.8. No Undisclosed Liabilities.........................................................22
4.9. Absence of Certain Changes.........................................................22
4.10. No Default.........................................................................22
4.11. Litigation; Compliance with Laws; Permits..........................................23
4.12 Taxes..............................................................................23
4.13. Labor Relations....................................................................24
4.14. Accounting Matters.................................................................24
4.15. SEC Documents......................................................................24
4.16. Registration Statement.............................................................24
4.17 Statements True and Correct........................................................25
ARTICLE 5
COVENANTS...................................................................................25
5.1 Mutual Covenants...................................................................25
5.2 Covenants of MRC...................................................................26
5.3. Covenants of MedQuist..............................................................28
ARTICLE 6
CONDITIONS PRECEDENT TO THE CLOSING.........................................................30
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
6.1 Mutual Conditions..................................................................30
6.2. Conditions Precedent to MedQuist's and Sub's Obligation in Respect of the
Closing............................................................................31
6.3. Conditions Precedent to MRC's Obligation in Respect of the Closing.................32
ARTICLE 7
TERMINATION OF AGREEMENT....................................................................33
7.1 Termination........................................................................33
7.2 Effect of Termination..............................................................34
7.3. Expenses; Termination Fees.........................................................35
ARTICLE 8
GENERAL.....................................................................................35
8.1. Entire Agreement; Amendments.......................................................35
8.2. Headings...........................................................................35
8.3. Gender; Number.....................................................................35
8.4. Exhibits and Schedules.............................................................35
8.5. Severability.......................................................................36
8.6. Notices............................................................................36
8.7 Options............................................................................37
8.8. Waiver.............................................................................37
8.9. Assignment.........................................................................37
8.10. Successors and Assigns.............................................................38
8.11. Governing Law......................................................................38
8.12. No Benefit to Others...............................................................38
8.13 Survival of Representations and Warranties.........................................38
8.14 Counterparts.......................................................................38
</TABLE>
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger ("Agreement") is made on September
18, 1998, by and among MedQuist Inc., a New Jersey corporation ("MedQuist"),
Mercury Acquisition Corp.,a Missouri corporation and a wholly-owned subsidiary
of MedQuist ("Sub") and The MRC Group, Inc., a Missouri corporation ("MRC").
BACKGROUND
MedQuist desires to acquire the medical records transcription business
operated by MRC and Medical Records Corp. through the merger of Sub with and
into MRC, with MRC as the surviving corporation (the "Merger") pursuant to which
each share of MRC Common Stock (as hereinafter defined) and each share of MRC
Preferred Stock (as hereafter defined) outstanding at the Effective Time (as
hereinafter defined) will be converted into the right to receive shares of
MedQuist Common Stock (as hereinafter defined) as more fully provided in this
Agreement.
The parties intend that the Merger constitute a tax-free
"reorganization" within the meaning of Section 368(a)(1)(A) of the Internal
Revenue Code of 1986, as amended (the "Code") by reason of Section 368(a)(2)(E)
thereof.
The parties intend that the Merger be accounted for as a
pooling-of-interests for financial reporting purposes.
The respective Boards of Directors of MRC, MedQuist and Sub have
approved and adopted this Agreement, as a plan of reorganization within the
provisions of Section 368 of the Code, and as being in the best interests of
MRC, MedQuist and Sub respectively and their respective stockholders.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises, covenants, representations, warranties, and agreements herein
contained, and intending to be legally bound, the parties hereby agree as
follows:
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ARTICLE 1
DEFINED TERMS
1.1. Certain Defined Terms. As used in this Agreement, the following
terms will have the meanings given to them below:
"Act" will mean the Securities Act of 1933, as amended.
"Action" will mean any and all actions, suits, investigations,
proceedings, demands, assessments, audits, judgments and claims (including
employment-related claims) relating to a Person.
"Assets" will mean all of the assets of MRC or Medical Records
Corp. or MedQuist or MedQuist's subsidiaries, as the case may be, whether real,
personal or mixed, owned or leased as of the date of this Agreement and such
other assets acquired after the date of this Agreement and on or prior to the
Closing Date.
"Auditor" will mean Arthur Andersen LLP.
"Benefit Plans" will have the meaning given to it in Section
3.14(a) of this Agreement.
"Business Day" will mean every day of the week excluding
Saturdays, Sundays and federal holidays.
"Closing" will have the meaning given to it in Section 2.2 of
this Agreement.
"Closing Date" will mean the date on which the Closing is
scheduled to occur.
"Code" will have the meaning given to it in the Background
section of this Agreement.
"Common Stock Exchange Ratio" will have the meaning given to
it in Section 2.4(b).
"Contracts" will mean all contracts, agreements, arrangements,
commitments, purchase orders, sales orders and understandings, whether written
or oral, to which MRC or Medical Records Corp. or MedQuist or MedQuist's
subsidiaries, as the case may be, is a party or by which any of its respective
properties or Assets may be bound.
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"Creditor's Rights Laws" will have the meaning given to it in
Section 3.2 of this Agreement.
"Damages" will mean any and all damages, losses, obligations,
deficiencies, liabilities, claims, encumbrances, penalties, costs, and expenses,
including, without limitation, reasonable attorneys' fees and disbursements and
expert and consulting fees, costs and expenses.
"Dissenting MRC Shares" will have the meaning given to it in
Section 2.4(i) of this Agreement.
"Dissenting Stockholder" will have the meaning given to it in
Section 2.4(i) of this Agreement.
"Effective Time" will have the meaning given to it in Section
2.2 of this Agreement.
"Encumbrance" will mean any claim, mortgage, assignment,
conditional sale, lease, easement, consignment, bailment, contingent interest,
pledge, lien, option, charge, security interest, preemptive right, right of
first refusal, encumbrance or other restrictions of any kind or nature
whatsoever.
"ERISA" will mean the Employee Retirement Income Security Act
of 1974, as amended.
"ERISA Affiliate" will mean any entity, trade or business that
is a member of a group described in Section 414(b), (c), (m) or (o) of the Code
or Section 4001(b)(1) of ERISA that includes MRC or that is a member of the same
"controlled group" as MRC pursuant to Section 4001(a)(14) of ERISA.
"Exchange Agent" will have the meaning given to it in Section
2.5(a) of this Agreement.
"Exchange Fund" will have the meaning given to it in Section
2.5(a) of this Agreement.
"Exercise Price" will mean the amount due from an option
holder upon the exercise of a MRC Option.
"Financial Statements" will have the meaning given to it in
Section 3.5 of this Agreement.
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"GAAP" will mean generally accepted accounting principles.
"Governmental Entity" will mean any federal, state or local
department, official, commission, authority, board, bureau, agency or other
public body, domestic or foreign.
"HSR Act" will mean the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Intellectual Property" will mean all trademarks, trade names,
assumed names, service marks, logos, patents, patent rights, copyrights,
drawings, trade secrets, technology, know-how and processes, applications of or
relating to any of the foregoing or any other intellectual property necessary in
the conduct of MRC's or Medical Records Corp.'s business in the manner conducted
at or prior to the Closing.
"Material Adverse Effect" will mean a material adverse effect
on the business, operations or financial condition of MRC or MedQuist and their
respective subsidiaries, as the case may be, taken as a whole.
"Material Contract" will mean any Contract that would have to
be filed with the SEC as an exhibit pursuant to the requirements of Item 601 of
Regulation S-K.
"Medical Records Corp." means Medical Records Corp., an Ohio
corporation and a wholly-owned subsidiary of MRC.
"MRC Annual Financial Statements" will have the meaning given
to it in Section 3.5 of this Agreement.
"MRC Common Stock" will mean the common stock, $.01 par value,
of MRC.
"MRC Disclosure Schedule" will mean the disclosure schedule
delivered by MRC to MedQuist on the date hereof.
"MRC Interim Financial Statements" will have the meaning given
to it in Section 3.5 of this Agreement.
"MRC's Knowledge" will mean the actual knowledge of an
executive officer of MRC or Medical Records Corp. or such knowledge that a
prudent individual in such capacity would gain in the course of conducting a
reasonably comprehensive investigation concerning the existence of such fact or
other matters.
"MRC Options" will mean all the vested and unvested options to
purchase MRC
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Common Stock, including options granted under the terms of MRC's Amended and
Restated Employee Stock Option Plan or otherwise, as set forth in Section 3.4 of
the MRC Disclosure Schedule, that are outstanding at the Effective Time, except
the option granted to MedQuist pursuant to the Stock Option Agreement attached
hereto as Exhibit E.
"MRC Preferred Stock" will mean Series IV preferred stock,
$1.00 par value, of MRC, Series V preferred stock, $1.00 par value, of MRC and
Series VI preferred stock, $1.00 par value, of MRC.
"Merger" will have the meaning given to it in the Background
section of this Agreement.
"MedQuist Annual Financial Statements" will have the meaning
given to it in Section 4.6 of this Agreement.
"MedQuist Common Stock" will mean the common stock, no par
value, of MedQuist.
"MedQuist Disclosure Schedule" means the disclosure schedule
of MedQuist and Sub delivered to MRC on the date hereof.
"MedQuist Financial Statements" will have the meaning given to
it in Section 4.6 of this Agreement.
"MedQuist Interim Financial Statements" will have the meaning
given to it in Section 4.6 of this Agreement.
"MedQuist Option" will have the meaning given to it in Section
2.6 of this Agreement.
"MedQuist SEC Documents" will have the meaning given to it in
Section 4.15 of this Agreement.
"MedQuist's Knowledge" will mean the actual knowledge of an
executive officer of MedQuist or any of its subsidiaries or such knowledge that
a prudent individual in such capacity would gain in the course of conducting a
reasonably comprehensive investigation concerning the existence of such fact or
other matters.
"Permits" will mean all surety bonds, permits, licenses,
zoning variances, approvals, exemptions, and other authorizations for the
operation of the businesses of MRC or Medical Records Corp. or MedQuist or Sub,
as the case may be, as presently operated.
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"Person" will mean any natural person, corporation,
partnership, unincorporated association, trust, Governmental Entity, joint
venture or trade group, or any individual, entity or group that is a part of, or
associated with, any of the foregoing.
"Possible Transaction" will have the meaning given to it in
Section 5.2(d) of this Agreement.
"Registration Statement" will mean the registration statement
filed by MedQuist on Form S-4 to register the MedQuist Common Stock to be issued
to the Stockholders pursuant to the Merger.
"Representatives" will have the meaning given to it in Section
5.2(d).
"SEC" will mean the U.S. Securities and Exchange Commission.
"Securities Laws" will mean the Act and any federal or state
securities laws, rules and regulations.
"Series IV Preferred Exchange Ratio" will have the meaning
given to it in Section 2.4(c).
"Series V Preferred Exchange Ratio" will have the meaning
given to it in Section 2.4(d).
"Series VI Preferred Exchange Ratio" will have the meaning
given to it in Section 2.4(e).
"Stockholders" will mean all of the holders of record of MRC
Common Stock and MRC Preferred Stock.
"Subsidiaries" or "Subsidiary", whether or not used as a
capitalized term, will mean the direct or indirect subsidiaries of an entity.
"Surviving Corporation" will have the meaning given it in
Section 2.1 of this Agreement.
"Taxes" will mean all taxes, fees, levies, duties, charges or
other like assessments or payment obligations including, without limitation,
income, withholding, gross receipts, excise, real or personal property, asset,
sales, use, license, payroll, unemployment, disability, workers' compensation,
transaction, capital, net worth and franchise taxes imposed by or payable to any
federal, state, county, local or foreign government, taxing authority,
subdivision or agency thereof,
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including interest, penalties, additions to tax or additional amounts thereto.
"Tax Return" will mean any report, return, declaration or
other information required to be supplied to a taxing authority in connection
with Taxes.
"Value" will mean the market value of a single share of
MedQuist Common Stock as determined by taking the average of the closing price
of a share of MedQuist Common Stock as reported on NASDAQ, as reported by The
Wall Street Journal, for the 10 trading days preceding the second Business Day
prior to the Closing Date.
ARTICLE 2
PLAN OF MERGER
2.1. The Merger. Subject to the terms and conditions of this
Agreement, and in accordance with the provisions of Missouri law, Sub shall be
merged with and into MRC as soon as practicable following the satisfaction or
waiver of the conditions set forth in Article 6 of this Agreement. As of the
Effective Time, the separate corporate existence of Sub shall cease and MRC
shall continue as the surviving corporation under and pursuant to the laws of
the State of Missouri under the name The MRC Group, Inc. (the "Surviving
Corporation").
2.2. Effective Time. The Merger shall be consummated by filing with
the Secretary of State of Missouri articles of merger in such form as is
required by and executed in accordance with Missouri law. The Merger shall
become effective (the "Effective Time") when a certificate of merger has been
issued by the Secretary of State of Missouri. Prior to the filing referred to in
this Section, a closing (the "Closing") shall be held at the offices of Blank
Rome Comisky & McCauley LLP, A Pennsylvania LLP, 210 Lake Drive East, Suite 200,
Cherry Hill, New Jersey, 08002, at 10:00 a.m. on a date (the "Closing Date")
specified by the parties which shall be no later than the second Business Day
following the date on which all conditions set forth in Article 6 of this
Agreement have been satisfied or waived, unless another time, date or place is
agreed to in writing by the parties.
2.3. Effect of Merger; Officers and Directors. The Merger shall have
the effects set forth in Section 351.450 of the General and Business Corporation
Law of Missouri. The articles of merger shall provide that at the Effective
Time, the Articles of Incorporation and Bylaws of Sub, as in effect immediately
prior to the Effective Time, shall be the Articles of Incorporation and Bylaws
of the Surviving Corporation, in each case until amended in accordance with
applicable law. The articles of merger shall provide that from and after the
Effective Time, the persons serving as
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the directors and officers of Sub immediately prior to the Effective Time shall
be the directors and officers of the Surviving Corporation, in each case until
their respective successors are duly elected and qualified.
2.4. Conversion of Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of MedQuist, Sub, MRC or the
Stockholders:
(a) Each share of common stock, $.01 par value, of Sub shall
be converted into one share of common stock of the Surviving Corporation, which
shall thereafter constitute all of the issued and outstanding capital stock of
the Surviving Corporation.
(b) Each full and fractional share of MRC Common Stock issued
and outstanding immediately prior to the Effective Time shall be converted into
and represent a number of shares of MedQuist Common Stock equal to such number
of full and fractional shares of MRC Common Stock multiplied by the Common Stock
Exchange Ratio. The "Common Stock Exchange Ratio" is equal to (i) 0.5163 if the
Value is equal to or greater than $16.28; and (ii) $8.41 divided by the Value if
the Value is below $16.28.
(c) Each full or fractional share of Series IV Preferred Stock
of MRC issued and outstanding immediately prior to the Effective Time shall be
converted into and represent a number of shares of MedQuist Common Stock equal
to such number of full and fractional shares of Series IV Preferred Stock
multiplied by the Series IV Preferred Exchange Ratio. The "Series IV Preferred
Exchange Ratio" is equal to (i) 34.2376 if the Value is equal to or greater than
$16.28; and (ii) $557.70 divided by the Value if the Value is below $16.28.
(d) Each full or fractional share of Series V Preferred Stock
of MRC issued and outstanding immediately prior to the Effective Time shall be
converted into and represent a number of shares of MedQuist Common Stock equal
to such number of full and fractional shares of Series V Preferred Stock
multiplied by the Series V Preferred Stock Ratio. The "Series V Preferred Stock
Ratio" is equal to (i) 46.5619 if the Value is equal to or greater than $16.28;
and (ii) $758.45 divided by the Value if the Value is below $16.28.
(e) Each full or fractional share of Series VI Preferred Stock
of MRC issued and outstanding immediately prior to the Effective Time shall be
converted into and represent a number of shares of MedQuist Common Stock equal
to such number of full and fractional shares of Series VI Preferred Stock
multiplied the Series VI Preferred Exchange Ratio. The "Series VI Preferred
Exchange Ratio" is equal to (i) 9.5476 if the Value is equal to or greater than
$16.28; and (ii) $155.52 divided by the Value if the Value is below $16.28.
(f) No certificates for fractional shares of MedQuist Common
Stock shall be
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<PAGE>
issued as a result of the conversions provided for in Sections 2.4(b), (c), (d)
and (e). To the extent that an outstanding share of MRC Common Stock or MRC
Preferred Stock (or fraction thereof) would otherwise have become a fractional
share of MedQuist Common Stock, the holder thereof, upon presentation of such
fractional interest represented by an appropriate certificate for MRC Common
Stock or MRC Preferred Stock to the Exchange Agent pursuant to Section 2.5 will
be entitled to receive a cash payment therefor in an amount equal to the Value
multiplied by such fractional interest. Such payment with respect to fractional
shares is merely intended to provide a mechanical rounding off of, and is not
separately bargained for, consideration. If more than one certificate (whether
representing MRC Common Stock or MRC Preferred Stock) shall be surrendered for
the account of the same holder, the number of shares of MedQuist Common Stock
for which certificates have been surrendered shall be computed on the basis of
the aggregate number of shares represented by the certificates so surrendered.
(g) Each share of capital stock of MRC held in treasury of MRC
shall be canceled and retired and no payment shall be made in respect thereof.
(h) If, prior to the Effective Time, MedQuist effects a stock
dividend or other distribution payable in shares of MedQuist Common Stock or
securities convertible into shares of MedQuist Common Stock, or effects a stock
split, reclassification, combination or other change with respect to shares of
MedQuist Common Stock, the number of shares of MedQuist Common Stock set forth
in Section 2.4 into which shares of MRC Common Stock and MRC Preferred Stock
shall be converted at the Effective Time shall be adjusted such that each
Stockholder shall be entitled to receive at the Effective Time that number of
shares of MedQuist Common Stock such Stockholder would have received had such
dividend, distribution, stock split, reclassification, combination or other
change and the record date, if any, therefor occurred immediately after the
Effective Time, in addition to those shares such Stockholder would have received
under 2.4(b), (c), (d) or (e).
(i) Notwithstanding anything in this Agreement to the
contrary, any issued and outstanding shares of MRC Common Stock or MRC Preferred
Stock ("Dissenting MRC Shares") held by a Person (a "Dissenting Stockholder")
who has validly elected to exercise his right of appraisal pursuant to Missouri
law shall not be converted in the manner provided in this Section 2.4, but shall
become the right to receive such consideration as may be determined to be due to
such Dissenting Stockholder pursuant to Missouri law. If, after the Effective
Time, such Dissenting Stockholder withdraws his demand for appraisal or fails to
perfect or otherwise loses his right of appraisal, in any case pursuant to
Missouri law, the Dissenting MRC Shares owned by such Dissenting Stockholder
shall be deemed to be canceled as of the Effective Time and become the right to
receive, in respect thereof, the consideration set forth in this Section 2.4 to
be delivered in connection with the Merger. MRC shall give MedQuist (i) prompt
notice of any demands for appraisal of shares received by MRC and (ii) the
opportunity to participate in and direct all negotiations and proceedings with
respect to any such demands.
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2.5 Exchange of Certificates.
(a) Prior to the Effective Time, MedQuist shall deposit with
American Stock Transfer & Trust Company, or such other exchange agent as may be
designated by MedQuist and is reasonably satisfactory to MRC (the "Exchange
Agent"), for the benefit of the Stockholders, for exchange in accordance with
this Section 2.5, certificates representing shares of MedQuist Common Stock and
cash in an amount reasonably expected to be paid pursuant to Section 2.4(f)
(such shares of MedQuist Common Stock and cash, together with any dividends or
distributions with respect thereto, the "Exchange Fund") issuable pursuant to
Section 2.4 in exchange for outstanding shares of MRC Common Stock and MRC
Preferred Stock.
(b) As soon as practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record a certificate or certificates
that immediately prior to the Effective Time represented outstanding shares of
MRC Common Stock or MRC Preferred Stock whose shares were converted into the
right to receive shares of MedQuist Common Stock pursuant to Section 2.4 a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to such certificates shall pass, only upon delivery of
the certificates to the Exchange Agent) and (ii) instructions for effecting the
surrender of the certificates in exchange for certificates representing shares
of MedQuist Common Stock. Upon surrender of a certificate for cancellation to
the Exchange Agent, together with a duly executed letter of transmittal, the
holder of such certificate will be entitled to receive in exchange therefor a
certificate or certificates representing that number of shares of MedQuist
Common Stock which such holder has the right to receive pursuant to Section 2.4
and the certificates so surrendered shall forthwith be canceled. In the event of
a transfer of ownership of shares of MRC Common Stock or MRC Preferred Stock
which is not registered on the transfer records of MRC, a certificate
representing the proper number of shares of MedQuist Common Stock may be issued
to such transferee if the certificate representing such shares of MRC Common
Stock or MRC Preferred Stock held by such transferee is presented to the
Exchange Agent, accompanied by all documents required to evidence and effect
such transfer and to evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 2.5, each certificate
evidencing shares of MRC Common Stock or MRC Preferred Stock will be deemed at
any time after the Effective Time to represent only the right to receive upon
surrender a certificate representing shares of MedQuist Common Stock, cash in
lieu of any fractional shares thereof as provided in Section 2.4(f) and any
dividends or distributions declared or made after the Effective Time with a
record date after the Effective Time. Notwithstanding the foregoing, upon the
request of any Stockholder, MedQuist, upon notice given three days prior to
Closing, shall make available to such requesting Stockholder at the Closing
certificates for shares of MedQuist Common Stock to be received in the Merger by
such requesting Stockholder against delivery of certificates representing shares
of MRC Common Stock or MRC Preferred Stock and a duly executed letter of
transmittal.
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(c) No dividends or other distributions declared or made after
the Effective Time with respect to shares of MedQuist Common Stock having a
record date after the Effective Time will be paid to the holder of any
unsurrendered certificate evidencing shares of MRC Common Stock or MRC Preferred
Stock, and no cash payment in lieu of fractional shares will be paid to any such
holder, in each case until such holder surrenders such certificate as provided
in this Section 2.5.
(d) All shares of MedQuist Common Stock issued upon surrender
of certificates evidencing shares of MRC Common Stock or MRC Preferred Stock in
accordance with the terms of this Agreement (including any cash paid pursuant to
Section 2.4(f)) will be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of MRC Common Stock or MRC Preferred Stock, as
the case may be, represented thereby, and no further registration of transfers
of MRC Common Stock or MRC Preferred Stock on the stock transfer books of MRC
will be made. If, after the Effective Time, certificates are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided for in this Section 2.5.
2.6. Options Conversion.
(a) At the Effective Time, each MRC Option shall be converted
automatically into an option to purchase shares of MedQuist Common Stock
("MedQuist Option") in an amount and at an exercise price determined as follows:
(i) The number of shares of MedQuist Common Stock to
be subject to the MedQuist Options issuable in exchange for, and upon
cancellation of, each MRC Option shall be equal to the product of (A) the number
of shares of MRC Common Stock issuable upon the exercise of MRC Options and (B)
the Common Stock Exchange Ratio; provided, however, that any fractional shares
of MedQuist Common Stock resulting from such multiplication shall be rounded to
the nearest whole share; and
(ii) The exercise price per share of each MedQuist
Option shall be equal to (A) the Exercise Price of the MRC Option for which the
MedQuist Option is being converted and issued in place thereof divided by (B)
the Common Stock Exchange Ratio; provided, however, that such exercise price
shall be rounded to the nearest whole cent.
The duration, vesting provisions and other terms of each MedQuist Option shall
be substantially the same as that of each MRC Option converted therefor.
(b) MedQuist shall (i) reserve for issuance the number of
shares of MedQuist Common Stock that will become subject to the MedQuist Options
pursuant to this Section and (ii) from and after the Effective Time, upon
exercise of the MedQuist Options, make available for issuance shares of MedQuist
Common Stock converted thereby, subject to the terms and conditions applicable
thereto.
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(c) MedQuist agrees to file with the SEC within fourteen
calendar days after the Closing a registration statement on Form S-8 or other
appropriate form under the Act to register shares of MedQuist Common Stock
issuable upon exercise of the MedQuist Options and use all reasonable efforts to
cause such registration statement to remain effective until the exercise or
expiration of such options.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF MRC
Except as disclosed to MedQuist and Sub in the MRC Disclosure Schedule, MRC
represents and warrants, and where applicable, covenants as provided in each
Section of this Article 3:
3.1. Organization and Good Standing. MRC is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Missouri and has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as presently conducted.
Medical Records Corp. is a corporation duly organized, validly existing and in
good standing under the laws of the State of Ohio and has all requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business as presently conducted. Each of MRC and Medical Records
Corp. is duly qualified or licensed, and in good standing to do business, in
each jurisdiction in which the property owned, leased or operated by it, or the
nature of the business conducted by it, makes such qualification or licensing
necessary, except in such jurisdictions where the failure to be so duly
qualified or licensed and in good standing would not have a Material Adverse
Effect on MRC.
3.2. Power and Authority. MRC has the requisite corporate power and
authority to execute and deliver this Agreement, to perform its obligations
under this Agreement and to consummate the transactions contemplated by this
Agreement. The Board of Directors of MRC has duly and validly authorized and
approved the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby and no other corporate
proceedings or actions on the part of MRC are necessary to authorize the
execution and delivery of this Agreement or to consummate the transactions
contemplated by this Agreement other than stockholder approval. MRC has duly and
validly executed and delivered this Agreement, which is a valid and binding
agreement of MRC enforceable against MRC in accordance with its terms,
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except as such enforcement may be limited by applicable bankruptcy, insolvency,
moratorium, or similar laws affecting the enforcement of creditors' rights
generally, or by general principles of equity (regardless of whether such
enforceability is considered in a proceeding at law or in equity) (collectively,
"Creditor's Rights Laws").
3.3. Consents and Approvals; No Violations. Assuming the filing of any
and all documents necessary to consummate the Merger, including under applicable
federal and state securities laws, and compliance with the HSR Act, no filing
with, and no permit, authorization, consent or approval of any Governmental
Entity is necessary for the consummation of the transactions contemplated by
this Agreement. The execution, delivery and performance of this Agreement will
not (i) conflict with or result in any breach of any provision of the Articles
of Incorporation or Bylaws of MRC, (ii) result in a violation or breach of, or
constitute with or without due notice or lapse of time or both a default under,
or give rise to any right of termination, cancellation or acceleration under, or
result in the forfeiture of any rights under, or create any right under, or
require the consent or approval of any Person under, any of the terms,
conditions or provisions of any Contract to which MRC or Medical Records Corp.
is a party or by which MRC or Medical Records Corp. or their respective Assets
are bound except for such violations, breaches, defaults, terminations,
cancellations, accelerations, forfeitures of any rights, creations of any
rights, or failure to obtain consents or approvals of any Person which,
individually or in the aggregate, would not have a Material Adverse Effect on
MRC, (iii) violate any order, writ, injunction, decree, statute, treaty, rule or
regulation applicable to MRC or Medical Records Corp., or any of their
properties or Assets, or (iv) result in the creation of or imposition of any
Encumbrance upon any property or Assets of MRC or Medical Records Corp..
3.4. Capitalization. Section 3.4 of the MRC Disclosure Schedule sets
forth all of the authorized capital stock and classes of common stock and
preferred stock of MRC and Medical Records Corp. and the respective ownership
interests of the Stockholders and the aggregate number of such shares owned by
the Stockholders, the identities and interest held of any other Person having an
ownership interest in MRC or Medical Records Corp. including the MRC Options and
the number of shares of MRC Common Stock required to be issued for each share of
MRC Preferred Stock upon conversion. All of the issued and outstanding shares of
MRC Common Stock and common stock of Medical Records Corp. are validly issued,
fully paid and nonassessable and are not subject to any voting agreements. Other
than the MRC Options, there are no outstanding subscriptions, options, warrants,
calls, rights, convertible securities or other agreements or commitments
(contingent or otherwise) of any character relating to the issued or unissued
MRC Common Stock, common stock of Medical Records Corp. or other capital stock
or securities of MRC or Medical Records Corp., or otherwise obligating MRC or
Medical Records Corp. to issue, transfer, register or sell any such securities.
Neither MRC nor Medical Records Corp. has a direct or indirect, legal or
beneficial interest in any corporation, partnership, trust or other entity.
Since July 31, 1996, neither MRC nor Medical Records Corp. has made any
redemptions of, or distributions with respect
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to, any of its shares of capital stock. To MRC's Knowledge, upon consummation of
the Merger, no former Stockholder will hold (as defined in the HSR Act) ten
percent (10%) or more of the outstanding voting securities of MedQuist.
3.5. Financial Statements; Reports. Section 3.5 of the MRC Disclosure
Schedule includes complete copies of (i) MRC's audited consolidated financial
statements consisting of balance sheets of MRC as of December 31, 1996 and 1997
and the related statements of income, changes in stockholders' equity and cash
flows together with related notes for the years then ended (collectively, "MRC
Annual Financial Statements"). MRC has previously delivered to MedQuist complete
copies of MRC's unaudited consolidated financial statements consisting of a
balance sheet of MRC as of the six months ended June 30, 1998 and the related
statements of income, changes in stockholders' equity, and cash flows for the
periods then ended (collectively, "MRC Interim Financial Statements"). The MRC
Annual Financial Statements and the MRC Interim Financial Statements shall
collectively be referred to as the "Financial Statements." The Financial
Statements have been prepared from the applicable books and records of MRC in
accordance with GAAP, consistently applied during the related periods. The
balance sheets contained in each of the Financial Statements fairly present, in
all material respects, the consolidated financial condition of MRC as of the
respective periods set forth therein, and each income statement, statement of
stockholders equity and statement of cash flow included in each of the Financial
Statements fairly presents, in all material respects, the consolidated results
of operations, stockholders equity and cash flows, respectively, of MRC for the
respective periods set forth therein except as described below. The Annual
Financial Statements have been audited by the Auditor and include the
unqualified opinion of such firm.
3.6. No Undisclosed Liabilities. Neither MRC nor Medical Records Corp.
has any material liabilities or obligations, absolute, accrued, fixed,
contingent, liquidated, unliquidated or otherwise, except for (i) those
reflected or reserved against (which reserves are adequate) on MRC's
consolidated unaudited June 30, 1998 balance sheet, (ii) those which are
specifically disclosed in this Agreement or in the Disclosure Schedule and (iii)
those incurred since June 30, 1998 in the ordinary course of business consistent
with past practice. To MRC's Knowledge, there is no basis for the assertion
against MRC or Medical Records Corp. of any liability of any material nature or
in any material amount not fully reflected or reserved against in MRC's
consolidated unaudited June 30, 1998 balance sheet.
3.7. Absence of Certain Changes. Since June 30, 1998, each of MRC and
Medical Records Corp. has operated in the ordinary course of business and there
has not occurred: (a) any transaction in which MRC or Medical Records Corp.
incurred any material debts, liabilities or obligations except in the ordinary
course of business, (b) any transaction in which MRC or Medical Records Corp.
discharged or satisfied any Encumbrances except in the ordinary course of
business, (c) any transaction in which MRC or Medical Records Corp. mortgaged,
pledged or subjected to Encumbrance any of its Assets, (d) any transaction in
which MRC or Medical Records Corp. sold
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or transferred any of its Assets or canceled any debts or claims, (e) any
transaction in which MRC or Medical Records Corp. suffered any extraordinary
losses or waived any rights of substantial value, (f) any material damage,
destruction or loss (whether or not covered by insurance) or any condemnation by
governmental authorities which has or may affect the business or the properties
of MRC or Medical Records Corp., (g) any declaration, setting aside or payment
of any dividend or other distribution in respect of any of the capital stock of
MRC, or any direct or indirect issuance, redemption, purchase or other
acquisition of the capital stock of MRC, (h) any increase not in the ordinary
course of business in the compensation payable or to become payable by MRC or
Medical Records Corp., or (i) any undertaking or any change in any existing
obligation of any kind of MRC or Medical Records Corp. other than in the
ordinary course of business.
3.8. No Default. Neither MRC nor Medical Records Corp. is in material
default or violation, and no event has occurred which with notice or the lapse
of time or both would constitute a material default or violation, of any
material term, condition or provision of (i) the Articles of Incorporation or
Bylaws of MRC, or (ii) any Material Contract.
3.9. Litigation; Compliance with Laws; Permits. There are no Actions
pending or to the knowledge of MRC threatened against MRC or Medical Records
Corp., which if determined adversely would be reasonably likely to have a
Material Adverse Effect on MRC. There is not and has not been any failure by MRC
or Medical Records Corp. to comply with any law, ordinance, requirement,
regulation, or order applicable to MRC or Medical Records Corp., which failure
to comply would have a Material Adverse Effect on MRC or Medical Records Corp..
There is no violation of, default with respect to, or failure to comply with any
material order, writ, injunction, judgment, or decree of any court or
Governmental Entity issued or pending against MRC or Medical Records Corp.. Each
of MRC and Medical Records Corp. has obtained all Permits for the operation of
its business as presently operated, and all such Permits are set forth on
Section 3.9 of the MRC Disclosure Schedule, except where the failure to obtain
such Permits would not have a Material Adverse Effect on MRC. Each of MRC and
Medical Records Corp. is in material compliance with all relevant Permits.
3.10. Intellectual Property. Section 3.10 of the MRC Disclosure
Schedule sets forth a list and a brief description of all of the trademark and
service mark registrations and applications, copyright registrations, and patent
registrations of MRC and Medical Records Corp.. No claim is pending or to the
knowledge of MRC or Medical Records Corp., threatened, relating to the ownership
or present or past use of the Intellectual Property. To MRC's Knowledge, the
Intellectual Property does not conflict with or infringe upon any rights of any
third party.
3.11. Contracts. Section 3.11 of the MRC Disclosure Schedule sets
forth a list of all of MRC and Medical Records Corp.'s Material Contracts.
Complete and correct copies (except for certain redactions) of all written
Material Contracts and Contracts with MRC's top 25 customers by
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revenue, including all amendments, modifications or extensions thereof, have
been previously made available to MedQuist. Each Contract to which MRC or
Medical Records Corp. is a party or by which it is bound is valid and binding
and in full force and effect except for such Contracts which, individually or in
the aggregate, would not have a Material Adverse Effect on MRC.
3.12. Employee and Management Agreements. Section 3.12 of the MRC
Disclosure Schedule sets forth a complete and correct list of all Material
Contracts relating to employment, compensation, severance, change-in-control,
consulting, indemnification, service, purchase or any other matter between or
among MRC or Medical Records Corp. and their present or former employees,
officers, directors and consultants pursuant to which MRC or Medical Records
Corp. has any continuing obligations thereunder. Complete and correct copies of
all such agreements have been made available to MedQuist.
3.13. Taxes. Each of MRC and Medical Records Corp. has duly filed, in
compliance with applicable laws, all Tax Returns required to be filed by it
prior to the date hereof, and each of MRC and Medical Records Corp. has duly
paid, caused to be paid or made adequate provision and has reserved for the
payment of all Taxes required to be paid in respect of the periods covered by
such Tax Returns and has made adequate provision for payment of all Taxes
anticipated to be payable in respect of all taxable periods since the periods
covered by such returns. Each of MRC and Medical Records Corp. has materially
complied with the requirements of all applicable laws relating to the payment
and withholding of Taxes (including, without limitation, withholding of Taxes
pursuant to Sections 1441 and 1442 of the Code) and has, within the time and in
the manner prescribed by applicable laws, withheld from employee wages and paid
over, in a timely manner, to the proper taxing or other authorities all amounts
required to be so withheld and paid over under applicable laws. No claims for
Taxes have been asserted against MRC or Medical Records Corp., and no deficiency
for any Taxes has been proposed, asserted or assessed which has not been
resolved or paid in full. No Tax Return or taxable period of MRC or Medical
Records Corp. is under examination and, neither MRC nor Medical Records Corp.
has received notice of any pending audit as of September 18, 1998. There are no
outstanding agreements or waivers extending the statutory period of limitation
applicable to any Tax Return for any period of MRC or Medical Records Corp..
There are no liens or encumbrances of any kind for Taxes upon any Assets or
properties of MRC or Medical Records Corp. other than for Taxes not yet due and
payable. Neither MRC nor Medical Records Corp. has any obligation or liability
to pay Taxes of or attributable to any other Person or entity. No issue or claim
that has not been finally resolved without further right of appeal has been
asserted for Taxes by any taxing authority in excess of $50,000 individually or
in the aggregate. Neither MRC nor Medical Records Corp. has filed any consent
pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of
the Code apply to any disposition of a subsection (f) asset owned by MRC or
Medical Records Corp.. Neither MRC nor Medical Records Corp. has made any
payments, or is obligated to make any payments, that are not or will not be
deductible under Section 280G of the Code.
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To MRC's Knowledge, neither MRC nor Medical Records Corp. has taken or
failed to take any action and to MRC's Knowledge, there is no state of affairs
with respect to the activities or operations of MRC or Medical Records Corp.,
that would prevent the Merger from constituting a transaction qualifying as a
tax-free reorganization under Section 368(a) of the Code.
3.14. Employee Benefit Matters.
(a) Section 3.14(a) of the MRC Disclosure Schedule sets forth
a complete list of all plans, programs or arrangements that provide employee
benefits or fringe benefits that are or, at any time during the preceding five
years, have been maintained by MRC, Medical Records Corp. or their ERISA
Affiliates or that currently are or, at any time during the preceding five
years, have been entitled to receive contributions from MRC, Medical Records
Corp. or their ERISA Affiliates (including health, life insurance and other
benefit plans maintained for retirees), including without limitation (a) all
plans, programs and arrangements providing any form of deferred compensation,
pension, profit sharing, stock option, stock purchase, savings, thrift, group
insurance, accident, sickness, medical, dental or disability benefits; (b) all
vacation and severance pay; (c) all incentive compensation, consulting and bonus
agreements; and (d) all benefits relating to the use of Company vehicles;
whether or not such plans, programs and arrangements constitute "employee
benefit plans" within the meaning of Section 3(3) of ERISA, and whether or not
such plans, programs and arrangements are in the nature of formal or informal
understandings, and whether or not pursuant to any collective bargaining
arrangements. Said plans, programs and arrangements sometimes are referred to
collectively in this Agreement as the "Benefit Plans." Neither MRC, Medical
Records Corp., nor any of their ERISA Affiliates is or has been, at any time
during the preceding five years, a member, whether or not incorporated, under
common control (within the meaning of Section 414(c) of the Code) or is a member
of an affiliated service group (within the meaning of Section 414(m) of the
Code) which includes a trade or business that is, or has ever been, a party to
any employee pension benefit plan or employee welfare benefit plan (both terms
as defined in ERISA) that is a "multiemployer plan" (within the meaning of
Section 3(37) of ERISA).
(b) Each Benefit Plan has complied in all material respects
and has been administered in all material respects in accordance with the
applicable provisions of ERISA and the Code. To MRC's Knowledge, no facts or
circumstances exist which could result in any material liability against MRC or
Medical Records Corp., or any Benefit Plan, or any fiduciary of a Benefit Plan
under any provision of ERISA, the Code or any other applicable law. Except for
benefits claims asserted and administered in the normal course, there has not
been asserted by any Benefit Plan participant, beneficiary or other person any
facts or circumstances which could result in any liability under any Benefit
Plan or any fiduciary of a Benefit Plan under any provision of ERISA, the Code
or any other applicable law.
(c) If permitted and/or required by applicable Law, MRC,
Medical Records Corp.
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or their ERISA Affiliates have submitted all Benefit Plans in good faith to meet
the applicable requirements of the Code to the IRS for its approval within the
time prescribed therefor under applicable federal regulations. Favorable letters
of determination of such tax-qualified status from the IRS are attached to the
MRC Disclosure Schedule. With respect to the Benefit Plans, MRC, Medical Records
Corp. or their ERISA Affiliates have made, on or prior to the Closing Date, all
payments required to be made by them on or prior to the Closing Date and will
have accrued (in accordance with GAAP consistently applied) as of the Closing
Date all payments due but not yet payable as of the Closing Date, so there will
not have been, nor will there be, any Accumulated Funding Deficiencies (as
defined in ERISA or the Code) or waivers of such deficiencies. MRC has furnished
MedQuist with a true and correct copy of the most current Form 5500 and any
other form or filing submitted to any Governmental Entity with regard to any of
the Benefit Plans and the most current actuarial report with regard to any of
the Benefit Plans. There would be no liability of MRC, Medical Records Corp. or
their ERISA Affiliates under Title IV of ERISA if any of the Benefit Plans were
terminated as of the Closing Date. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby (without
taking into account any reductions in force following such transactions) will
(i) result in any payment (including, without limitation, severance,
unemployment compensation, golden parachute or otherwise) becoming due from MRC,
Medical Records Corp. or their ERISA Affiliates under any of the Benefit Plans,
(ii) increase any benefits otherwise payable under any of the Benefit Plans, or
(iii) result in the acceleration of the time of payment or vesting of any such
benefits to any extent. No event has occurred which will result in material
liability to MRC, Medical Records Corp. or their ERISA Affiliates in connection
with any Benefit Plan established, maintained, contributed to or to which there
has been an obligation to contribute (currently or within the last five years)
by MRC, Medical Records Corp. or any ERISA Affiliate.
(d) Neither MRC nor Medical Records Corp. has any severance
agreements or arrangements, or any formal or informal severance plan or
practice, pursuant to which any liability for severance payments to employees of
MRC or Medical Records Corp. may arise, regardless of whether separation from
service occurs before, at the time of, or after the Closing Date.
3.15. Labor Relations. Neither MRC nor Medical Records Corp. is a
party to any Contract with any labor union and, to MRC's Knowledge, neither is
experiencing, the subject of, or threatened by, any union organization campaign
or any strike, slowdown, picketing, work stoppage, or other labor disturbance by
any labor union or group of employees. For the past three years neither MRC nor
Medical Records Corp., to MRC's Knowledge, has had (a) any unfair labor practice
charge or complaint or other proceeding pending or threatened against MRC or
Medical Records Corp. before the National Labor Relations Board or (b) any
material arbitrations, grievances, suits or administrative proceedings before
any Government Entity (excluding, however, charges made to the Equal Employment
Opportunity Commission previously resolved without further right of appeal)
relating to labor or employment matters involving any employees of MRC or
Medical Records Corp.
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3.16. Brokers or Finders. No agent, broker, investment banker,
financial advisor or other firm or Person is or will be entitled to any brokers'
or finders' fee or any other commission or similar fee from MRC or Medical
Records Corp. in connection with this Agreement and the transactions
contemplated by this Agreement other than that due to BT Alex. Brown
Incorporated for its investment advisory services.
3.17. Insurance. Section 3.17 of the MRC Disclosure Schedule sets
forth a complete and correct schedule of all policies of fire, liability, and
other forms of insurance, excluding the Benefit Plans, pursuant to which MRC or
Medical Records Corp. or any of its Assets are insured (whether or not held by
MRC or Medical Records Corp.) or with respect to which MRC or Medical Records
Corp. directly or indirectly pays all or part of the premium including the
identity of the carrier, the policy number, the amounts and types of coverage,
the premium and the expiration date of each such policy. All of the Assets of
MRC and Medical Records Corp. are insured against fire and other casualty under
the policies and in the amounts and types of coverage set forth in Section 3.17
of the MRC Disclosure Schedule, and such policies are outstanding and duly in
force and the premiums thereon fully paid. No notice of cancellation or
non-renewal with respect to any insurance policy has been received by MRC or
Medical Records Corp.. The insurance policies are sufficient for compliance with
all statutes, laws, ordinances, regulations, orders, rules or other requirements
of any Governmental Entity, including, but not limited to, those covering
safety, health, transportation, record keeping, zoning, employment, wage and
hour and price and wage control matters. There are no pending claims against
such insurance policies. There is no material default by MRC or Medical Records
Corp. with respect to any provision contained in any insurance policy. Neither
MRC nor Medical Records Corp. has received any notice from its insurance carrier
disclaiming coverage as to any of the foregoing.
3.18. Bank Accounts. Section 3.18 of the MRC Disclosure Schedule lists
the names and addresses of every bank and other financial institution in which
MRC or Medical Records Corp. maintains an account (whether checking, savings or
otherwise), lock box or safe deposit box, and the account numbers and names of
persons having signing authority or other access thereto.
3.19. Real Property. Neither MRC nor Medical Records Corp. owns any
real property. Section 3.19 of the MRC Disclosure Schedule is a detailed list of
all real property leased by MRC and Medical Records Corp. showing location,
rental cost, term and landlord. Neither MRC nor Medical Records Corp. is in
material violation of any such lease or has received any notice of violation
from any landlord or Governmental Entity with respect to such real property.
3.20. Accounts Receivable. All of the accounts and notes receivable of
MRC and Medical Records Corp. as set forth on MRC's consolidated unaudited June
30, 1998 balance sheet or arising
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since the date thereof (a) are valid claims for monies due; (b) have arisen in
the ordinary course of business; and (c) except to the extent of any allowances
with respect thereto set forth on such balance sheet, are not subject to valid
claims, contests, defenses, set-offs or counterclaims and have been (or will be
in the ordinary course of business) billed. A correct and complete list of all
accounts receivable as of June 30, 1998 have previously been provided to
MedQuist. The allowance for doubtful accounts reflected on MRC's consolidated
unaudited June 30, 1998 balance sheet has been determined in accordance with
GAAP.
3.21. Loans to Officers, Employees and Others. There are no
outstanding loans made by MRC or Medical Records Corp. to any stockholder,
employee, director or officer of MRC or Medical Records Corp. or to any other
Person except for loans to all such persons not exceeding $10,000 in the
aggregate.
3.22. Accounting Matters. MRC, having consulted with its accountants,
lawyers and financial advisors, has no knowledge of any action taken or agreed
to be taken by MRC, or of any fact or circumstance, that is reasonably likely to
prevent the Merger from qualifying for pooling-of-interests accounting
treatment.
3.23. Registration Statement. None of the information provided by MRC
for inclusion in the Registration Statement, including the proxy statement
included therein, when filed and at the time the Registration Statement becomes
effective will contain any untrue statement of material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading.
3.24. Statements True and Correct. No statement made by MRC or Medical
Records Corp. in this Agreement, the MRC Disclosure Schedule or Exhibits
attached to this Agreement or any document, instrument or certificate furnished
or to be furnished by MRC or Medical Records Corp. or any director or officer of
MRC or Medical Records Corp. at Closing, contains or will contain any untrue
statement of material fact or omits or will omit to state a material fact
required to be stated herein or therein, or necessary in order to make the
statements herein or therein not misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF MEDQUIST AND SUB
Except as specifically disclosed to MRC on the MedQuist Disclosure
Schedule, MedQuist and Sub represent and warrant and, where applicable,
covenant, as provided in each Section of this Article 4:
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4.1. Organization and Good Standing. Each of MedQuist and Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the State of New Jersey and Missouri, respectively. Each subsidiary of
MedQuist is duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation. Each of MedQuist, Sub and each
subsidiary of MedQuist has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as presently
conducted. Each of MedQuist, Sub and each subsidiary of MedQuist is duly
qualified or licensed, and in good standing to do business, in each jurisdiction
in which the property owned, leased or operated by it, or the nature of the
business conducted by it, makes such qualification or licensing necessary,
except in such jurisdictions where the failure to be so duly qualified or
licensed and in good standing would not have a Material Adverse Effect on
MedQuist.
4.2. Power and Authority. Each of MedQuist and Sub has the requisite
corporate power and authority to execute and deliver this Agreement, to perform
its obligations under this Agreement and to consummate the transactions
contemplated by this Agreement. The Board of Directors of each of MedQuist and
Sub has duly and validly authorized and approved the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated by this Agreement and no other proceedings or actions on the part
of MedQuist or Sub are necessary to authorize the execution and delivery of this
Agreement or to consummate the transactions contemplated by this Agreement other
than stockholder approval. Each of MedQuist and Sub has duly and validly
executed and delivered this Agreement, which is the valid and binding agreement
of MedQuist and Sub enforceable against them in accordance with its terms,
except as such enforcement may be limited by applicable Creditor's Rights Laws.
4.3. Consents and Approvals; No Violations. Assuming the filing of any
and all documents necessary to consummate the Merger, including under applicable
federal and state securities laws, and compliance with the HSR Act, no filing
with, and no permit, authorization, consent or approval of any Governmental
Entity is necessary for the consummation of transactions contemplated by this
Agreement. The execution, delivery and performance of this Agreement will not
(i) conflict with or result in any breach of any provision of the Certificate of
Incorporation or Bylaws of MedQuist or Articles of Incorporation or Bylaws of
Sub, (ii) result in a violation or breach of, or constitute with or without due
notice or lapse of time or both a default under, or give rise to any right of
termination, cancellation or acceleration under, or result in the forfeiture of
any rights under, or create any right under, or require the consent or approval
of any Person under, any of the terms, conditions or provisions of any Contract
to which MedQuist or any subsidiary of MedQuist is a party or by which MedQuist
or any subsidiary of MedQuist or their respective Assets are bound except for
such violations, breaches, defaults, terminations, cancellations, accelerations,
forfeitures of any rights, creations of any rights, or failure to obtain
consents or approvals of any Person which, individually or in the aggregate,
would not have a Material Adverse Effect on MedQuist, or (iii) violate any
order, writ, injunction, decree, statute, treaty, rule or regulation applicable
to MedQuist or Sub, or any of
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their properties or Assets or (iv) result in the creation of or imposition of
any Encumbrance upon any property or Assets of MedQuist or Sub.
4.4. Validity of Shares to be Issued. The shares of MedQuist Common
Stock to be issued to the Stockholders in connection with the Closing have been
duly authorized and, when issued by MedQuist in accordance with the terms of
this Agreement, will be validly issued, fully paid and nonassessable.
4.5. Capitalization of MedQuist. Section 4.5 of the MedQuist
Disclosure Schedule sets forth all of the authorized capital stock and classes
of common stock and preferred stock of MedQuist. All of the issued and
outstanding shares of MedQuist Common Stock are validly issued, fully paid and
nonassessable, and are not subject to any voting agreements. There are no
outstanding subscriptions, options, warrants, calls, rights, convertible
securities or other agreements or commitments (contingent or otherwise) of any
character relating to the issued or unissued MedQuist Common Stock or other
capital stock or securities of MedQuist, or otherwise obligating MedQuist to
issue, transfer, register or sell any such securities. MedQuist has no direct or
indirect, legal or beneficial interest in any corporation, partnership, trust or
other entity. Since June 30, 1996, MedQuist has not made, and as of the Closing
Date will not have made, any redemptions of, or distributions with respect to,
any of its shares of capital stock other than in connection with stock splits.
4.6. Financial Statements; Reports. The MedQuist SEC Documents include
complete copies of MedQuist's audited consolidated financial statements
consisting of balance sheets of MedQuist as of December 31, 1995, 1996 and 1997
and the related statements of income, changes in stockholders' equity and cash
flows together with related notes for the years then ended (collectively,
"MedQuist Annual Financial Statements"), complete copies of MedQuist's unaudited
consolidated financial statements consisting of a balance sheet of MedQuist as
of the six months ended June 30, 1998 and the related statements of income,
changes in stockholders' equity, and cash flows for the period then ended
(collectively, "MedQuist Interim Financial Statements"). The MedQuist Annual
Financial Statements and the MedQuist Interim Financial Statements shall
collectively be referred to as "MedQuist Financial Statements." The MedQuist
Financial Statements have been prepared from the applicable books and records of
MedQuist in accordance with GAAP, consistently applied during the related
periods and comply in all material respects with applicable rules and
regulations of the SEC. The balance sheets contained in each of the MedQuist
Financial Statements fairly present, in all material respects, the financial
condition of MedQuist as of the respective periods set forth therein, and each
income statement, statement of shareholders equity and statement of cash flow
included in each of the MedQuist Financial Statements fairly presents, in all
material respects, the consolidated results of operations, shareholders equity
and cash flows, respectively, of MedQuist for the respective periods set forth
therein except as described below. The MedQuist Annual Financial Statements have
been audited by the Auditor and include the unqualified opinion of such firm.
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4.7. Brokers or Finders. No agent, broker, investment banker,
financial advisor or other firm or Person is or will be entitled to any brokers'
or finders' fee or any other commission or similar fee from MedQuist or Sub in
connection with this Agreement and the transactions contemplated by this
Agreement other than that due to Volpe Brown Whelan & Company for its investment
advisory services.
4.8. No Undisclosed Liabilities. None of MedQuist or any of its
subsidiaries has any material liabilities or obligations, absolute, accrued,
fixed, contingent, liquidated, unliquidated or otherwise, except for (i) those
reflected or reserved against (which reserves are adequate) on MedQuist's
consolidated unaudited June 30, 1998 balance sheet, (ii) those which are
specifically disclosed in this Agreement or in the MedQuist Disclosure Schedule,
and (iii) those incurred since June 30, 1998 in the ordinary course of business
consistent with past practice. To MedQuist's Knowledge, there is no basis for
the assertion against MedQuist or any of its subsidiaries of any liability of
any material nature or in any material amount not fully reflected or reserved
against in MedQuist's consolidated unaudited June 30, 1998 balance sheet.
4.9. Absence of Certain Changes. Since June 30, 1998, MedQuist and Sub
have operated only in the ordinary course of business and there has not
occurred: (a) any transaction in which MedQuist or any of its subsidiaries
incurred any material debts, liabilities or obligations except in the ordinary
course of business, (b) any transaction in which MedQuist or any of its
subsidiaries discharged or satisfied any Encumbrances except in the ordinary
course of business, (c) any transaction in which MedQuist or any of its
subsidiaries mortgaged, pledged or subjected to Encumbrance any of its Assets,
(d) any transaction in which MedQuist or any of its subsidiaries sold or
transferred any of its Assets or canceled any debts or claims, (e) any
transaction in which MedQuist or any of its subsidiaries suffered any
extraordinary losses or waived any rights of substantial value, (f) any material
damage, destruction or loss (whether or not covered by insurance) or any
condemnation by governmental authorities which has or may affect the business or
the properties of MedQuist or any of its subsidiaries, (g) any declaration,
setting aside or payment of any dividend or other distribution in respect of any
of the capital stock of MedQuist or any of its subsidiaries, or any direct or
indirect issuance, redemption, purchase or other acquisition of the capital
stock of MedQuist or any of its subsidiaries, (h) any increase not in the
ordinary course of business in the compensation payable or to become payable by
MedQuist or any of its subsidiaries, or (i) any undertaking or any change in any
existing obligation of any kind of MedQuist or any of its subsidiaries other
than in the ordinary course of business.
4.10. No Default. None of MedQuist or any of its subsidiaries are in
material default or violation, and no event has occurred which with notice or
the lapse of time or both would constitute a material default or violation, of
any material term, condition or provision of (i) its respective
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Certificate or Articles of Incorporation or Bylaws, or (ii) any Material
Contract.
4.11. Litigation; Compliance with Laws; Permits. There are no Actions
pending or to MedQuist's Knowledge, threatened against or related to MedQuist or
any of MedQuist's subsidiaries which if determined adversely would be reasonably
likely to have a Material Adverse Effect on MedQuist. There is not and has not
been any failure by MedQuist or any of MedQuist's subsidiaries to comply with
any law, ordinance, requirement, regulation, or order applicable to MedQuist or
any of MedQuist's subsidiaries, which failure to comply would have a Material
Adverse Effect on MedQuist or any of MedQuist's subsidiaries. There is no
violation of, default with respect to, or failure to comply with any material
order, writ, injunction, judgment, or decree of any court or Governmental
Entity, issued or pending against MedQuist or any of MedQuist's subsidiaries.
Each of MedQuist and its subsidiaries has obtained all Permits for the operation
of its business as presently operated, and all such Permits are set forth on
Section 4.11 of the Disclosure Schedule, except where the failure to obtain such
Permits would not have a Material Adverse Effect on MedQuist. MedQuist and its
subsidiaries are in material compliance with all relevant Permits and the
Permits.
4.12 Taxes. Each of MedQuist and its subsidiaries has duly filed, in
compliance with applicable laws, all Tax Returns required to be filed by it
prior to the date hereof, and each of MedQuist and its subsidiaries has duly
paid, caused to be paid or made adequate provision and has reserved for the
payment of all Taxes required to be paid in respect of the periods covered by
such Tax Returns and has made adequate provision for payment of all Taxes
anticipated to be payable in respect of all taxable periods since the periods
covered by such returns. Each of MedQuist and its subsidiaries has materially
complied with the requirements of all applicable laws relating to the payment
and withholding of Taxes (including, without limitation, withholding of Taxes
pursuant to Sections 1441 and 1442 of the Code) and has, within the time and in
the manner prescribed by applicable laws, withheld and paid over, in a timely
manner, to the proper taxing or other authorities all amounts required to be so
withheld and paid over under applicable laws. No claims for Taxes have been
asserted against MedQuist or any of its subsidiaries, and no deficiency for any
Taxes has been proposed, asserted or assessed which has not been resolved or
paid in full. No Tax Return or taxable period of MedQuist or any of its
subsidiaries is under examination and none of MedQuist or any of its
subsidiaries has received notice of any pending audit as of September 18, 1998.
There are no outstanding agreements or waivers extending the statutory period of
limitation applicable to any Tax Return for any period of MedQuist or any of its
subsidiaries. There are no liens or encumbrances of any kind for Taxes upon any
Assets or properties of MedQuist or any of its subsidiaries other than for Taxes
not yet due and payable. None of MedQuist or any of its subsidiaries has any
obligation or liability to pay Taxes of or attributable to any other Person or
entity. No issue or claim that has not been finally resolved without further
right of appeal has been asserted for Taxes by any taxing authority in excess of
$50,000 individually or in the aggregate. None of MedQuist or any of its
subsidiaries has filed any consent pursuant to Section 341(f) of the Code or
agreed to have Section 341(f)(2) of the Code apply to any disposition of a
subsection (f) asset owned by MedQuist or any of its subsidiaries.
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To the best of MedQuist's Knowledge, none of MedQuist or any of its
subsidiaries has taken or failed to take any action, and, to MedQuist's
Knowledge, there is no state of affairs with respect to the activities or
operations of MedQuist or any of its subsidiaries, that would prevent the Merger
from constituting a transaction qualifying as a tax-free reorganization under
Section 368(a) of the Code.
4.13. Labor Relations. None of MedQuist or any of its subsidiaries is
a party to any Contract with any labor union and, to MedQuist's Knowledge, none
of them is experiencing, the subject of, or threatened by, any union
organization campaign or any stroke, slowdown, picketing, work stoppage, or
other labor disturbance by any labor union or group of employees. For the past
three years none of MedQuist or any of its subsidiaries, to MedQuist's
Knowledge, has had (a) any unfair labor practice charge or complaint or other
proceeding pending or threatened against it before the National Labor Relations
Board or (b) any material arbitrations, grievances, suits or administrative
proceedings before any governmental entity (excluding, however, charges made to
the Equal Opportunity Commission previously resolved without further right of
appeal) relating to labor or employment matters involving employees of MedQuist
or any of its subsidiaries.
4.14. Accounting Matters. MedQuist and Sub, each having consulted with
their respective accountants, lawyers and financial advisors, have no knowledge
of any action taken or agreed to be taken by MedQuist or Sub, or of any fact or
circumstance, that is reasonably likely to prevent the Merger from qualifying
for pooling-of-interests accounting treatment.
4.15. SEC Documents. MedQuist has timely filed with the SEC all
reports, schedules, statements, forms and other documents required to be filed
by it pursuant to the Securities Laws. MedQuist has heretofore provided to MRC
and Medical Records Corp. or otherwise made available all reports, schedules,
forms, statements and other documents filed with the SEC since December 31, 1996
(the "MedQuist SEC Documents"). As of their respective dates, the MedQuist SEC
Documents (including, without limitation, any financial statements and schedules
included therein) complied in all material respects with the requirements of the
Securities Laws applicable to such MedQuist SEC Documents, and none of the
MedQuist SEC Documents when filed contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. There has been no material change,
financial or otherwise, in the condition of MedQuist since the date of
MedQuist's Form 10-Q for the quarter ended June 30, 1998.
4.16. Registration Statement. None of the information provided by
MedQuist for inclusion in the Registration Statement, including the prospectus
included therein relating to the shares of MedQuist Common Stock to be issued in
the Merger, when filed and at the time the Registration Statement becomes
effective will contain any untrue statement of material fact or omit to state
any
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material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading. The Registration Statement will comply as to form in all material
respects with the provisions of the Act and the rules and regulations
promulgated thereunder.
4.17 Statements True and Correct. No statement made by MedQuist or Sub
in this Agreement, the MedQuist Disclosure Schedule or Exhibits attached to this
Agreement or any document, instrument or certificate furnished or to be
furnished by MedQuist or Sub or any director or officer of MedQuist or Sub at
Closing contains or will contain any untrue statement of material fact or omits
or will omit to state a material fact required to be stated herein or therein,
or necessary in order to make the statements therein not misleading.
ARTICLE 5
COVENANTS
The parties hereto agree as follows with respect to the period from and after
the execution of this Agreement:
5.1 Mutual Covenants.
(a) General. Each of the parties shall use its reasonable
efforts to take all action and to do all things necessary, proper or advisable
to consummate the Merger and the transactions contemplated by this Agreement
(including, without limitation, using its reasonable efforts to cause the
conditions set forth in Article 6 for which they are responsible to be satisfied
as soon as reasonably practicable and to prepare, execute and deliver such
further instruments and take or cause to be taken such other and further actions
as any other party to this Agreement shall reasonably request).
(b) HSR Act. As soon as practicable, and in any event no later
than five Business Days after the date of this Agreement, each of the parties
hereto shall file any Notification and Report Forms and related material
required to be filed by it with the Federal Trade Commission and the Antitrust
Division of the United States Department of Justice under the HSR Act with
respect to the Merger, shall use its reasonable efforts to obtain an early
termination of the applicable waiting period, and shall promptly make any
further filings pursuant thereto that may be necessary, proper or advisable.
(c) Other Governmental Matters. Each of the parties shall use
its reasonable efforts to take any additional action that may be necessary,
proper or advisable in connection with any other notices to, filings with, and
authorizations, consents and approvals of any Governmental Equity that
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it may be required to give, make or obtain.
(d) Pooling-of-Interests and Tax-Free Treatment. Each of the
parties shall use its reasonable efforts to cause the Merger to (i) qualify for
pooling-of-interests accounting treatment for financial reporting purposes and
(ii) constitute a tax-free "reorganization" under Section 368(a) of the Code.
(e) Public Announcements. At all times prior to the earlier of
the Effective Time or termination of this Agreement pursuant to Article 7, MRC
and MedQuist shall consult with each other before issuing any press release with
respect to the Merger and shall not issue any such press release prior to such
consultation.
(f) Access. From and after the date of this Agreement until
the Effective Time (or termination of this Agreement), MRC and MedQuist shall
permit employees, agents and Representatives of the other to have appropriate
access at all reasonable times to the other's premises, properties, books,
records, Contracts, tax records, documents, customers and suppliers.
5.2 Covenants of MRC.
(a) Operation of Business by MRC and Medical Records Corp.
From and after the date of this Agreement to the Effective Time, except with the
consent of MedQuist or as otherwise specifically contemplated by this Agreement,
or Section 5.2 of the MRC Disclosure Schedule, MRC shall, and shall cause
Medical Records Corp.
to, conduct their business in the ordinary course and shall:
(i) not amend MRC's or Medical Records Corp.'s
Articles of Incorporation or Bylaws or Code of Regulations except as may be
necessary to carry out this Agreement, the Merger or as required by law;
(ii) not declare or pay any dividend of any kind on
or make any other distribution or payment in respect of any of the capital stock
of MRC, or repurchase or agree to repurchase any of the stock, or issue any
shares of the stock of MRC or Medical Records Corp. or grant any options or
other securities whether or not presently authorized (except for MRC Common
Stock issued upon the conversion of MRC Preferred Stock or upon the exercise of
MRC Options, or except for redemption of MRC Preferred Stock required pursuant
to the Articles of Incorporation of MRC provided that such redemption does not
adversely affect the qualification of the Merger for pooling-of-interests
accounting treatment), or change any of the characteristics of the capital stock
of MRC or Medical Records Corp. or merge or consolidate MRC or Medical Records
Corp. with any other corporation or allow MRC ro Medical Records Corp., its
Assets or any part of the business to be acquired by any Person;
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(iii) not sell, transfer, or otherwise dispose of any
Assets except in the ordinary
course of business or any other dispositions that are not, individually or in
the aggregate, material to the business of MRC and Medical Records Corp.;
(iv) not create, incur, assume, or guarantee any
indebtedness for money borrowed or create any Encumbrance on any of their
Assets, except in the ordinary course of business;
(v) maintain the Assets of MRC and Medical Records
Corp. in good operating repair, order, and condition, reasonable wear and tear
excepted, and notify MedQuist immediately upon any material loss of, damage to,
or destruction of any of the Assets of MRC and Medical Records Corp. taken as a
whole;
(vi) maintain in full force and effect the insurance
coverage of the types and in the amounts set forth in Section 3.17 of the
Disclosure Schedule and apply the proceeds received under any insurance policy
or as a result of any loss or destruction of or damage to any Assets or
operations of MRC or Medical Records Corp. to the repair or replacement of such
Assets;
(vii) use reasonable efforts to preserve MRC's and
Medical Records Corp.'s business organization intact and preserve the good will
of its customers, suppliers and others having business relations with it;
(viii) promptly advise MedQuist in writing of the
commencement of, and of any known threat to commence any Action or tax audit
against MRC or Medical Records Corp. or of the occurrence (or failure to occur)
of any fact or circumstance which may become known to MRC and Medical Records
Corp. that would cause MRC's representations or warranties to be inaccurate in
any material respect;
(ix) not materially change the titles, duties or
responsibilities of or voluntarily terminate any executive officer of MRC; and
(x) not discount or otherwise invoice or bill clients
inconsistent with past practices.
(b) MRC Representations and Warranties. MRC shall use its
reasonable efforts to maintain the truthfulness and accuracy of all of MRC
representations and warranties set forth in this Agreement and shall promptly
notify MedQuist of any fact or event of which MRC has knowledge causing any of
such representations or warranties to be inaccurate and shall use reasonable
efforts to cure, if possible, the same as soon as practical, but in no event
later than the Closing Date.
(c) MRC Stockholder Meeting. MRC will hold a meeting of the
Stockholders on or before the earlier of (i) 45 days after the effective date of
the Registration Statement or (ii) the date
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established by MedQuist for the meeting of MedQuist shareholders, subject to
compliance with applicable laws and MRC's Articles of Incorporation and Bylaws.
MRC's Board of Directors will recommend approval of the Merger.
(d) No Solicitation. MRC agrees that neither it, nor any of
its directors, officers, employees, agents, or advisors (including, without
limitation, attorneys, accountants, consultants, investment bankers and
financing sources, and advisors (collectively, "Representatives")), will
solicit, enter into or participate in any discussions, negotiations,
solicitation, arrangements or agreements with or otherwise assist, facilitate,
solicit or encourage, any corporation, partnership, person or other entity or
group concerning any merger, consolidation, sale of all or substantially all of
the assets, or the issuance or sale of any shares of capital stock or similar
transaction involving MRC (collectively, a "Possible Transaction"). During the
term of this Agreement, MRC shall advise MedQuist immediately if it hereafter
receives any bids or proposals regarding a Possible Transaction.
MRC shall advise its directors, officers, employees,
agents and Representatives that MRC has agreed to be bound by the above
restrictions and MRC will be responsible for a breach of such provisions by any
of the foregoing and MRC shall take all reasonable measures to restrain any of
the foregoing from violating the restrictions referred to above.
(e) Registration Statement. MRC shall cooperate with MedQuist
in the preparation and filing of the Registration Statement.
(f) No Mergers or Acquisitions. Without the prior written
consent of MedQuist, which shall not unreasonably be withheld, MRC shall not,
and shall not permit Medical Records Corp. or any subsidiary of MRC to (i)
participate in any merger, consolidation or reorganization or (ii) acquire the
business or all or a substantial part of the Assets of any other Person.
5.3. Covenants of MedQuist.
(a) MedQuist's and Sub's Representations and Warranties.
MedQuist and Sub will use their best efforts to maintain the truth and accuracy
of all of MedQuist's and Sub's representations and warranties set forth in this
Agreement and shall promptly notify MRC of any fact or event of which MedQuist
or Sub has knowledge causing any of such representations or warranties to be
inaccurate and shall use reasonable efforts to cure the same as soon as
practical, but in no event later than the Closing Date.
(b) MedQuist Stockholder Meeting. MedQuist will hold a meeting
of its stockholders within 45 days after the effective date of the Registration
Statement. MedQuist's Board of Directors will recommend approval of the Merger.
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(c) Registration Statement. MedQuist shall promptly file the
Registration Statement with the SEC and shall use its best efforts to have the
Registration Statement declared effective under the Act as promptly as
practicable under the Act and to maintain the effectiveness of the Registration
Statement through the Effective Time. MedQuist also shall take such other action
required to be taken under state securities laws in connection with the issuance
of shares of MedQuist Common Stock in connection with the Merger.
(d) Operation of Business by MedQuist. From and after the date
of this Agreement to the Effective Time, MedQuist shall conduct its business in
the ordinary course and shall:
(i) use reasonable efforts to preserve MedQuist's
business organization intact and preserve the goodwill of its customers,
suppliers and others having business relations with it;
(ii) promptly advise MRC in writing of the
commencement of, and of any known threat to commence any Action or of the
occurrence (or failure to occur) of any fact or circumstance which may become
known to MedQuist or Sub that would cause MedQuist's and Sub's representations
and warranties to be inaccurate in any material respect; and
(iii) not declare or pay any extraordinary cash
dividend.
(e) Nasdaq Listing. MedQuist shall obtain approval for the
listing of Nasdaq of the shares of MedQuist Common Stock to be issued to the
Stockholders in connection with the Merger.
(f) Indemnification.
(i) MedQuist shall take all actions necessary to
cause the Articles of Incorporation and Bylaws of the Surviving Corporation to
contain the provisions with respect to indemnification and exculpation from
liability set forth in MRC's Articles of Incorporation and Bylaws on the date of
this Agreement, which provisions shall not be amended, repealed or otherwise
modified for a period of six years from the Effective Time in any manner that
would adversely affect the rights thereunder of individuals who on or prior to
the Effective Time were directors, officers, employees or agents of MRC or
Medical Records Corp., as the case may be, unless such modification is required
by law. MedQuist hereby unconditionally and irrevocably guarantees for the
benefit of MRC's and Medical Records Corp.'s directors and officers the
obligations of MRC, Medical Records Corp. and the Surviving Corporation under
the foregoing indemnification arrangements. If MedQuist, the Surviving
Corporation or Medical Records Corp. or any of their successors or assigns (A)
consolidates with or merges into any other Person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(B) transfers all or substantially all of its
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properties and assets to any Person, then and in each such case, proper
provisions shall be made so that the successors and assigns of MedQuist, the
Surviving Corporation or Medical Records Corp., as the case may be, shall assume
the obligations set forth in this Section 5.3(f).
(ii) For a period of six years from the Effective
Time, MedQuist shall cause the Surviving Corporation and Medical Records Corp.
to provide officers' and directors' liability insurance in respect of acts or
omissions occurring prior to the Effective Time covering each such person
currently covered by MRC's and Medical Records Corp.'s officers' and directors'
liability insurance policies on terms with respect to coverage and amount no
less favorable that those of such policies in effect on the date hereof.
(g) [Intentionally Omitted].
(h) Directors. The Board of Directors of MedQuist shall take
such corporate actions as are necessary to provide that effective at the
Effective Time the individuals listed in Section 5.3(h) of the MedQuist
Disclosure Schedule, subject to completion of a director questionnaire, shall be
elected to the Board of Directors of MedQuist pursuant to this Section 5.3(h).
In addition, pursuant to MedQuist's Bylaws, each such Person shall be presented
and recommended for confirmation by MedQuist's stockholders at the next annual
meeting of stockholders following such Person's appointment and the Person whose
term expires at the next annual meeting of stockholders shall be included for
nomination in management's slate of directors at such meeting.
(i) Business Combinations. MedQuist agrees that, prior to the
Effective Time, it will not enter into any agreement to acquire any business or
entity other than MRC, whether by merger, acquisition of stock or assets or
otherwise, that would require a filing under the HSR Act or that involves the
issuance of securities of MedQuist which cannot be effected pursuant to an
exemption from the registration requirements under the Act.
(j) Registration Rights. MedQuist agrees that it will adhere
to all of the terms and conditions of the Amended and Restated Registration
Rights Agreement dated July 19, 1996 among MRC and certain of its Stockholders
as modified by a letter agreement dated September 18, 1998 with certain of the
Stockholders as set forth as Exhibit A ("Letter Agreement").
ARTICLE 6
CONDITIONS PRECEDENT TO THE CLOSING
6.1 Mutual Conditions. The obligations of the parties hereto to
consummate the Closing shall be subject to the satisfaction of the following
conditions on or prior to the Closing Date:
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(a) Litigation. On the Closing Date, no Action will be pending
or threatened before any court or Governmental Entity in which it is sought to
restrain or prohibit the consummation of the transactions contemplated by this
Agreement or, except as disclosed in the Disclosure Schedule, to obtain Damages
the amount of which would be reasonably likely to have a Material Adverse Effect
on the other party and no investigation that might result in any such Action
will be pending, or to the knowledge of the parties, threatened.
(b) HSR Act. All applicable waiting periods with respect to
the transactions contemplated by this Agreement shall have expired under the HSR
Act and neither the Federal Trade Commission nor the Antitrust Division of the
Department of Justice shall have (i) required any party to divest itself of any
assets in order to consummate such transactions, or (ii) taken any actions to
prohibit the consummation of such transactions.
(c) Pooling Letter. At the Closing, MedQuist and MRC shall
have received a letter in form and substance satisfactory to them from the
Auditor dated as of the Closing Date confirming that the Merger will qualify as
a pooling-of-interests under Opinion 16 of the Accounting Principles Board.
(d) Tax-Free Exchange. MedQuist and MRC shall have received an
opinion letter from Blank Rome Comisky & McCauley LLP, A Pennsylvania LLP (or,
upon failure of Blank Rome Comisky & McCauley LLP to deliver such an opinion,
from Baker & Hostetler LLP) that the Merger will qualify as a tax-free exchange
within the meaning of Section 368(a) of the Code.
(e) Registration Statement. The SEC shall have declared
effective the Registration Statement and MedQuist shall have received all state
securities laws permits and other authorizations necessary to consummate the
Merger and no stop order or similar restraining order shall have been threatened
by the SEC or entered by the SEC or any state securities administrator
prohibiting the Merger.
6.2. Conditions Precedent to MedQuist's and Sub's Obligation in Respect
of the Closing. The obligation of MedQuist and Sub to consummate the Closing
shall be subject to the satisfaction, or the waiver by MedQuist and Sub, of the
following conditions on or prior to the Closing Date:
(a) Representations and Warranties; Compliance with Agreement.
The representations and warranties of MRC set forth in this Agreement shall have
been true and correct on the date of this Agreement and shall be true and
correct as of the Closing Date as though made on and as of such Closing Date,
except for representations and warranties that speak as of a specific date
before the Closing Date, and except for such inaccuracies which have not had and
would not reasonably be expected to have a Material Adverse Effect on MRC, and
MRC shall have performed in all material respects all covenants and agreements
to be performed by it under this Agreement on
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or prior to the Closing Date, and MRC's Chief Executive Officer and Chief
Financial Officer shall have delivered to MedQuist and Sub a certificate to such
effect dated the Closing Date signed by them which certificate will be in form
and substance satisfactory to MedQuist's and Sub's counsel.
(b) Required Consents. On or prior to the Closing, MRC shall
have obtained the consent of the Persons listed in Section 6.2(b) of the MRC
Disclosure Schedule and MRC shall have made such filings or certifications to
Governmental Entities as is required by it.
(c) No Damage to Business. On or prior to the Closing, MRC
shall not have suffered, and there shall not be, or likely to be, a Material
Adverse Effect on MRC.
(d) Approval of Stockholders; Dissenting Stockholders. The
Stockholders of MRC shall have approved the Merger and Dissenting MRC Shares
shall not exceed 9% of the number of shares of MRC Common Stock and MRC
Preferred Stock eligible to vote on the Merger. The stockholders of MedQuist
shall have approved the Merger and required matters relating thereto.
(e) Employment Agreements. Those certain Employment Agreements
and Severance Agreements dated the date hereof between MRC and each of Messrs.
Edward Samek, Ethan Cohen, Dennis Byerly and Steven Bell and Ms. Ellen Norton
shall remain in full force and effect unless terminated in accordance with the
terms thereof.
(f) Legal Opinion. Baker & Hostetler LLP, counsel for MRC,
shall have delivered to Sub and MedQuist an opinion dated as of the Closing
Date, in the form attached to this Agreement as Exhibit B.
(g) Good Standing Certificates. MRC shall have delivered to
MedQuist good standing certificates for MRC and Medical Records Corp., dated no
earlier than ten days before the Closing Date, from the States of Missouri and
Ohio, as applicable, and from each other jurisdiction in which either is
qualified or registered to do business as a foreign corporation.
(h) Affiliate Letters. MedQuist shall have received a duly
signed letter from each affiliate of MRC, substantially in the form attached
hereto as Exhibit C, stating that such affiliate (i) has not sold any shares of
capital stock or other securities of MRC or MedQuist at any time during the
30-day period ending on the Closing Date, and (ii) will not sell, assign, give,
pledge (except in connection with fully recourse bank loans), or otherwise
transfer, dispose of or reduce such affiliate's risk related to any of such
affiliate's shares of capital stock or other securities of MRC or of MedQuist
except under the de minimus exception to the pooling rules until MedQuist shall
have published financial results covering at least 30 days of post-Merger
combined operations of MedQuist and MRC and thereafter, except in compliance
with applicable federal and state securities laws.
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(i) Nasdaq Listing. MedQuist shall have delivered to MRC
evidence that the MedQuist Common Stock has been approved, upon official notice
of issuance, for listing on Nasdaq.
(j) Resignations. MedQuist shall have received duly executed
resignations from all of the directors of MRC and Medical Records Corp..
(k) Registration Rights. The Letter Agreement dated September
18, 1998 among MedQuist and certain of the Stockholders shall be in full force
and effect.
6.3. Conditions Precedent to MRC's Obligation in Respect of the
Closing. The obligation of MRC to consummate the Closing shall be subject to the
satisfaction by MedQuist and Sub or the waiver by MRC of the following
conditions on or prior to the Closing Date:
(a) Representations and Warranties; Compliance with Agreement.
The representations and warranties of MedQuist and Sub set forth in this
Agreement shall have been true and correct on the date of this Agreement and
shall be true and correct as of the Closing Date as though made on and as of
such Closing Date, except for representations and warranties that speak as of a
specific date before the Closing Date, and except for such inaccuracies which
have not had and would not reasonably be expected to have a Material Adverse
Effect on MedQuist, and MedQuist and Sub shall have performed in all material
respects all covenants and agreements to be performed by them on or prior to the
Closing Date, and MedQuist's and Sub's Chief Executive Officers and Chief
Financial Officers shall have delivered to MRC a certificate to such effect
dated the Closing Date signed by them which certificate will be in form and
substance satisfactory to MRC's counsel.
(b) Approval of Stockholders. The Stockholders of MRC shall
have approved the Merger and the Stockholders of MedQuist shall have approved
the Merger and the required matters related thereto.
(c) Legal Opinion. Blank Rome Comisky & McCauley LLP, A
Pennsylvania LLP, counsel for MedQuist and Sub, shall have delivered to MRC an
opinion dated as of the Closing Date, in the form attached to this Agreement as
Exhibit D.
(d) Good Standing Certificates. MedQuist shall have delivered
to MRC good standing certificates for MedQuist and Sub, dated no earlier than
ten days before the Closing Date, from the States of New Jersey and Missouri,
respectively.
(e) Affiliate Letters. MedQuist shall have provided MRC with
copies of a duly signed letter from each affiliate of MedQuist, substantially in
the form attached hereto as Exhibit C, stating that such affiliate (i) has not
sold any shares of capital stock or other securities of MRC or MedQuist at any
time during the 30-day period ending on the Closing Date, and (ii) will not
sell,
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assign, give, pledge (except in connection with fully recourse bank loans), or
otherwise transfer, dispose of or reduce such affiliate's risk related to any of
such affiliate's shares of capital stock or other securities of MRC or of
MedQuist except pursuant to the de minimus exception permitted under the pooling
rules until MedQuist shall have published financial results covering at least 30
days of post-Merger combined operations of MedQuist and MRC and thereafter,
except in compliance with applicable federal and state securities laws.
ARTICLE 7
TERMINATION OF AGREEMENT
7.1 Termination. This Agreement may be terminated prior to the Closing
as follows:
(a) at the election of MRC, if any one or more of the
conditions to its obligation to complete the Closing as set forth in Section 6.1
or 6.3 has not been fulfilled by February 28, 1999, unless extended by the Board
of Directors of both MedQuist and MRC, provided, however, that the right to
terminate under this Section 7.1(a) will not be available to MRC if MRC's
failure to perform any covenant or obligation under this Agreement has been the
cause of or resulted in the failure of the Closing to occur;
(b) at the election of MedQuist, if any one or more of the
conditions to its obligation to complete the Closing as set forth in Section 6.1
or 6.2 has not been fulfilled by February 28, 1999, unless extended by the Board
of Directors of both MedQuist and MRC, provided, however that the right to
terminate under this Section 7.1(b) will not be available to MedQuist if
MedQuist's failure to perform any covenant or obligation under this Agreement
has been the cause of or resulted in the failure of the Closing to occur.
(c) at the election of either MedQuist or MRC if any action
shall have been instituted and be continuing by any Governmental Entity with
proper authority to restrain, modify or prohibit carrying out of the
transactions contemplated hereby;
(d) by MedQuist if the Board of Directors of MRC (i)
withdraws, modifies or changes its recommendation of this Agreement or the
Merger in a manner adverse to MedQuist or Sub, or (ii) shall have recommended to
the Stockholders any Possible Transaction;
(e) by MedQuist in the event MRC (i) has not within 45 days of
the effective date of the Registration Statement had a Stockholders meeting at
which its Stockholders have approved the Merger or (ii) has entered into an
agreement with any other Person in connection with a Possible Transaction;
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(f) by MRC if the Board of Directors of MedQuist withdraws,
modifies or changes its recommendation of this Agreement or the Merger in a
manner adverse to MRC;
(g) by MRC in the event that MedQuist has not within 45 days
of the effective date of the Registration Statement had a stockholders meeting
at which its stockholders have approved the Merger; or
(h) at any time on or prior to the Closing Date, by mutual
written consent of MRC and MedQuist.
If MedQuist or MRC, as the case may be, elects to terminate this Agreement, the
terminating party shall deliver a notice to the other party hereto declaring its
election to so terminate this Agreement, and setting forth therein the basis for
such termination.
7.2 Effect of Termination. Except as provided in Section 7.3, in the
event of termination of this Agreement pursuant to Section 7.1, this Agreement
shall forthwith become void, there shall be no liability, under this Agreement
on the part of MedQuist, Sub or MRC or any of their respective officers or
directors, and all rights and obligations of each party hereto shall cease.
7.3. Expenses; Termination Fees.
(a) Except as set forth in this Section 7.3, all fees and
expenses incurred in connection with this Agreement and the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses, whether or not the Merger is consummated; provided, however, that
MedQuist and MRC shall share equally all fees and expenses, other than
attorneys' fees, incurred in connection with (i) the filing, printing and
mailing of the Registration Statement and the prospectus/proxy statement
contained therein and any amendments or supplements thereto and (ii) the filing
of the premerger notification and report forms relating to the Merger under the
HSR Act.
(b) If a breach of this Agreement by one party gives rise to a
right of termination by the other party (other than a right of termination by
MedQuist pursuant to Section 7.1(d) or (e) in which event subsection (c)
applies), then the non-breaching party shall be entitled to all available legal
and equitable remedies.
(c) If this Agreement is terminated by MedQuist and Sub
pursuant to Section 7.1(d) or (e), then MRC shall pay to MedQuist, in cash,
within five Business Days after the termination of this Agreement a
non-refundable fee in the amount of $7,500,000, which fee shall be MedQuist's
and Sub's sole and exclusive remedy for any act, omission or breach of MRC if
this Agreement is terminated pursuant to Section 7.1(d) or (e).
36
<PAGE>
ARTICLE 8
GENERAL
8.1. Entire Agreement; Amendments. This Agreement constitutes the
entire understanding among the parties with respect to the subject matter
contained in this Agreement and therein and supersedes any prior understandings
and agreements among them respecting such subject matter. This Agreement may be
amended or supplemented only by a written instrument duly executed by all of the
parties hereto.
8.2. Headings. The headings in this Agreement are for convenience of
reference only and will not affect its interpretation.
8.3. Gender; Number. Words of gender may be read as masculine,
feminine, or neuter, as required by context. Words of number may be read as
singular or plural, as required by context.
8.4. Exhibits and Schedules. Each Exhibit and Schedule referred to in
this Agreement is incorporated into this Agreement by such reference.
8.5. Severability. If any provision of this Agreement is held illegal,
invalid, or unenforceable, such illegality, invalidity, or unenforceability will
not affect any other provision hereof. This Agreement will, in such
circumstances, be deemed modified to the extent necessary to render enforceable
the provisions hereof.
8.6. Notices. All notices and other communications hereunder will be
in writing and will be given to the person either personally or by sending a
copy thereof by first class mail, courier services, charges prepaid, hand
delivery, or by facsimile, to such party's address (or to such party's facsimile
number). The notice will be effective upon receipt at the address or facsimile
number set forth below:
If to MedQuist or Sub to:
MedQuist Inc.
Five Greentree Centre
Suite 311
Marlton, NJ 08053
Attention: John M. Suender
Vice President and General Counsel
Telecopy: 609-797-5949
Telephone: 609-596-8877
37
<PAGE>
with a copy to:
A. Fred Ruttenberg, Esquire
Blank Rome Comisky & McCauley LLP
A Pennsylvania LLP
210 Lake Drive East, Suite 200
Cherry Hill, NJ 08002
Telecopy: 609-779-7647
Telephone: 609-779-3608
If to The MRC Group, Inc. to:
The MRC Group
Commerce Park, Building Four
23240 Chagrin Boulevard - Suite 400
Cleveland, OH 44122-5400
Attention: Edward L. Samek, President and CEO
Telecopy: (216) 514-0769
Telephone: (216) 464-2244
and
Attention: Steven Bell, Senior VP of Finance, CFO
Telecopy: (216) 464-4199
Telephone: (216) 464-2244
with a copy to:
John M. Gherlein, Esquire
Baker & Hostetler LLP
3200 National City Center
1900 East Ninth Street
Cleveland, OH 44114-3485
Telecopy: 216-696-0740
Telephone: 216-861-7398
38
<PAGE>
Notice of any change in any such address will also be given in the
manner set forth above. Whenever the giving of notice is required, the giving of
such notice may be waived by the party entitled to receive such notice.
8.7 Options. MRC hereby grants to MedQuist an option to purchase 19.9
percent of MRC's Common Stock (assuming conversion of the Preferred Stock and
exercise of all outstanding options) at $10.33 per share. The form of Option is
attached hereto as Exhibit E.
8.8. Waiver. The failure of any party to insist upon strict
performance of any of the terms or conditions of this Agreement will not
constitute a waiver of any of its rights hereunder.
8.9. Assignment. No party may assign any of its rights or delegate any
of its obligations hereunder without the prior written consent of the other
parties, except that MedQuist or Sub shall have the right to assign its rights
hereunder to a corporation owned or controlled by MedQuist or Sub.
8.10. Successors and Assigns. Except as set forth in Section 8.9, this
Agreement binds, inures to the benefit of, and is enforceable by the successors
and assigns of the parties, and does not confer any rights on any other persons
or entities.
8.11. Governing Law. This Agreement will be construed and enforced in
accordance with the laws of the State of New Jersey, notwithstanding the
conflict of laws principles of any jurisdiction.
8.12. No Benefit to Others. The representations, warranties, covenants
and agreements contained in this Agreement are for the sole benefit of the
parties hereto and their successors and assigns, and they will not be construed
as conferring and are not intended to confer any rights on any other persons
except that the provisions of Section 5.3(f) and 5.3(h) may be enforced by the
Persons referred to therein.
8.13 Survival of Representations and Warranties. The respective
representations and warranties of the parties in this Agreement shall not
survive the Closing Date and shall terminate on the Closing Date. However, such
termination shall not be deemed to deprive any of the parties hereto or their
subsidiaries, or any of their directors, officers or controlling Persons, of any
defense in law or equity which otherwise would be available against the claims
of any Person, including, but not limited to, any stockholder or former
stockholder of the parties hereto. Before and on the Closing Date, each party
shall be deemed to have relied upon each of the representations and warranties
made to it in this Agreement or pursuant hereto, regardless of any investigation
made by or on behalf of such party or the right of investigation of such party.
8.14 Counterparts. This Agreement may be executed in any number of
counterparts and any party hereto may execute any such counterpart, each of
which when executed and delivered will be
39
<PAGE>
deemed to be an original and all of which counterparts taken together will
constitute but one and the same instrument. The execution of this Agreement by
any party hereto will not become effective until counterparts hereof have been
executed by all the parties hereto. It will not be necessary in making proof of
this Agreement or any counterpart hereof to produce or account for any of the
other counterparts.
[SIGNATURE PAGE FOLLOWS]
40
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first above written.
MEDQUIST INC.
By: /s/ David A. Cohen
-----------------------------------------------------
David A. Cohen, Chairman and Chief Executive Officer
MERCURY ACQUISITION CORP.
By: /s/ David A. Cohen
-----------------------------------------------------
David A. Cohen, President
THE MRC GROUP, INC.
By: /s/ Edward L. Samek
-----------------------------------------------------
Edward L. Samek, Chairman and Chief Executive Officer
41
<PAGE>
SCHEDULES AND EXHIBITS TO
AGREEMENT AND PLAN OF MERGER
SCHEDULES
MRC Disclosure Schedule
Medquist Disclosure Schedule
EXHIBIT DESCRIPTION
- ------- -----------
Exhibit A Registration Rights Letter Agreement
Exhibit B Form of Legal Opinion from Counsel for MRC
Exhibit C Form of Affiliate Letter
Exhibit D Form of Legal Opinion from Counsel for MedQuist and Sub
Exhibit E Form of Stock Option Agreement
- --------------------------------------------------------------------------------
THE REGISTRANT AGREES TO FURNISH SUPPLEMENTALLY A COPY OF ANY OMITTED SCHEDULE
TO THE SECURITIES AND EXCHANGE COMMISSION UPON REQUEST.
<PAGE>
ANNEX B
STOCK OPTION AGREEMENT
<PAGE>
ANNEX B
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of September 18, 1998 (the "Stock
Option Agreement"), by and between The MRC Group, Inc, a Missouri corporation
("Issuer"), and MedQuist Inc., a New Jersey corporation ("Grantee").
WHEREAS, Grantee and Issuer are concurrently herewith entering into an
Agreement and Plan of Merger dated as of the date hereof (the "Merger
Agreement")(capitalized terms used and not defined herein shall have the
meanings set forth in the Merger Agreement), providing for, among other things,
the merger of Mercury Acquisition Corp., a Missouri corporation and a
wholly-owned subsidiary of Grantee, ("Sub") with and into Issuer with Issuer as
the surviving corporation;
WHEREAS, as a condition and inducement to Grantee's willingness to
enter into the Merger Agreement, Grantee has requested that Issuer agree, and
Issuer has agreed, to grant Grantee the Option (as defined below); and
WHEREAS, as a condition and inducement to Grantee's willingness to
enter into the Merger Agreement, Issuer is granting to Grantee an option to
purchase up to that number of shares of Common Stock, $.01 par value (the
"Common Stock") of Issuer as shall equal 19.9% of shares of Common Stock of
Issuer issued and outstanding immediately prior to such purchase (assuming
conversion of the Preferred Stock and exercise of all outstanding options) on
the terms and conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements as set forth herein, in
the Merger Agreement, Issuer and Grantee agree as follows:
1. Grant of Option. Subject to the terms and conditions set forth
herein, Issuer hereby grants to Grantee an irrevocable option (the "Option") to
purchase up to 4,911,090 (as adjusted as set forth herein) authorized and
unissued shares (the "Option Shares") of Common Stock of Issuer at a purchase
price of $10.33 per Option Share (the "Purchase Price") payable in cash as
provided in Section 3.
2. Exercise of Option. Provided that (i) Grantee shall not be on the
date of exercise in breach of any of the agreements or covenants contained in
the Merger Agreement or herein, and (ii) no preliminary or permanent injunction
or other order against the delivery of shares covered by the Option issued by
any court of competent jurisdiction in the United States shall be in effect,
upon or after the occurrence of a Triggering Event (as such term is hereinafter
defined) and until termination of this Stock Option Agreement in accordance with
the provisions of Section 23, Grantee may exercise the Option, in whole or in
part, at any time or one or more times, from time-to-time. As used herein, the
term "Triggering Event" means the occurrence of any of the following events:
<PAGE>
(a) if the Board of Directors of Issuer (i) withdraws,
modifies or changes its recommendation of the Merger Agreement or the Merger in
a manner adverse to Grantee or Sub, or (ii) shall have recommended to the
Stockholders any Possible Transaction; or
(b) if Issuer (i) has not within forty-five days of the
effective date of the Registration Statement had a Stockholders meeting at which
its Stockholders have approved the Merger or (ii) has entered into an agreement
with any other Person in connection with a Possible Transaction.
Issuer shall notify Grantee promptly in writing of the occurrence of
any Triggering Event known to it, it being understood that the giving of such
notice by Issuer shall not be a condition to the right of Grantee to exercise
the Option. Subject to compliance with applicable securities laws or
regulations, Issuer will not take any action which would have the effect of
preventing or disabling Issuer from delivering the Option Shares to Grantee upon
exercise of the Option or otherwise performing its obligations under this Stock
Option Agreement. In the event Grantee wishes to exercise the Option, Grantee
shall send a written notice to Issuer (the date of which is hereinafter referred
to as the "Notice Date") specifying the total number of Option Shares it wishes
to purchase and a place and date between two and ten business days inclusive
from the Notice Date for the closing of such a purchase (a "Closing"); provided,
however, that a Closing shall not occur prior to two days after the later of
receipt of any necessary regulatory approvals or the expiration of any legally
required notice or waiting period, if any.
3. Payment and Delivery of Certificates. At any Closing hereunder, (a)
Grantee will make payment to Issuer of the aggregate price for the Option Shares
so purchased by wire transfer of immediately available funds to an account
designated by Issuer, (b) Issuer will deliver to Grantee a stock certificate or
certificates representing the number of Option Shares so purchased, registered
in the name of Grantee or its designee, in such denominations as were specified
by Grantee in its notice of exercise, and (c) Grantee will pay any transfer or
other taxes required by reason of the issuance of the Option Shares so
purchased.
A legend will be placed on each stock certificate evidencing Option
Shares issued pursuant to this Stock Option Agreement, which legend will read
substantially as follows:
"The shares of stock evidenced by this certificate have not been the
subject of a registration statement filed under the Securities Act of
1933, as amended (the "Act"), and declared effective by the Securities
and Exchange Commission. These shares may not be sold, transferred or
otherwise disposed of prior to such time (i) unless The MRC Group, Inc.
receives an opinion of counsel reasonably acceptable to it stating that
an exemption from the registration provisions of the Act is available
for such sale, transfer or disposition or (ii) such sale, transfer or
disposition shall have been registered pursuant to the Act."
2
<PAGE>
4. Registration Rights. Upon or after the occurrence of a Triggering
Event and upon receipt of a written request from Grantee, but only if Issuer is
then required to file reports under Section 13(a) of the Securities Exchange Act
of 1934, as amended, or any successor provision or statute, Issuer shall prepare
and file as soon as practicable a registration statement under the Securities
Act of 1933, as amended (the "Securities Act"), with the Securities and Exchange
Commission covering the Option and such number of Option Shares as Grantee shall
specify in its request, and Issuer shall use its best efforts to cause such
registration statement to be declared effective in order to permit the sale or
other disposition of the Option and the Option Shares, provided that Grantee
shall in no event have the right to have more than one such registration
statement become effective, and provided further that Issuer shall not be
required to prepare and file any such registration statement in connection with
any proposed sale with respect to which counsel to Issuer delivers to Issuer and
to Grantee its opinion to the effect that no such filing is required under
applicable laws and regulations with respect to such sale or disposition;
provided, however, that Issuer may delay any registration of Option Shares above
for a period not exceeding 90 days in the event that Issuer shall in good faith
determine that any such registration would adversely affect an offering or
contemplated offering of other securities by Issuer. Grantee shall provide all
information reasonably requested by Issuer for inclusion in any registration
statement to be filed hereunder. In connection with such filing, Issuer shall
use its commercially reasonable efforts to cause to be delivered to Grantee such
certificates, opinions, accountant's letters and other documents as Grantee
shall reasonably request and as are customarily provided in connection with
registration of securities under the Securities Act. Issuer shall provide to
Grantee such number of copies of the preliminary prospectus and final prospectus
and any amendments and supplements thereto as Grantee may reasonably request.
If Issuer effects a registration under the Securities Act of Issuer
Common Stock for its own account or for any other stockholders of Issuer (other
than on Form S-4 or Form S-8, or any successor form), it shall allow Grantee the
right to participate in such registration, and such participation shall not
affect the obligation of Issuer to effect the one registration statement for
Grantee under this Section 4; provided that, if the managing underwriters of
such offering advise Issuer in writing that in their opinion the number of
shares of Issuer Common Stock requested to be included in such registration
exceeds the number which can be sold in such offering, Issuer shall include the
shares requested to be included therein by Grantee pro rata with the shares
intended to be included therein by Issuer.
All reasonable expenses incurred by Issuer in complying with the
provisions of this Section 4, including, without limitation, all registration
and filing fees, reasonable printing expenses, reasonable fees and disbursements
of counsel for Issuer and blue sky fees and expenses, shall be paid by Issuer.
Underwriting discounts and commissions to brokers and dealers relating to the
Option Shares, fees and disbursements of counsel to Grantee and any other
expenses incurred by Grantee in connection with such filing shall be borne by
Grantee. In connection with such filing, Issuer shall indemnify and hold
harmless Grantee against any losses, claims, damages or liabilities, joint or
several, to which Grantee may become subject, insofar as such losses, claims,
damages or liabilities
3
<PAGE>
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
preliminary or final registration statement or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and Issuer will reimburse Grantee for any
legal or other expense reasonably incurred by Grantee in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that Issuer will not be liable in any case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such preliminary or final registration statement or such amendment or
supplement thereto in reliance upon and in conformity with written information
furnished by or on behalf of Grantee specifically for use in the preparation
thereof. Grantee will indemnify and hold harmless Issuer to the same extent as
set forth in the immediately preceding sentence but only with reference to
written information furnished by or on behalf of Grantee for use in the
preparation of such preliminary or final registration statement or such
amendment or supplement thereto; and Grantee will reimburse Issuer for any legal
or other expense reasonably incurred by Issuer in connection with investigating
or defending any such loss, claim, damage, liability or action. Notwithstanding
anything to the contrary contained herein, no indemnifying party shall be liable
for any settlement effected without its prior written consent.
5. Adjustment Upon Changes in Capitalization. In the event of any
change in the Common Stock by reason of stock dividends, split-ups,
recapitalizations, combinations, conversions, divisions, exchanges of shares or
the like, then the number and kind of Option Shares and the Option Price shall
be appropriately adjusted. If any additional shares of Common Stock, Preferred
Stock or Stock Options are issued after the date of this Stock Option Agreement
(other than pursuant to an event described in the first sentence of this Section
5) but prior to a Triggering Event, the number of shares of Common Stock subject
to the Option shall be adjusted so that, after such issuance, it equals 19.9% of
the number of shares of Common Stock then issued and outstanding, without giving
effect to any shares subject to or issued pursuant to the Option (assuming
conversion of the Preferred Stock and exercise of all outstanding options).
6. Filings and Consents. Each of Grantee and Issuer will use its
commercially reasonable efforts to make all filings with, and to obtain consents
of, all third parties and governmental authorities necessary to the consummation
of the transactions contemplated by this Stock Option Agreement.
7. Representations and Warranties of Issuer. Issuer hereby represents
and warrants to Grantee as follows:
(a) Due Authorization. Issuer has the requisite corporate power and
authority to execute, deliver and perform this Stock Option Agreement and all
corporate action necessary for execution, delivery and performance of this Stock
Option Agreement has been duly taken by Issuer. This Stock Option Agreement
constitutes a legal, valid and binding obligation of Issuer, enforceable against
Issuer in accordance with its terms (except as may be limited by applicable
Creditors' Rights Laws).
4
<PAGE>
(b) Authorized Shares. Issuer has taken all necessary corporate action
to authorize and reserve for issuance all shares of Common Stock that may be
issued pursuant to any exercise of the Option. The shares of Common Stock to be
issued upon due exercise of the Option shall be duly and validly issued, fully
paid and nonassessable, and shall be delivered free and clear of all liens,
claims, charges and encumbrances of any kind of nature whatsoever, including any
preemptive rights of any stockholder of Issuer.
(c) No Conflicts. The execution and delivery of this Stock Option
Agreement does not, and the consummation of the transactions contemplated hereby
will not, conflict with, or result in any violation pursuant to any provision of
the Articles of Incorporation or By-laws of Issuer or any subsidiary of Issuer
or, subject to obtaining any approvals or consents contemplated hereby, result
in any violation of any loan or credit agreement, note, mortgage, indenture,
lease, Benefit Plan or other agreement, obligation, instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Issuer or any subsidiary of Issuer
or their respective properties or assets which violation would, individually or
in the aggregate, have a Material Adverse Effect on Issuer.
8. Representations and Warranties of Grantee. Grantee hereby represents
and warrants to Issuer that Grantee has the requisite corporate power and
authority to execute, deliver and perform this Stock Option Agreement and all
corporate action necessary for execution, delivery and performance of this Stock
Option Agreement has been duly taken by Grantee. This Stock Option Agreement
constitutes a legal, valid and binding obligation of Grantee, enforceable
against Grantee in accordance with its terms (except as may be limited by
applicable Creditors' Rights Laws). Grantee represents that it is acquiring the
Option for Grantee's own account and not with a view to, or for sale in
connection with, any distribution of the Option or the Option Shares. Grantee is
aware that neither the Option nor the Option Shares is the subject of a
registration statement filed with, and declared effective by, the Securities and
Exchange Commission pursuant to Section 5 of the Securities Act, but instead
each is being offered in reliance upon the exemption from the registration
requirement provided by Section 4(2) thereof and the representations and
warranties made by Grantee in connection therewith. Grantee or its assignee
agrees to execute a standard investment representation letter with respect to
its acquisition of any Issuer securities acquired in connection with this
transaction.
9. Specific Performance. The parties hereto acknowledge that damages
would be an inadequate remedy for a breach of this Stock Option Agreement and
that the obligations of the parties hereto shall be specifically enforceable.
10. Entire Agreement. This Stock Option Agreement and the Merger
Agreement constitute the entire agreement between the parties with respect to
the subject matter hereof and supersede all other prior agreements and
understandings, both written and oral, among the parties or any of them with
respect to the subject matter hereof.
11. Assignment or Transfer. Neither this Stock Option Agreement nor any
of the
5
<PAGE>
rights, interests or obligations hereunder or under the Option shall be assigned
by any of the parties hereto (whether by operation of law or otherwise) without
(i) prior written consent of the other party and (ii) compliance with applicable
securities laws, except that Grantee may assign this Stock Option Agreement to a
wholly-owned Subsidiary of Grantee and that Grantee may assign all or part of
its rights hereunder to any Person after the occurrence of a Triggering Event.
Subject to the preceding sentence, this Stock Option Agreement shall be binding
upon, inure to the benefit of and be enforceable by the parties and their
respective successors and assigns.
12. Further Assurances. In the event of any exercise of the Option by
Grantee, Issuer and Grantee shall execute and deliver all other documents and
instruments and take all other action that may be reasonably necessary in order
to consummate the transactions provided for by such exercise.
13. Amendment of Stock Option Agreement. By mutual consent of the
parties hereto, this Stock Option Agreement may be amended in writing at any
time, for the purpose of facilitating performance hereunder or to comply with
any applicable regulation of any governmental authority or any applicable order
of any court or for any other purpose.
14. Validity. The invalidity or unenforceability of any provision of
this Stock Option Agreement shall not affect the validity or enforceability of
any other provisions of this Stock Option Agreement, which shall remain in full
force and effect. If for any reason a court or regulatory agency determines that
the Option does not permit Grantee to acquire the full number of shares of
Issuer Common Stock provided for hereunder, it is the express intention of
Issuer to allow Grantee to acquire up to the maximum amount of such lesser
number of shares as may be permissible without any amendment or modification
hereof.
15. Notices. All notices and other communications hereunder will be in
writing and will be given to the person either personally or by sending a copy
thereof by first-class mail, courier services, charges prepaid, hand delivery,
or by facsimile, to such party's address (or to such party's facsimile number).
The notice will be effective upon receipt at the address or facsimile number set
forth below.
If to Grantee to:
MedQuist Inc.
Five Greentree Centre
Suite 311
Marlton, NJ 08053
Attention: John M. Suender
Vice President and General Counsel
Telecopy: 609-797-5949
Telephone: 609-596-8877
6
<PAGE>
with a copy to:
A. Fred Ruttenberg, Esquire
Blank Rome Comisky & McCauley LLP
A Pennsylvania LLP
210 Lake Drive East - Suite 200
Cherry Hill, NJ 08002
Telecopy: 609-779-7647
Telephone: 609-779-3608
If to Issuer to:
The MRC Group
Commerce Park, Building Four
23240 Chagrin Boulevard - Suite 400
Cleveland, OH 44122-5400
Attention: Edward L. Samek, President and CEO
Telecopy: (216) 514-0769
Telephone: (216) 464-2244
and
Attention: Steven Bell, Senior VP of Finance, CFO
Telecopy: (216) 464-4199
Telephone: (216) 464-2244
with a copy to:
John M. Gherlein, Esquire
Baker & Hostetler LLP
3200 National City Center
1900 East Ninth Street
Cleveland, OH 44114-3485
Telecopy: 216-696-0740
Telephone: 216-861-7398
Notice of any change in any such address will also be given in the
manner set forth above. Whenever the giving of notice is required, the giving of
such notice may be waived by the party entitled to receive such notice.
16. Governing Law. This Stock Option Agreement shall be governed by and
construed in accordance with the laws of the State of New Jersey,
notwithstanding the conflicts of law principles
7
<PAGE>
of any jurisdiction.
17. Captions. The captions in this Stock Option Agreement are inserted
for convenience and reference purposes, and shall not limit or otherwise affect
any of the terms or provisions hereof.
18. Waivers and Extensions. The parties hereto may, by mutual consent,
extend the time for performance of any of the obligations or acts of either
party hereto. Each party may waive (i) compliance with any of the covenants of
the other party contained in this Stock Option Agreement and/or (ii) the other
party's performance of any of its obligations set forth in this Stock Option
Agreement.
19. Parties in Interest. This Stock Option Agreement shall be binding
upon and inure solely to the benefit of each party hereto, and, nothing in this
Stock Option Agreement, express or implied, is intended to confer upon any other
person any rights or remedies of any nature whatsoever under or by reason of
this Stock Option Agreement.
20. Counterparts. This Stock Option Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
21. Expenses. Except as otherwise provided herein, all costs and
expenses incurred by the parties hereto in connection with the transactions
contemplated by this Stock Option Agreement or the Option shall be paid by the
party incurring such cost or expense.
22. Defined Terms. Capitalized terms which are used but not defined
herein shall have the meanings ascribed to such terms in the Merger Agreement.
23. Termination. This Stock Option Agreement shall terminate and be of
no further force or effect upon the earliest to occur of (A) the Effective Time
or (B) termination of the Merger Agreement in accordance with the terms thereof,
except that if the Merger Agreement is terminated pursuant to Sections 7.1(d) or
(e), this Stock Option Agreement shall not terminate until one year after the
date of termination of the Merger Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first above written.
MEDQUIST INC.
By: /s/ David A. Cohen
-----------------------------------------------------
David A. Cohen, Chairman and Chief Executive Officer
THE MRC GROUP, INC.
By: /s/ Edward L. Samek
-----------------------------------------------------
Edward L. Samek, Chairman and Chief Executive Officer
8
<PAGE>
ANNEX C-1
NEW JERSEY STATUTES
TITLE 14A. CORPORATIONS, GENERAL
CHAPTER 11. RIGHTS OF DISSENTING SHAREHOLDERS
14A:11-1. Right of shareholders to dissent
(1) Any shareholder of a domestic corporation shall have the right to dissent
from any of the following corporate actions
(a) Any plan of merger or consolidation to which the corporation is a
party, provided that, unless the certificate of incorporation otherwise provides
(i) a shareholder shall not have the right to dissent from any
plan of merger or consolidation with respect to shares
(A) of a class or series which is listed on a national securities exchange or is
held of record by not less than 1,000 holders on the record date fixed to
determine the shareholders entitled to vote upon the plan of merger or
consolidation; or
(B) for which, pursuant to the plan of merger or consolidation, he will receive
(x) cash, (y) shares, obligations or other securities which, upon consummation
of the merger or consolidation, will either be listed on a national securities
exchange or held of record by not less than 1,000 holders, or (z) cash and such
securities;
(ii) a shareholder of a surviving corporation shall not have
the right to dissent from a plan of merger, if the merger did not require for
its approval the vote of such shareholders as provided in section 14A:10-5.1 or
in subsection 14A:10-3(4), 14A:10-7(2) or 14A:10-7(4); or
(b) Any sale, lease, exchange or other disposition of all or
substantially all of the assets of a corporation not in the usual or regular
course of business as conducted by such corporation, other than a transfer
pursuant to subsection (4) of N.J.S. 14A:10-11, provided that, unless the
certificate of incorporation otherwise provides, the shareholder shall not have
the right to dissent
(i) with respect to shares of a class or series which, at the
record date fixed to determine the shareholders entitled to vote upon such
transaction, is listed on a national securities exchange or is held of record by
not less than 1,000 holders; or
(ii) from a transaction pursuant to a plan of dissolution of
the corporation which provides for distribution of substantially all of its net
assets to shareholders in accordance with their respective interests within one
year after the date of such transaction, where such transaction is wholly for
(A) cash; or
(B) shares, obligations or other securities which, upon consummation of the plan
of dissolution will either be listed on a national securities exchange or held
of record by not less than 1,000 holders; or
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(C) cash and such securities; or
(iii) from a sale pursuant to an order of a court having jurisdiction.
(2) Any shareholder of a domestic corporation shall have the right to dissent
with respect to any shares owned by him which are to be acquired pursuant to
section 14A:10-9.
(3) A shareholder may not dissent as to less than all of the shares owned
beneficially by him and with respect to which a right of dissent exists. A
nominee or fiduciary may not dissent on behalf of any beneficial owner as to
less than all of the shares of such owner with respect to which the right of
dissent exists.
(4) A corporation may provide in its certificate of incorporation that holders
of all its shares, or of a particular class or series thereof, shall have the
right to dissent from specified corporate actions in addition to those
enumerated in subsection 14A:11-1(1), in which case the exercise of such right
of dissent shall be governed by the provisions of this Chapter.
14A:11-2. Notice of dissent; demand for payment; endorsement of certificates
(1) Whenever a vote is to be taken, either at a meeting of shareholders or upon
written consents in lieu of a meeting pursuant to section 14A:5-6, upon a
proposed corporate action from which a shareholder may dissent under section
14A:11-1, any shareholder electing to dissent from such action shall file with
the corporation before the taking of the vote of the shareholders on such
corporate action, or within the time specified in paragraph 14A:5-6(2)(b) or
14A:5-6(2)(c), as the case may be, if no meeting of shareholders is to be held,
a written notice of such dissent stating that he intends to demand payment for
his shares if the action is taken.
(2) Within 10 days after the date on which such corporate action takes effect,
the corporation, or, in the case of a merger or consolidation, the surviving or
new corporation, shall give written notice of the effective date of such
corporate action, by certified mail to each shareholder who filed written notice
of dissent pursuant to subsection 14A:11-2(1), except any who voted for or
consented in writing to the proposed action.
(3) Within 20 days after the mailing of such notice, any shareholder to whom the
corporation was required to give such notice and who has filed a written notice
of dissent pursuant to this section may make written demand on the corporation,
or, in the case of a merger or consolidation, on the surviving or new
corporation, for the payment of the fair value of his shares.
(4) Whenever a corporation is to be merged pursuant to section 14A:10-5.1 or
subsection 14A:10-7(4) and shareholder approval is not required under
subsections 14A:10-5.1(5) and 14A:10-5.1(6), a shareholder who has the right to
dissent pursuant to section 14A:11-1 may, not later than 20 days after a copy or
summary of the plan of such merger and the statement required by subsection
14A:10-5.1(2) is mailed to such shareholder, make written demand on the
corporation or on the surviving corporation, for the payment of the fair value
of his shares.
(5) Whenever all the shares, or all the shares of a class or series, are to be
acquired by another corporation pursuant to section 14A:10-9, a shareholder of
the corporation whose shares are to be acquired may, not later than 20 days
after the mailing of notice by the acquiring corporation pursuant to paragraph
14A:10-9(3)(b), make written demand on the acquiring corporation for the payment
of the fair value of his shares.
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(6) Not later than 20 days after demanding payment for his shares pursuant to
this section, the shareholder shall submit the certificate or certificates
representing his shares to the corporation upon which such demand has been made
for notation thereon that such demand has been made, whereupon such certificate
or certificates shall be returned to him. If shares represented by a certificate
on which notation has been made shall be transferred, each new certificate
issued therefor shall bear similar notation, together with the name of the
original dissenting holder of such shares, and a transferee of such shares shall
acquire by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making a demand for payment of the
fair value thereof.
(7) Every notice or other communication required to be given or made by a
corporation to any shareholder pursuant to this Chapter shall inform such
shareholder of all dates prior to which action must be taken by such shareholder
in order to perfect his rights as a dissenting shareholder under this Chapter.
14A:11-3. "Dissenting shareholder" defined; date for determination of fair value
(1) A shareholder who has made demand for the payment of his shares in the
manner prescribed by subsection 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) is
hereafter in this Chapter referred to as a "dissenting shareholder."
(2) Upon making such demand, the dissenting shareholder shall cease to have any
of the rights of a shareholder except the right to be paid the fair value of his
shares and any other rights of a dissenting shareholder under this Chapter.
(3) "Fair value" as used in this Chapter shall be determined
(a) As of the day prior to the day of the meeting of shareholders at which
the proposed action was approved or as of the day prior to the day specified by
the corporation for the tabulation of consents to such action if no meeting of
shareholders was held; or
(b) In the case of a merger pursuant to section 14A:10-5.1 or subsection
14A:10-7(4) in which shareholder approval is not required, as of the day prior
to the day on which the board of directors approved the plan of merger; or
(c) In the case of an acquisition of all the shares or all the shares of a
class or series by another corporation pursuant to section 14A:10-9, as of the
day prior to the day on which the board of directors of the acquiring
corporation authorized the acquisition, or, if a shareholder vote was taken
pursuant to section 14A:10-12, as of the day provided in paragraph 14A:11-
3(3)(a).
In all cases, "fair value" shall exclude any appreciation or depreciation
resulting from the proposed action.
14A:11-4. Termination of right of shareholder to be paid the fair value of his
shares
(1) The right of a dissenting shareholder to be paid the fair value of his
shares under this Chapter shall cease if
(a) he has failed to present his certificates for notation as provided by
subsection 14A:11-2(6), unless a court having jurisdiction, for good and
sufficient cause shown, shall otherwise direct;
(b) his demand for payment is withdrawn with the written consent of the
corporation;
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(c) the fair value of the shares is not agreed upon as provided in this
Chapter and no action for the determination of fair value by the Superior Court
is commenced within the time provided in this Chapter;
(d) the Superior Court determines that the shareholder is not entitled to
payment for his shares;
(e) the proposed corporate action is abandoned or rescinded; or
(f) a court having jurisdiction permanently enjoins or sets aside the
corporate action.
(2) In any case provided for in subsection 14A:11-4(1), the rights of the
dissenting shareholder as a shareholder shall be reinstated as of the date of
the making of a demand for payment pursuant to subsections 14A:11-2(3),
14A:11-2(4) or 14A:11-2(5) without prejudice to any corporate action which has
taken place during the interim period. In such event, he shall be entitled to
any intervening preemptive rights and the right to payment of any intervening
dividend or other distribution, or, if any such rights have expired or any such
dividend or distribution other than in cash has been completed, in lieu thereof,
at the election of the board, the fair value thereof in cash as of the time of
such expiration or completion.
14A:11-5. Rights of dissenting shareholder
(1) A dissenting shareholder may not withdraw his demand for payment of the fair
value of his shares without the written consent of the corporation.
(2) The enforcement by a dissenting shareholder of his right to receive payment
for his shares shall exclude the enforcement by such dissenting shareholder of
any other right to which he might otherwise be entitled by virtue of share
ownership, except as provided in subsection 14A:11-4(2) and except that this
subsection shall not exclude the right of such dissenting shareholder to bring
or maintain an appropriate action to obtain relief on the ground that such
corporate action will be or is ultra vires, unlawful or fraudulent as to such
dissenting shareholder.
14A:11-6. Determination of fair value by agreement
(1) Not later than 10 days after the expiration of the period within which
shareholders may make written demand to be paid the fair value of their shares,
the corporation upon which such demand has been made pursuant to subsections
14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) shall mail to each dissenting
shareholder the balance sheet and the surplus statement of the corporation whose
shares he holds, as of the latest available date which shall not be earlier than
12 months prior to the making of such offer and a profit and loss statement or
statements for not less than a 12-month period ended on the date of such balance
sheet or, if the corporation was not in existence for such 12-month period, for
the portion thereof during which it was in existence. The corporation may
accompany such mailing with a written offer to pay each dissenting shareholder
for his shares at a specified price deemed by such corporation to be the fair
value thereof. Such offer shall be made at the same price per share to all
dissenting shareholders of the same class, or, if divided into series, of the
same series.
(2) If, not later than 30 days after the expiration of the 10-day period limited
by subsection 14A:11-6(1), the fair value of the shares is agreed upon between
any dissenting shareholder and the corporation, payment therefor shall be made
upon surrender of the certificate or certificates representing such shares.
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14A:11-7. Procedure on failure to agree upon fair value; commencement of action
to determine fair value
(1) If the fair value of the shares is not agreed upon within the 30-day
period limited by subsection 14A:11-6(2), the dissenting shareholder may serve
upon the corporation upon which such demand has been made pursuant to
subsections 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) a written demand that it
commence an action in the Superior Court for the determination of the fair value
of the shares. Such demand shall be served not later than 30 days after the
expiration of the 30-day period so limited and such action shall be commenced by
the corporation not later than 30 days after receipt by the corporation of such
demand, but nothing herein shall prevent the corporation from commencing such
action at any earlier time.
(2) If a corporation fails to commence the action as provided in subsection
14A:11-7(1), a dissenting shareholder may do so in the name of the corporation,
not later than 60 days after the expiration of the time limited by subsection
14A:11-7(1) in which the corporation may commence such an action.
14A:11-8. Action to determine fair value; jurisdiction of court; appointment of
appraiser
In any action to determine the fair value of shares pursuant to this
Chapter:
(a) The Superior Court shall have jurisdiction and may proceed in the
action in a summary manner or otherwise;
(b) All dissenting shareholders, wherever residing, except those who have
agreed with the corporation upon the price to be paid for their shares, shall be
made parties thereto as an action against their shares quasi in rem;
(c) The court in its discretion may appoint an appraiser to receive
evidence and report to the court on the question of fair value, who shall have
such power and authority as shall be specified in the order of his appointment;
and
(d) The court shall render judgment against the corporation and in favor of
each shareholder who is a party to the action for the amount of the fair value
of his shares.
14A:11-9. Judgment in action to determine fair value
(1) A judgment for the payment of the fair value of shares shall be payable
upon surrender to the corporation of the certificate or certificates
representing such shares.
(2) The judgment shall include an allowance for interest at such rate as
the court finds to be equitable, from the date of the dissenting shareholder's
demand for payment under subsections 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) to
the day of payment. If the court finds that the refusal of any dissenting
shareholder to accept any offer of payment, made by the corporation under
section 14A:11-6, was arbitrary, vexatious or otherwise not in good faith, no
interest shall be allowed to him.
14A:11-10. Costs and expenses of action
The costs and expenses of bringing an action pursuant to section 14A:11-8
shall be determined by the court and shall be apportioned and assessed as the
court may find equitable upon the parties or any of them. Such expenses shall
include reasonable compensation for and reasonable expenses of the appraiser, if
any,
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<PAGE>
but shall exclude the fees and expenses of counsel for and experts employed by
any party; but if the court finds that the offer of payment made by the
corporation under section 14A:11-6 was not made in good faith, or if no such
offer was made, the court in its discretion may award to any dissenting
shareholder who is a party to the action reasonable fees and expenses of his
counsel and of any experts employed by the dissenting shareholder.
14A:11-11. Disposition of shares acquired by corporation
(1) The shares of a dissenting shareholder in a transaction described in
subsection 14A:11-1(1) shall become reacquired by the corporation which issued
them or by the surviving corporation, as the case may be, upon the payment of
the fair value of shares.
(2) (Deleted by amendment, P.L.1995, c. 279.)
(3) In an acquisition of shares pursuant to section 14A:10-9 or section
14A:10-13, the shares of a dissenting shareholder shall become the property of
the acquiring corporation upon the payment by the acquiring corporation of the
fair value of such shares. Such payment may be made, with the consent of the
acquiring corporation, by the corporation which issued the shares, in which case
the shares so paid for shall become reacquired by the corporation which issued
them and shall be cancelled.
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ANNEX C-2
SECTION 351.455 OF THE MISSOURI GENERAL BUSINESS AND CORPORATION LAW
351.455 Shareholder Who Objects to Merger May Demand Value of Shares, When
1. If a shareholder of a corporation which is a party to a merger or
consolidation shall file with such corporation, prior to or at the meeting of
shareholders at which the plan of merger or consolidation is submitted to a
vote, a written objection to such plan of merger or consolidation, and shall not
vote in favor thereof, and such shareholder, within twenty days after the merger
or consolidation is effected, shall make written demand on the surviving or new
corporation for payment of the fair value of his shares as of the day prior to
the date on which the vote was taken approving the merger or consolidation, the
surviving or new corporation shall pay to such shareholder, upon surrender of
his certificate or certificates representing said shares, the fair value
thereof. Such demand shall state the number and class of the shares owned by
such dissenting shareholder. Any shareholder failing to make demand within the
twenty day period shall be conclusively presumed to have consented to the merger
or consolidation and shall be bound by the terms thereof.
2. If within thirty days after the date on which such merger or
consolidation was effected the value of such shares is agreed upon between the
dissenting shareholder and the surviving or new corporation, payment therefor
shall be made within ninety days after the date on which such merger or
consolidation was effected, upon the surrender of his certificate or
certificates representing said shares. Upon payment of the agreed value the
dissenting shareholder shall cease to have any interest in such shares or in the
corporation.
3. If within such period of thirty days the shareholder and the
surviving or new corporation do not so agree, then the dissenting shareholder
may, within sixty days after the expiration of the thirty day period, file a
petition in any court of competent jurisdiction within the county in which the
registered office of the surviving or new corporation is situated, asking for a
finding and determination of the fair value of such shares, and shall be
entitled to judgment against the surviving or new corporation for the amount of
such fair value as of the day prior to the date on which such vote was taken
approving such merger or consolidation, together with interest thereon to the
date of such judgment. The judgment shall be payable only upon and
simultaneously with the surrender to the surviving or new corporations of the
certificate or certificates representing said shares. Upon the payment of the
judgment, the dissenting shareholder shall cease to have any interest in such
shares, or in the surviving or new corporation. Such shares may be held and
disposed of by the surviving or new corporation as it may see fit. Unless the
dissenting shareholder shall file such petition within the time herein limited,
such shareholder and all persons claiming under him shall be conclusively
presumed to have approved and ratified the merger or consolidation, and shall be
bound by the terms thereof.
4. The right of a dissenting shareholder to be paid the fair value of
his shares as herein provided shall cease if and when the corporation shall
abandon the merger or consolidation.
1
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ANNEX D
OPINION OF VOLPE BROWN WHELAN & COMPANY, LLC
<PAGE>
Annex D
[Letterhead of Volpe Brown Whelan & Company, LLC]
September 18, 1998
The Board of Directors
MedQuist Inc.
Five Greentree Centre, Suite 311
Marlton, NJ 08053
Members of the Board:
You have requested our opinion (the "Opinion") as to the fairness, from a
financial point of view, to MedQuist Inc. ("MedQuist") of the consideration to
be received by the shareholders of The MRC Group, Inc. ("MRC" or the "Company")
in connection with the proposed merger (the "Merger") of MRC and Mercury
Acquisition Corp., a wholly owned subsidiary of MedQuist (the "Merger Sub")
pursuant to the Agreement and Plan of Merger dated September 18, 1998 (the
"Agreement") by and among MedQuist, MRC and the Merger Sub.
The Agreement provides, in general, that upon the effectiveness of the Merger:
(i) each share of MRC Common Stock, $0.01 par value ("MRC Common
Stock") will be converted into and represent a number of
shares of MedQuist Common Stock, no par value ("MedQuist
Common Stock") equal to such number of shares of MRC Common
Stock multiplied by the "Common Stock Exchange Ratio", which
is equal to (a) 0.5163 if the average closing price of
MedQuist Common Stock for the ten trading days preceding the
second business day prior to closing (the "Value") is equal to
or greater than $16.28 or (b) $8.41 divided by the Value if
the Value is below $16.28;
(ii) each share of MRC Series IV Preferred Stock ("Series IV
Preferred Stock") will be converted into and represent a
number of shares of MedQuist Common Stock equal to such number
of shares of Series IV Preferred Stock multiplied by the
"Series IV Preferred Exchange Ratio", which is equal to (a)
34.2376 if the Value is equal to or greater than $16.28 or (b)
$557.70 divided by the Value if the Value is below $16.28;
(iii) each share of MRC Series V Preferred Stock ("Series V
Preferred Stock") will be converted into and represent a
number of shares of MedQuist Common Stock equal to such number
of shares of Series V Preferred Stock multiplied by the
"Series V Preferred Exchange Ratio", which is equal to (a)
46.5619 if the Value is equal to or greater than $16.28 or (b)
$758.45 divided by the Value if the Value is below $16.28; and
(iv) each share of MRC Series VI Preferred Stock ("Series VI
Preferred Stock") will be converted into and represent a
number of shares of MedQuist Common Stock
<PAGE>
The Board of Directors
MedQuist Inc.
September 18, 1998
Page 2
equal to such number of shares of Series VI Preferred Stock
multiplied by the "Series VI Preferred Exchange Ratio", which
is equal to (a) 9.5476 if the Value is equal to or grater than
$16.28 or (b) $155.52 divided by the Value if the Value is
below $16.28.
For purposes of this Opinion, the Common Stock Exchange Ratio, the Series IV
Preferred Exchange Ratio, the Series V Exchange Ratio and the Series VI Exchange
Ratio are referred to herein collectively as the "Exchange Ratio".
It is our understanding that the transaction will be accounted for as a pooling
of interests for financial reporting purposes and as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended.
For the purposes of formulating the Opinion, we have, among other things:
(i) reviewed the Agreement and Plan of Merger dated as of September 18,
1998;
(ii) interviewed the management teams of MedQuist and MRC concerning their
business prospects, financial outlook and operating plans as standalone
concerns and as combined;
(iii) reviewed certain historical and projected MedQuist and MRC financial
statements and other relevant financial and operating data of both
companies prepared by the management teams of MedQuist and MRC;
(iv) reviewed the relevant contribution each party is making to the combined
company in terms of financial results and compared the results of this
analysis with the implied pro forma ownership of the combined company;
(v) reviewed the valuation of selected publicly traded companies we deemed
comparable and relevant to MRC;
(vi) reviewed, to the extent publicly available, the financial terms of
selected merger and acquisition transactions that we deemed comparable
and relevant to the Merger;
(vii) performed an analysis of the potential valuation which would be
accorded MRC by public market investors in a public offering of its
equities;
(viii) performed a discounted cash flow analysis of MRC as a standalone entity
based upon the financial projections provided by MedQuist management
through December 1999 and as extrapolated by Volpe Brown Whelan &
Company, LLC ("VBW&Co.") and reviewed by MedQuist management
thereafter;
<PAGE>
The Board of Directors
MedQuist Inc.
September 18, 1998
Page 3
(ix) performed a pro forma financial impact analysis of the combined entity,
based upon financial projections for 1999 provided by the management
team of MedQuist and thereafter as extrapolated by VBW&Co. and reviewed
by MedQuist management; and
(x) performed such other studies, analyses and inquiries and considered
such other information as we deemed relevant.
VBW&Co. relied without independent verification upon the accuracy and
completeness of all of the financial, accounting, legal, tax, operating and
other information provided to VBW&Co. by MedQuist and MRC and has relied upon
the assurances of MedQuist and MRC that all such information provided by them is
complete and accurate in all material respects and that there is no additional
material information known to them that would make any of the information made
available to VBW&Co. either incomplete or misleading. MedQuist has also retained
outside legal, accounting and tax advisors to advise on matters relating to the
Merger. Accordingly, VBW&Co. has relied on their advice and expresses no opinion
on such matters.
With respect to the projected financial data of MedQuist and MRC, all of which
has been provided by or reviewed by the management of MedQuist, as well as the
combined business plan, VBW&Co. has relied upon the assurances of MedQuist and
MRC that such data has been prepared in good faith on a reasonable basis
reflecting the best currently available estimates and judgments of the
respective management teams as to the future financial performance of MRC
separately and as combined with MedQuist and that all extrapolations of such
projected financial data are reasonable. Our Opinion is based, in large part, on
these projected financial data and estimates.
VBW&Co. is relying upon the information provided to it by MedQuist and MRC for
the purposes of rendering the Opinion. VBW&Co. expresses no opinion and has made
no investigation with respect to the validity, accuracy or completeness of the
information provided to it and does not warrant any projections included in such
information. Actual results that MedQuist or MRC might achieve in the future as
standalone entities or as a combined company may vary materially from those used
in VBW&Co.'s analysis.
VBW&Co. has assumed that the Merger will be consummated in accordance with the
terms of Agreement without waiver of any of the conditions to the parties'
obligations thereunder. The Opinion is further based on the assumption that
there will be no change in the number of shares, options or warrants of MedQuist
or MRC between the date of the opinion and the effective date of the Merger.
VBW&Co. has, furthermore, not made any independent appraisals or valuations of
any assets of MedQuist or MRC, nor has VBW&Co. been furnished with any such
appraisals or valuations. VBW&Co. has performed no investigations relating to
the representations and warranties made by MedQuist or MRC, including any
representations or warranties with respect to their intellectual property and
status of any
<PAGE>
The Board of Directors
MedQuist Inc.
September 18, 1998
Page 4
litigation pending or threatened against either company, respectively. While
VBW&Co. believes that its review, as described herein, is an adequate basis for
the Opinion it has expressed, the Opinion is necessarily based upon marked,
economic and other conditions that exist and can be evaluated as of the date of
the Opinion, and any change in such conditions would require a re-evaluation of
the Opinion.
The Opinion addresses only the financial fairness of the Exchange Ratio and does
not address the relative merits of the Merger and any alternatives to the
Merger, MedQuist's decision to proceed with or the effect of the Merger, or any
other aspect of the Merger. The Opinion also does not address the individual or
respective fairness of the exchange ratios that comprise the Exchange Ratio.
The preparation of a fairness opinion involves various judgments as to
appropriate and relevant quantitative and qualitative methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Accordingly, we believe our analyses and the factors utilized in
such analyses must be considered as a whole and that considering any portion of
such analyses or factors, without considering all analyses and factors could
create a misleading or incomplete view of the process underlying the Opinion. In
our analyses, we made numerous assumptions with respect to industry performance,
general business and other conditions and matters, many of which are beyond
MedQuist's or MRC's control and are not susceptible to accurate prediction.
As a customary part of its investment banking business, VBW&Co. engages in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of securities,
private placements and valuations for corporate and other purposes. In the
ordinary course of its business, VBW&Co. and its affiliates may actively trade
the equity securities of MedQuist for their own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
VBW&Co. will receive a fee for rendering its Opinion, no portion of which is
conditioned upon the Opinion being favorable. VBW&Co. will also receive a fee
equal to one percent of the aggregate value of the transaction if the Merger
closes.
No opinion is expressed herein as to the future trading price or range of prices
of any securities of MedQuist issued prior to or in conjunction with the Merger.
Furthermore, the Opinion does not constitute a recommendation as to the Board of
Directors' decision on whether to support the Merger and recommend it to
MedQuist's shareholders and does not constitute a recommendation to shareholders
as to whether to vote in favor of the Merger. The Opinion and related materials
have been prepared for the use and benefit of the Board of Directors of
MedQuist. VBW&Co. assumes no obligation to update, revise or reaffirm the
Opinion.
<PAGE>
The Board of Directors
MedQuist Inc.
September 18, 1998
Page 5
Based upon and subject to the foregoing limitations and restrictions and after
considering such other matters as we deem relevant, it is our opinion that, as
of the date hereof, the Exchange Ratio is fair, from a financial point of view,
to MedQuist.
Very truly yours,
VOLPE BROWN WHELAN & COMPANY, LLC
By: /s/ James Feuille
-----------------------------
Date: 9/18/98
<PAGE>
ANNEX E
OPINION OF BT ALEX. BROWN INCORPORATED
<PAGE>
ANNEX E
[LETTERHEAD OF BT ALEX. BROWN INCORPORATED]
September 18, 1998
Board of Directors
The MRC Group, Inc.
Commerce Park, Building Four
23240 Chagrin Boulevard
Suite 400
Cleveland, OH 44122-5400
Gentlemen:
BT Alex. Brown Incorporated ("BT Alex. Brown") has acted as financial
advisor to The MRC Group, Inc. ("MRC") in connection with the proposed
combination of MRC and MedQuist Inc. ("MedQuist") pursuant to the Agreement and
Plan of Merger, dated September 18, 1998 (the "Merger Agreement"), among
MedQuist, MRC and a wholly-owned subsidiary of MedQuist ("Acquisition Sub"),
which provides, among other things, for the merger of Acquisition Sub with and
into MRC (the "Transaction"), as a result of which MRC will become a wholly
owned subsidiary of MedQuist. As set forth more fully in the Merger Agreement,
as a result of the Transaction, each share of MRC's Common Stock, par value
$0.01 per share, Series IV Preferred Stock, $1.00 par value per share, Series V
Preferred Stock, $1.00 par value per share and Series VI Preferred Stock, $1.00
par value per share, will be converted into shares of common stock of MedQuist
("MedQuist Common Stock"). The terms and conditions of the Transaction are more
fully set forth in the Merger Agreement.
You have requested BT Alex. Brown's opinion, as investment bankers, as
to the fairness, from a financial point of view, of the consideration payable to
the holders of the outstanding capital stock of MRC.
In connection with BT Alex. Brown's role as financial advisor to MRC,
and in arriving at its opinion, BT Alex. Brown has reviewed certain publicly
available financial and other information concerning MedQuist and certain
internal analyses and other information furnished to it by MedQuist and MRC. BT
Alex. Brown has also held discussions with members of the senior managements of
MedQuist and MRC regarding the businesses and prospects of their respective
companies and the joint prospects of a combined company. In addition, BT Alex.
Brown has (i) reviewed the reported prices and trading activity for MedQuist
Common Stock, (ii) compared certain financial and stock market information for
MedQuist with similar information for certain companies
<PAGE>
Board of Directors
The MRC Group, Inc.
September 18, 1998
Page 2 of 3
whose securities are publicly traded, (iii) reviewed the financial terms of
certain business combinations which BT Alex. Brown deemed comparable, in whole
or in part, (iv) reviewed the terms of the Merger Agreement, and (v) performed
such other studies and analyses and considered such other factors as it deemed
appropriate.
BT Alex. Brown has not assumed responsibility for independent
verification of, and has not independently verified, any information, whether
publicly available or furnished to it, concerning MedQuist or MRC, including,
without limitation, any financial information, forecasts or projections
considered in connection with the rendering of its opinion. Accordingly, for
purposes of its opinion, BT Alex. Brown has assumed and relied upon the accuracy
and completeness of all such information, and BT Alex. Brown has not conducted a
physical inspection of any of the properties or assets, and has not prepared,
obtained or received any independent evaluation or appraisal of any of the
assets or liabilities of MedQuist or MRC. With respect to the financial
forecasts and projections, including the analyses and forecasts of certain cost
savings, operating efficiencies, revenue effects and financial synergies
expected by MRC and MedQuist to be achieved as a result of the Transaction
(collectively, the "Synergies"), made available to BT Alex. Brown and used in
its analyses, BT Alex. Brown has assumed that they have been reasonably prepared
on bases reflecting the best currently available estimates and judgments of the
management of MedQuist or MRC, as the case may be, as to the matters covered
thereby. In rendering its opinion, BT Alex. Brown expresses no view as to the
reasonableness of such forecasts and projections, including the Synergies, or
the assumptions on which they are based. BT Alex. Brown's opinion is necessarily
based upon economic, market and other conditions as in effect on, and the
information made available to it as of, the date hereof.
For purposes of rendering its opinion, BT Alex. Brown has assumed that,
in all respects material to its analysis, (i) the representations and warranties
of MedQuist, Acquisition Sub and MRC contained in the Merger Agreement are true
and correct; (ii) MedQuist, Acquisition Sub and MRC will each perform all of the
covenants and agreements to be performed by it under the Merger Agreement; and
(iii) all conditions to the obligations of each of MedQuist, Acquisition Sub and
MRC to consummate the Transaction will be satisfied without any waiver thereof.
BT Alex. Brown has also assumed that all material governmental, regulatory or
other approvals and consents required in connection with the consummation of the
Transaction will be obtained and that in connection with obtaining any necessary
governmental, regulatory or other approvals and consents, or any amendments,
modifications or waivers to any agreements, instruments or orders to which
either MRC or MedQuist is a party or is subject or by which it is bound, no
limitations, restrictions or conditions will be imposed or amendments,
modifications or waivers made that would have a material adverse effect on MRC
or MedQuist or materially reduce the contemplated benefits of the Transaction to
MRC or MedQuist. In addition, you have informed BT Alex. Brown, and accordingly
for purposes of rendering its opinion BT Alex. Brown has assumed, that the
Transaction will be tax-free to each of MRC and MedQuist and their respective
stockholders and that the
<PAGE>
Board of Directors
The MRC Group, Inc.
September 18, 1998
Page 3 of 3
Transaction will be accounted for as a pooling of interests.
This opinion is addressed to, and for the use and benefit of, the Board
of Directors of MRC and is not a recommendation to the stockholders of MRC to
approve the Transaction. This opinion is limited to the fairness, from a
financial point of view, of the consideration payable to the holders of the
outstanding capital stock of MRC, and BT Alex. Brown expresses no opinion as to
the merits of the underlying decision by MRC to engage in the Transaction.
BT Alex. Brown (together with its affiliates, the "BT Group") is a
registered broker-dealer and member of the New York Stock Exchange. BT Alex.
Brown will be paid a fee for its services as a financial advisor to MRC in
connection with the Transaction, a portion of which is contingent upon
consummation of the Transaction. In the ordinary course of business, members of
the BT Group may actively trade in the securities and other instruments and
obligations of MedQuist for their own accounts and for the accounts of their
customers. Accordingly, the BT Group may at any time hold a long or short
position in such securities, instruments and obligations.
Based upon and subject to the foregoing, it is BT Alex. Brown's
opinion, as investment bankers, that the consideration payable to the holders of
the outstanding capital stock of MRC is fair, from a financial point of view.
Very truly yours,
BT ALEX. BROWN INCORPORATED
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 14A:3-5 of the NJBCA permits each New Jersey business
corporation to indemnify its directors, officers, employees and agents against
expenses and liability for each such person's acts taken in his or her capacity
as a director, officer, employee or agent of the corporation if such actions
were taken in good faith and in a manner which he or she reasonably believed to
be in or not opposed to the best interests of the corporation, and with respect
to any criminal proceeding, if he or she had no reasonable cause to believe his
or her conduct was unlawful. Article 10 of MedQuist's By-laws provides for
indemnification for its directors and officers, to the full extent permitted by
applicable law, including, but not limited to, Section 14A:3-5 of the NJBCA.
MedQuist maintains insurance to cover its directors and officers for
liabilities which may be incurred by its directors and officers in the
performance of their duties.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES .
(a) Exhibits
Exhibit No. Description
2.1 Agreement and Plan of Merger dated September 18, 1998 among
MedQuist, Mercury Acquisition Corporation and MRC filed
herewith as Annex A to the Joint Proxy Statement/Prospectus.
2.2 Stock Option Agreement dated September 18, 1998 by and between
MRC and MedQuist filed herewith as Annex B to the Joint Proxy
Statement/Prospectus.
3.1 Amended and Restated Certificate of Incorporation of MedQuist Inc.
5.1 Opinion of Blank Rome Comisky & McCauley LLP.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Skoda, Minotti, Reeves & Co.
23.4 Consent of Blank Rome Comisky & McCauley LLP, included in
Exhibit 5.1.
23.5 Consent of Volpe Brown Whelan & Company, LLC
23.6 Consent of BT Alex. Brown Incorporated
24.1 Powers of Attorney (included on signature page)
27.1 Financial Data Schedules
27.2 Financial Data Schedules
27.3 Financial Data Schedules
<PAGE>
99.1 MedQuist Proxy Card
99.2 MRC Proxy Card
99.3 Consent of Edward L. Samek to be named as a director
99.4 Consent of Bruce K. Anderson to be named as a director
99.5 Consent of Richard H. Stowe to be named as a director
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which any offers or sales are being
made, a post-effective amendment to the registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any other material change to such information in the registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply of the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934, as amended,
that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities being
offered therein, and the offering of such securities at the time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to
<PAGE>
section 13(a) or section 15(d) of the Securities Exchange Act of 1934, as
amended, that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934, as amended; and where interim financial information required to be
presented by Article 3 of Regulation S-X are not set forth in the prospectus, to
deliver, or cause to be delivered to each person to whom the prospectus is sent
or given, the latest quarterly report that is specifically incorporated by
reference in the prospectus to provide such interim financial information.
(d) (1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (d)(1) immediately preceding or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933, as amended,
and is used in connection with an offering of securities subject to Rule 415,
will be filed as part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, as amended, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
(f) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one (1) business day of receipt
of such request, and to send the incorporated documents by first-class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
<PAGE>
(g) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Marlton and
the State of New Jersey, as of October 28, 1998.
MEDQUIST INC.
By: /s/
------------------------------------
David A. Cohen
Chairman and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David A. Cohen and John R. Emery, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign any and all amendments (including, without
limitation, post-effective amendments) to this Registration Statement and any
registration statement filed under Rule 462 under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons as of October
28, 1998 in the capacities indicated:
Signatures Title
/s/ Chairman and Chief Executive Officer
- ----------------------------- (principal executive officer)
David A. Cohen
/s/ Vice President, Treasurer and Chief
- ----------------------------- Financial Officer (principal financial
John R. Emery officer and principal accounting
officer)
/s/ President, Chief Operating Officer and
- ----------------------------- Director
John A. Donohoe, Jr.
/s/ Director
- -----------------------------
James R. Emshoff
/s/ Director
- -----------------------------
William T. Carson
[EXECUTIONS CONTINUED ON FOLLOWING PAGE]
<PAGE>
Signatures Title
/s/ Director
- -----------------------------
Richard J. Censits
/s/ Director
- -----------------------------
John T. Casey
/s/ Director
- -----------------------------
A. Fred Ruttenberg
/s/ Director
- -----------------------------
John H. Underwood
/s/ Director
- -----------------------------
Terrence J. Mulligan
/s/ Director
- -----------------------------
R. Timothy Stack
<PAGE>
EXHIBIT INDEX
Exhibit Description
3.1 Amended and Restated Certificate of Incorporation of MedQuist Inc.
5.1 Opinion of Blank Rome Comisky & McCauley LLP
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Skoda, Minotti, Reeves & Co.
23.5 Consent of Volpe Brown Whelan & Company LLC
23.6 Consent of BT Alex. Brown Incorporated
27.1 Financial Data Schedules
27.2 Financial Data Schedules
27.3 Financial Data Schedules
99.1 MedQuist Proxy Card
99.2 MRC Proxy Card
99.3 Consent of Edward L. Samek to be named as a director
99.4 Consent of Bruce K. Anderson to be named as a director
99.5 Consent of Richard H. Stowe to be named as a director
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MEDQUIST INC.
ARTICLE FIRST
NAME
The name of the corporation is MedQuist Inc.
ARTICLE SECOND
REGISTERED OFFICE
The location of the corporation's current registered office in this
State is Five Greentree Centre, Suite 311, Marlton, New Jersey, 08053.
ARTICLE THIRD
PURPOSE
The name of the current registered agent for the corporation is John M.
Suender.
ARTICLE FOURTH
PURPOSE
The purposes for which the corporation is formed are: to engage,
without limitation, in any activity within the purposes for which corporations
may be organized under the New Jersey Business Corporation Act and any
amendments thereto.
ARTICLE FIFTH
CAPITAL STOCK
The aggregate number of shares which the corporation shall have
authority to issue is 36,055,987.50 shares of which 30,000,000 shares shall be
common stock and 6,055,987.50 shares shall be preferred stock.
The designation, relative rights, preferences and liabilities of each
class of stock, itemized by class, shall be as follows:
(a) Preferred. The corporation's board of directors
(hereinafter called" Board of Directors" or "Board") is authorized to adopt at
any time, or from time-to-time, amendments to the Certificate of Incorporation
in respect to any unissued and/or treasury shares of preferred stock, and
thereby to fix or change the division of shares of the preferred stock into
classes and/or into series within any class or classes, and to fix or change the
determination of the relative rights, preferences and limitations of the share
of any class or series. The authority of the Board with respect to each class or
series of preferred stock shall include, but not be limited to, determination of
the following:
(i) The number of shares constituting that class
or series and the distinctive designation of that class or series;
<PAGE>
(ii) The dividend rate on the shares of that
class or series, whether dividends shall be cumulative, and, if so, from which
date or dates;
(iii) Whether that class or series shall have voting
rights, in addition to any voting rights provided by law, and, if so, the terms
of such voting rights;
(iv) Whether that class or series shall have
conversion privileges and, if so, the terms and conditions of such conversion,
including provision for adjustment of the conversion rate in such events as the
Board of Directors shall determine;
(v) Whether or not shares of that class or
series shall be redeemable and whether or not the corporation or the holder (or
both) may exercise the redemption right, including the date or dates upon or
after which they shall be redeemable, and the amount per share payable in case
of redemption, which amount may vary under different conditions;
(vi) The rights of the shares of that class or
series in the event of voluntary or involuntary liquidation, dissolution or
winding up of the corporation; and
(vii) Any other relative rights, preferences and
limitations of that class or series as may be permitted or required by law.
(b) Common. Each share of common stock shall be entitled to
one vote on all matters submitted to a vote of shareholders, except as the right
to exercise such vote may be limited by the provisions of this Certificate of
Incorporation. The holders of common stock shall be entitled to such dividends
as may be declared by the Board of Directors from time-to-time, provided that
required dividends, if any, on the preferred stock have been paid or provided
for. In the event of the liquidation, dissolution, or winding up, whether
voluntary or involuntary, of the corporation, the assets and funds of the
corporation available for distribution to shareholders, and remaining after the
payment to holders of preferred stock of the amounts to which they are entitled,
shall be divided and paid to the holders of the common stock according to their
respective shares.
ARTICLE SIXTH
DIRECTOR NUMBER; CLASSIFICATION; REMOVAL
(a) The number of directors which shall constitute the whole
Board of Directors shall be not less than five nor more than twenty. Subject to
any rights of holders of preferred stock, the exact number of directors within
such maximum and minimum shall be determined by resolution duly adopted by the
Board of Directors by a majority vote of the entire Board of Directors. No
decrease in the number of directors shall shorten the term of any incumbent
directors.
(b) The Board of Directors shall be divided into three
classes, which shall be as nearly equal in number as possible. Directors of each
class shall serve for a term of three years, and until their successors shall
have been elected and qualified. Upon the adoption of this Article SIXTH and the
filing of the Amended and Restated Certificate of Incorporation with the New
Jersey Secretary of State, the existing Board of Directors shall automatically
be reclassified such that some of the director's terms will be automatically
extended as a result thereof. Each director of the reclassified Board of
Directors shall be placed in one of three classes, and the initial term of
office of each such class shall (except in the event of his earlier resignation
or removal) expire at the annual shareholders' meeting taking place in the year
set forth opposite such director's name (or, if later, upon the election and
qualification of his successor), as follows:
<PAGE>
Name Class Term Expires
---- ----- ------------
William T. Carson III 1995
Richard J. Censits
James F. Conway
Frederick S. Fox, III II 1994
Robert D. Mintz
A. Fred Ruttenberg
Joseph F. Centrone, M.D. I 1993
Barry D. Brown
Kyle W. Will
Richard G. Mohrfeld
At each annual shareholders' meeting following such initial
reclassification and election, the number of directors equal to the number of
directors in the class whose term expires at the time of such meeting shall be
elected to hold office until the third succeeding annual meeting of shareholders
following such meeting. Each director so elected shall hold office until his
term expires and his successor is elected and qualified, or until his earlier
resignation or removal.
(c) Newly elected directorships resulting from any increase in
the authorized number of directors and any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of all votes
entitled to be cast by the entire Board of Directors.
(d) Any directors elected pursuant to any special voting
rights of one or more series of Preferred Stock shall be excluded from, and for
no purpose be counted in, the scope and operation of the foregoing provisions of
this Article SIXTH.
ARTICLE SEVENTH
VOTING POWERS OF DIRECTORS GENERALLY
Every director of the corporation shall be entitled to one (1) vote on
all matters upon which the Board of Directors is entitled to vote. The number of
directors constituting the current Board of Directors of the corporation is ten.
The names and addresses of the directors are presently as follows:
Name Address
Barry D. Brown West Jersey Health System
Mt. Ephraim & Atlantic Avenues
Camden, NJ 08104
William T. Carson, Jr. The Covenant Bank for Savings
18 Kings Highway West
Haddonfield, NJ 08033
Richard J. Censits 688 Annemore Lane
Naples, FL 34108
<PAGE>
Joseph F. Centrone, M.D. South Jersey Radiology
Executive Office
100 Carnie Blvd., Suite B-9
Voorhees, NJ 08043
James F. Conway Mr. Softee, Inc.
901 Clements Bridge Road
Runnemede, NJ 08078
Frederick S. Fox, III Fox & Lazo
30 Washington Avenue
Haddonfield, NJ 08033
Robert D. Mintz, Esquire Freeman, Mintz, Hagner & Deiches, P.A.
34 Tanner Street
Haddonfield, NJ 08033
Richard G. Mohrfeld Mohrfeld, Inc.
24 Lees Avenue
Collingswood, NJ 08108
A. Fred Ruttenberg Blank Rome Comisky & McCauley LLP
Woodland Falls Corporate Park
210 Lake Drive East
Cherry Hill, NJ 08002
Kyle W. Will Delaware Valley/Liebert, Inc.
Keystone Industrial Park
200 Rittenhouse Circle - One East
Bristol, PA 19007
ARTICLE EIGHTH
DURATION
The duration of the corporation is perpetual.
ARTICLE NINTH
LIMITATION OF DIRECTOR LIABILITY
A director of the corporation shall not be personally liable to the
corporation or to the shareholders of the corporation for damages for breach of
any duty owed to the corporation or to the shareholders of the corporation
except that this Article NINTH shall not relieve a director of the corporation
from personal liability to the corporation and to the shareholders of the
corporation for damages for any breach of duty based upon an act or omission (a)
in breach of such director's duty of loyalty to the corporation or the
shareholders of the corporation, or (b) not in good faith or involving a knowing
violation of laws, or (c) resulting in the receipt by such director of an
improper personal benefit.
<PAGE>
ARTICLE TENTH
SEVERABILITY
In the event that all, some or any part of any provision contained in
this Amended and Restated Certificate of Incorporation shall be found by any
court of competent jurisdiction to be illegal, invalid or unenforceable (as
against public policy or otherwise), such provision shall be enforced to the
fullest extent permitted by law and shall be construed as if it had been
narrowed only to the extent necessary so as not to be invalid, illegal or
unenforceable; the validity, legality and enforceability of the remaining
provisions of this Amended and Restated Certificate of Incorporation shall
continue in full force and effect and shall not be affected or impaired by such
illegality, invalidity or unenforceability or any other provision (or any part
or parts thereof) of the Amended and Restated Certificate of Incorporation. If
and to the extent that any provision contained in this Amended and Restated
Certificate of Incorporation violates any rule of a securities exchange or
automated quotation system on which securities of the corporation are traded,
the Board of Directors is authorized, in its sole discretion, to suspend or
terminate such provision for such time or periods of time and subject to such
conditions as the Board of Directors shall determine in its sole discretion.
ARTICLE ELEVENTH
HEADINGS
Article headings and the ordering of paragraphs are for convenience of
reference only and shall not be construed to alter, amend or otherwise affect
the meaning, intent or effect of the provisions of this Amended and Restated
Certificate of Incorporation.
IN WITNESS WHEREOF, the corporation has executed this document on the
27th day of January, 1992.
MEDQUIST INC.
By: /s/ Richard J. Censits
-------------------------------
Richard J. Censits, President
<PAGE>
CERTIFICATE OF AMENDMENT TO
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MEDQUIST INC.
Pursuant to N.J.S.A. 14A:7-15.1(3)
Dated: May 11, 1998
The undersigned, the President of MedQuist Inc., hereby certifies as follows:
The name of the corporation is MedQuist Inc.
On May 11, 1998, the Board of Directors adopted a resolution approving a
division of all outstanding shares of capital stock of the Corporation
consistent with the terms of this Certificate of Amendment.
Such share division will not adversely affect the rights or preferences of the
holders of outstanding shares of any class or series and will not result in the
percentage of authorized shares that remains unissued after the share division
exceeding the percentage of authorized shares that was unissued before the share
division.
All of the common stock and preferred stock of the Corporation shall be subject
to said share division such that each share of common stock and preferred stock
shall be divided into two (2) shares.
5. The first sentence of "Article Fifth Capital Stock" of the Amended and
Restated Certificate of Incorporation is hereby amended to read as follows:
The aggregate number of shares which the Corporation shall
have authority to issue is 72,111,975 of which 60,000,000 shares shall be common
stock and 12,111,975 shares shall be preferred stock.
IN WITNESS THEREOF, the Corporation has caused this Certificate to be
executed on its behalf by its President as of the date first above written.
MedQuist Inc.
By: /s/ David A. Cohen
----------------------------------
David A. Cohen, President,
Chief Executive Officer and
Chairman of the Board of Directors
<PAGE>
MEDQUIST INC.
ACTION OF DIRECTORS BY UNANIMOUS WRITTEN CONSENT
The undersigned, being all of the directors of MEDQUIST INC., a New
Jersey corporation (the "Company"), under and pursuant to Section 14A:6-7.1 of
the New Jersey Business Corporation Act, do hereby propose, adopt and consent to
the following action, which consent shall have the same effect as action duly
taken by the unanimous vote of the Board of Directors at a duly called meeting:
2-FOR-1 SPLIT
WHEREAS, the Board of Directors deems it to be in the best interests of
the Company and its shareholders to declare a 2-for-1 split of the Company's
common stock, no par value;
NOW THEREFORE, BE IT:
RESOLVED, that the Board of Directors hereby declares a 2-for-1 split
(the "Stock Split") of the Company's common stock, no par value, pursuant to the
terms of the Certificate of Amendment ("Stock Split Amendment") to the Amended
and Restated Certificate of Incorporation attached hereto as Exhibit A and
subject to the other provisions of this Unanimous Consent; and be it further
RESOLVED, that the Officers (as defined below) shall have the authority
in their reasonable judgment and with the advice of the Company's investment
bankers and counsel, to determine the record date and effective date of the
Stock Split; provided, however, if such determinations are not made on or before
the next regular meeting of the Board of Directors (scheduled July 22, 1998)
then the authority of the Officers to so act shall be deemed revoked and the
Stock Split may not be effected without further action of the Board of
Directors;
RESOLVED, that the President and Chief Executive Officer, the Executive
Vice President and Chief Operating Officer, the Vice President and Chief
Financial Officer and the Vice President and General Counsel (collectively, the
"Officers"), or any of them, are hereby authorized and directed to take all
actions necessary and appropriate in order to effect the intent of the
foregoing, including, without limitation, executing and filing the Stock Split
Amendment with the New Jersey Secretary of State;
Exhibit 5.1
October 30, 1998
MedQuist Inc.
Five Greentree Centre
Suite 311
Marlton, NJ 08053
Re: MedQuist Inc.
Registration Statement on Form S-4
----------------------------------
Gentlemen:
We have acted as counsel to MedQuist Inc. ("MedQuist") in connection
with the Registration Statement on Form S-4 (the "Registration Statement") to be
filed on October 30, 1998 by MedQuist pursuant to the Securities Act of 1933, as
amended, relating to the issuance of up to 10,206,103 shares of common stock, no
par value, of MedQuist (the "Shares") in connection with the proposed merger
("Merger") of Mercury Acquisition Corporation, a Missouri corporation and a
wholly owned subsidiary of MedQuist ("Sub") with and into MRC, Inc., a Missouri
corporation ("MRC"). This opinion is furnished pursuant to the requirements of
Item 601(b)(5) of Regulation S-K.
In rendering this opinion, we have examined only the documents listed
on Exhibit "A" attached hereto. We have not performed any independent
investigation other than the document examination described above. Our opinion
is therefore qualified in all respects by the scope of that document
examination. We have assumed and relied on the truth, completeness, authenticity
and due authorization of all documents and records examined and the genuineness
of all signatures. This opinion is limited to the laws of the State of New
Jersey.
Based upon and subject to the foregoing, we are of the opinion that the
Shares, when issued in the manner contemplated by the Registration Statement,
will be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Joint Proxy Statement/Prospectus, which is part of the
Registration Statement.
Very truly yours,
BLANK ROME COMISKY & McCAULEY LLP
<PAGE>
EXHIBIT "A"
1. MedQuist's Amended and Restated Certificate of Incorporation and all
amendments thereto.
2. MedQuist's By-Laws and all amendments thereto.
3. Good Standing Certificate issued by the Secretary of State of the State
of New Jersey.
4. Resolutions adopted by the Board of Directors relating to transactions
contemplated by the Registration Statement.
5. MedQuist's Registration Statement on Form S-4.
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on MedQuist Inc.'s supplemental consolidated financial statements
included in this registration statement and to the incorporation by reference in
this registration statement of our report dated August 10, 1998, on the restated
consolidated financial statements included in Item 5 in MedQuist Inc.'s Form
10-Q for the period ended June 30, 1998, and to all references to our Firm
included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, PA
October 30, 1998
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports dated March 3, 1998 (except with respect to the matters discussed in
Note 11, as to which the date is September 18, 1998) and May 1, 1998 (and to all
references to our Firm) included in or made a part of this S-4 Registration
Statement.
/s/ Arthur Andersen LLP
Cleveland, Ohio,
October 30, 1998.
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 16, 1996 (and to all references to our Firm) included in
or made a part of this S-4 Registration Statement.
/s/ Skoda, Minotti, Reeves & Co.
Mayfield Village, Ohio
October 30, 1998
Exhibit 23.5
CONSENT OF FINANCIAL ADVISOR
We consent to the filing of our opinion dated September 18, 1998 to the
MedQuist Inc. Board of Directors attached as an Annex to the Joint Proxy
Statement/Prospectus and to the references to our firm name under the headings
"Opinion of Volpe Brown Whelan & Company, LLC", "Background of the Merger," and
"MedQuist's Reasons for the Merger".
Volpe, Brown Whelan & Company, LLC
San Francisco, California
Dated: October 30, 1998
Exhibit 23.6
CONSENT OF FINANCIAL ADVISOR
October 28, 1998
We hereby consent to the inclusion of the Opinion of BT Alex. Brown
Incorporated dated September 18, 1998 as an Annex to the Joint Proxy
Statement/Prospectus filed as part of the Form S-4 Registration Statement of
MedQuist Inc. and The MRC Group, Inc., and to the references to our firm as
Financial Advisor to The MRC Group, Inc. in the text of said Joint Proxy
Statement/Prospectus. In giving such consent, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933 or the rules and regulations of the Securities and
Exchange Commission.
BT Alex. Brown Incorporated
By: /s/ Russell T. Ray
--------------------------------
Russell T. Ray
Managing Director
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<LEGEND>
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<CIK> 0000884497
<NAME> MEDQUIST INC.
<MULTIPLIER> 1
<CURRENCY> US dollars
<S> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-1-1996 JAN-1-1996 JAN-1-1996
<PERIOD-END> JUN-30-1996 SEP-30-1996 DEC-31-1996
<EXCHANGE-RATE> 1.000 1.000 1.000
<CASH> 11,949 10,724 9,620
<SECURITIES> 0 0 0
<RECEIVABLES> 14,025 15,794 16,836
<ALLOWANCES> 245 244 318
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 27,295 27,795 26,687
<PP&E> 13,543 14,669 15,322
<DEPRECIATION> 5,257 5,853 6,073
<TOTAL-ASSETS> 72,679 77,534 78,760
<CURRENT-LIABILITIES> 6,350 7,810 6,261
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 59,799 66,564 68,427
<TOTAL-LIABILITY-AND-EQUITY> 72,679 77,534 78,760
<SALES> 0 0 0
<TOTAL-REVENUES> 35,469 54,865 76,475
<CGS> 0 0 0
<TOTAL-COSTS> 27,200 40,625 58,631
<OTHER-EXPENSES> 3,593 6,902 7,627
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 1,499 1,567 1,665
<INCOME-PRETAX> 3,177 5,771 8,552
<INCOME-TAX> 1,079 2,041 3,086
<INCOME-CONTINUING> 2,098 3,730 5,466
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,098 3,730 5,466
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<EPS-DILUTED> 0.14 0.21 0.28
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<CIK> 0000884497
<NAME> MEDQUIST INC.
<MULTIPLIER> 1
<CURRENCY> US dollars
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-1-1997 JAN-1-1997 JAN-1-1997 JAN-1-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<EXCHANGE-RATE> 1.000 1.000 1.000 1.000
<CASH> 11,023 9,771 14,330 13,169
<SECURITIES> 0 0 0 0
<RECEIVABLES> 17,769 19,588 19,478 23,380
<ALLOWANCES> 317 447 378 479
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 29,094 29,747 33,922 37,023
<PP&E> 16,337 18,491 19,885 21,812
<DEPRECIATION> 6,743 8,190 8,899 10,022
<TOTAL-ASSETS> 81,199 84,480 90,985 96,889
<CURRENT-LIABILITIES> 7,608 8,071 11,713 11,902
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 0 0 0 0
<OTHER-SE> 70,094 73,005 75,994 80,328
<TOTAL-LIABILITY-AND-EQUITY> 81,199 84,480 90,985 96,889
<SALES> 0 0 0 0
<TOTAL-REVENUES> 22,784 47,618 74,580 103,910
<CGS> 0 0 0 0
<TOTAL-COSTS> 17,295 36,111 56,526 78,955
<OTHER-EXPENSES> 2,271 4,726 7,414 10,258
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 60 112 137 158
<INCOME-PRETAX> 3,158 6,669 10,503 14,539
<INCOME-TAX> 1,118 2,329 3,677 5,192
<INCOME-CONTINUING> 2,040 4,340 6,826 9,347
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 2,040 4,340 6,826 9,347
<EPS-PRIMARY> 0.09 0.20 0.31 0.41
<EPS-DILUTED> 0.09 0.18 0.29 0.39
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<NAME> MEDQUIST INC.
<MULTIPLIER> 1
<CURRENCY> US dollars
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998
<PERIOD-START> JAN-1-1998 JAN-1-1998
<PERIOD-END> MAR-30-1998 JUN-30-1998
<EXCHANGE-RATE> 1.000 1.000
<CASH> 14,906 14,010
<SECURITIES> 0 0
<RECEIVABLES> 23,054 25,121
<ALLOWANCES> 433 527
<INVENTORY> 0 0
<CURRENT-ASSETS> 38,478 39,604
<PP&E> 23,609 25,484
<DEPRECIATION> 11,247 12,620
<TOTAL-ASSETS> 99,558 102,281
<CURRENT-LIABILITIES> 11,228 8,797
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 85,186 89,757
<TOTAL-LIABILITY-AND-EQUITY> 99,558 102,281
<SALES> 0 0
<TOTAL-REVENUES> 33,321 68,200
<CGS> 0 0
<TOTAL-COSTS> 25,227 51,741
<OTHER-EXPENSES> 3,059 7,045
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3 42
<INCOME-PRETAX> 5,032 9,519
<INCOME-TAX> 1,778 3,441
<INCOME-CONTINUING> 3,254 6,078
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,254 6,078
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Exhibit 99.1
MedQuist Inc.
Five Greentree Centre
Suite 311
Marlton, New Jersey 08053
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints John M. Suender and John R. Emery or
either of them as Proxies, each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote, as designated on the reverse,
all the shares of common stock of MedQuist Inc. held of record by the
undersigned on October 29, 1998, at the special meeting of shareholders to be
held on December 10, 1998 or any adjournments thereof.
Please sign on the reverse side
<PAGE>
Please mark your
Votes as in this example [X]
1. Proposal to approve (i) the Agreement and Plan of Merger and (ii) the
Merger, all as described in the accompanying Joint Proxy
Statement/Prospectus.
For Against Abstain
[ ] [ ] [ ]
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned shareholder. If no direction is made, this
Proxy will be voted FOR Proposal 1.
Please mark, sign, date and return this Proxy Card promptly using the
enclosed envelope.
The undersigned hereby acknowledges receipt of MedQuist's Joint Proxy
Statement/Prospectus.
SIGNATURE(S) DATE
--------------------------- ------------------------------
SIGNATURE
IF HELD JOINTLY DATE
--------------------------- ------------------------------
NOTE: Please sign name exactly as it appears above. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such.
If a corporation, please sign in full corporate name by President or
other authorized officer. If a partnership, please sign in
partnership name by authorized person.
Exhibit 99.2
PROXY
SPECIAL MEETING OF SHAREHOLDERS
OF THE MRC GROUP, INC.
December 9, 1998
THIS PROXY IS BEING SOLICITED BY THE BOARD OF DIRECTORS OF THE MRC GROUP, INC.
The undersigned, [name] being the holder(s) of [number] shares of
Common Stock, $0.01 par value (the "Common Stock"), and [number] shares of
Series IV Preferred Stock, $1.00 par value, number Series V shares of Series V
Preferred Stock, $1.00 par value and [number] shares of Series VI
Preferred Stock, $1.00 par value (collectively, the "Preferred Stock") of The
MRC Group, Inc., a Missouri corporation (the "MRC"), as of the close of business
on November 25, 1998, hereby revoking any proxy heretofore given, hereby
constitutes and appoints Edward L. Samek and Steven Bell, and each of them, with
full power of substitution as proxy to vote all such shares upon all subjects
that may come before the Special Meeting of Shareholders of MRC to be held
December 9, 1998 (the "Special Meeting") or any adjournment thereof as follows:
PROPOSAL 1 - AGREEMENT AND PLAN OF MERGER AND MERGER
On the proposal to approve the Agreement and Plan of Merger (the
"Merger Agreement") between MRC, MedQuist Inc, a New Jersey corporation
("MedQuist"), and Mercury Acquisition Corporation, a wholly owned subsidiary of
MedQuist ("Sub"), pursuant to which Sub will be merged with and into MRC (the
"Merger") and all the shares of Common Stock and Preferred Stock will be
converted into shares of common stock of MedQuist in accordance with the terms
of the Merger Agreement.
Pursuant to Articles of Incorporation of MRC, in addition to voting on
the Merger Agreement, holders of Series IV Preferred Stock, Series V Preferred
Stock and Series VI Preferred Stock are also voting on, each as a series, (i)
the Merger itself and (ii) the elimination in the Merger of the right to convert
Preferred Stock into Common Stock. A vote in favor of the Merger Agreement shall
be considered a vote in favor of these matters.
___ FOR APPROVAL ___ AGAINST APPROVAL ___ ABSTAIN
OTHER MATTERS TO COME BEFORE MEETING
On other matters incident to the conduct the Special Meeting or any adjournment
or postponement thereof. (TO WITHHOLD AUTHORITY, STRIKE A LINE THROUGH THE ABOVE
STATEMENT)
THE PROXIES WILL BE VOTED AS SPECIFIED ABOVE, OR IF A CHOICE IS NOT SPECIFIED,
THEY WILL BE VOTED FOR THE PROPOSAL TO APPROVE THE MERGER AGREEMENT.
IMPORTANT: Please date this proxy and sign exactly as your name or name(s)
appear in the shareholder records of MRC. If the shares are held jointly,
signatures must include both names. When signing as executor, administrator,
trustee or guardian, please give full title as such. If voting on behalf of a
corporation, please sign in full corporate name by president or other authorized
officer. If voting on behalf of a partnership, please sign in partnership name
by authorized person.
Receipt of the Notice of Special Meeting of Shareholders and the Joint Proxy
Statement/Prospectus dated November 2, 1998, is hereby acknowledged.
<TABLE>
<S> <C>
Print Name of Shareholder ___________________________________ Print Name of Shareholder _________________________________________
Printed Name and Title of Signer ____________________________ Printed Name and Title of Signer __________________________________
Signature ___________________________________________________ Signature _________________________________________________________
Dated: _______________________, 1998 Dated: _______________________, 1998
</TABLE>
Exhibit 99.3
CONSENT OF PERSON NAMED AS DIRECTOR
The undersigned hereby consents to being named as a person to become a
director of MedQuist Inc. (the "Company") in the Company's Registration
Statement on Form S-4, relating to the Merger of the Company and The MRC Group,
Inc., and in all amendments thereto filed with the Securities and Exchange
Commission.
/s/ Edward L. Samek
-----------------------------
Edward L. Samek
Dated: October 28, 1998
Exhibit 99.4
CONSENT OF PERSON NAMED AS DIRECTOR
The undersigned hereby consents to being named as a person to become a
director of MedQuist Inc. (the "Company") in the Company's Registration
Statement on Form S-4, relating to the Merger of the Company and The MRC Group,
Inc., and in all amendments thereto filed with the Securities and Exchange
Commission.
/s/ Bruce K. Anderson
-----------------------------
Bruce K. Anderson
Dated: October 28, 1998
Exhibit 99.5
CONSENT OF PERSON NAMED AS DIRECTOR
The undersigned hereby consents to being named as a person to become a
director of MedQuist Inc. (the "Company") in the Company's Registration
Statement on Form S-4, relating to the Merger of the Company and The MRC Group,
Inc., and in all amendments thereto filed with the Securities and Exchange
Commission.
/s/ Richard H. Stowe
-----------------------------
Richard H. Stowe
Dated: October 29, 1998
