SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (the "Act")
MEDQUIST INC.
(Exact name of registrant as specified in its charter)
For the fiscal year ended December 31, 1997 Commission file number 0-19941
New Jersey 22-2531298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Greentree Centre, Suite 311, Marlton, NJ 08053
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (609) 596-8877
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
--------------
Common Stock (no par value)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates was approximately $442 million on March 23, 1998, based on the
closing price of Registrant's Common Stock as reported on the Nasdaq National
Market as of such date.
The number of shares of the Registrant's Common Stock, no par value,
outstanding as of March 23, 1998 was 10,995,584.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated by reference.
Part III - Proxy Statement to be filed with the Commission in connection
with the 1998 Annual Meeting.
<PAGE>
PART I
Item 1. BUSINESS
The following report contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated or implied in any such forward-looking statements as a
result of various risks, including, without limitation, rapidly changing
technology; inability to manage and maintain growth; inability to penetrate new
markets; inability to make and successfully integrate acquisitions; inability to
attract and retain qualified management and transcriptionists; decreased demand
for existing products; and lack of a market for new products.
General
The Company is a leading national provider of electronic transcription and
data management services to the healthcare industry. Through its proprietary
software, open architecture environment and network of more than 2,800 trained
transcriptionists, the Company converts free-form medical dictation into
electronically formatted patient records which healthcare providers use in
connection with patient care and for other administrative purposes. The
Company's customized outsourcing services enable clients to improve the accuracy
of transcribed medical reports, reduce report turnaround times, shorten billing
cycles and reduce overhead and other administrative costs. The Company believes
that the electronic capture and delivery of free-form physician dictation are
key components in the increasing implementation by healthcare providers of
electronic medical record systems.
The Company continues to implement advances in technology to improve the
delivery of its services. The Company provides clients with its Medical
Transcription System ("MTS"), an integrated transcription and document
management system based upon proprietary software. The Company's technical staff
customize MTS to address initial data capture, conversion of data into
electronic format, editing of data and routing of electronically formatted
reports to the client's host computer system. For electronic data interchange,
MTS incorporates the HL-7 format or other interface protocols. The Company's
Dictation Tracking System ("DTS") enables the Company and its clients to track
the status of particular patient data and transcribed reports at any point in
time. Clients also use DTS as an integral management tool to monitor physician
timeliness in the dictation, review and sign-off process and to evaluate the
Company's on-time performance.
Company History
The Company was incorporated in New Jersey in 1987 as a group of
out-patient healthcare businesses affiliated with a non-profit healthcare
provider. During the last several years, the Company sold its out-patient
businesses, acquired Transcriptions, Ltd. in May 1994 and two other regional
transcription businesses in 1995, and sold its receivables management division
in December 1995. The Company acquired five regional transcription companies in
1996 and an additional five regional transcription companies in 1997. As used
herein, the term the "Company" includes all of its subsidiaries, including its
subsidiary Transcriptions, Ltd., as well as its predecessor.
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<PAGE>
Item 1. BUSINESS - Continued
Industry Overview
Electronic medical transcription and document management is the process by
which free-form dictated patient data is captured in a useable format, routed to
the appropriate location and inserted into a patient's medical record.
Physicians and other individual healthcare providers use this information for
direct patient care delivery purposes and administrative personnel use the
information for billing and other administrative purposes. Historically, the
majority of dictated reports and related transcription expenditures were
generated by hospital medical record departments, where transcription services
represent a significant expenditure. Examples of these reports include patient
histories, discharge summaries, operative reports and consults. Increasingly,
other hospital departments, such as radiology, emergency, oncology, pediatrics
and cardiology, are dictating reports to improve their delivery of care and
administrative functions. Health maintenance organizations, out-patient clinics
and physician practice groups are also expanding their use of transcribed
medical reports. Accordingly, the Company believes the market for outsourced
transcription services will expand due in part to the following emerging trends.
Outsourcing. In the 1990's outsourcing of services in the healthcare
industry is increasing as a means to reduce administrative burdens and fixed
costs. Hospitals and other healthcare organizations are increasingly outsourcing
their electronic transcription of dictated patient records as their information
needs and volume of dictated reports expand. Particularly as healthcare
providers grow in size and the delivery of medical care becomes decentralized,
outsourcing of transcription services permits providers to reduce overhead and
costs, ease administrative burdens, improve quality of reports, access leading
technologies without development and investment risk and obtain the expertise to
implement and manage a system tailored to their specific requirements.
Growth in Information Systems. As healthcare organizations expand and the
delivery of care becomes increasingly decentralized, the insurance industry and,
in some cases, healthcare accreditation organizations are requiring expanded use
of transcribed reports to facilitate communication between various parts of a
healthcare network, to improve the quality and efficiency of patient care, and
to retain and provide reliable information in the event of malpractice
litigation. Moreover, the growing information needs of hospitals and other
healthcare organizations are driving the creation of electronic medical record
systems as the first step in the implementation of the computer based patient
record and the ability to perform outcomes analysis. The Company believes that
electronic medical transcription services are a core component of such systems
and records since they provide the ability to capture, access and manipulate the
patient data which forms the basis of the patient record.
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<PAGE>
Item 1. BUSINESS - Continued
Delivery of Care. As the health insurance industry continues to shift from
traditional fee-for-service reimbursement to managed care forms of reimbursement
such as "capitation," healthcare providers and payors are creating integrated
healthcare delivery systems consisting of hospitals, health maintenance
organizations, out-patient clinics and physician practice groups which must
coordinate the exchange of patient information and the delivery of patient care.
The accurate and efficient capture of patient data, and the distribution and
storage of and access to patient medical records are critical to such
coordination. Similar coordination is required as healthcare organizations,
often with different information systems, consolidate and increase in size
through mergers and acquisitions. Increasingly, healthcare organizations are
recognizing that centralizing patient data into an accessible system can create
economies of scale to reduce overall healthcare costs and improve the efficient
delivery of patient care.
Consolidation. The medical transcription industry is highly fragmented. An
industry trade organization estimates that there are approximately 1,500
providers of medical transcription services, most of which are small local or
regional companies. Many of these companies lack the financial resources or the
technological capabilities necessary to provide outsourced transcription
services to healthcare providers nationwide. As healthcare organizations
themselves consolidate and increase in size, and their information needs become
more complex, providers and payors increasingly require large and sophisticated
vendors.
Strategy
The Company's objectives are to maintain its leadership position as a
provider of electronic transcription and document management services to the
healthcare industry and to enhance that position as the information needs of
healthcare providers continue to expand and evolve. The key elements of the
Company's strategy include the following:
Expand Existing Client Relationships. A majority of the Company's
transcription services are provided to hospital medical record departments.
Through its close and continuing client relationships, the Company seeks to
increase its services as these departments outsource more of their transcription
requirements and as the volume of patient records continue to grow. In addition,
the Company is seeking to penetrate the direct care departments at hospitals
such as radiology, emergency, oncology, pathology, pediatrics and cardiology,
within its existing client base. Historically, these departments have not
dictated their patient data or outsourced the transcription of their patient
data to the same extent as medical record departments.
Extend Current Client Base. The Company is seeking to extend its base of
traditional hospital clients and to pursue new clients such as health
maintenance organizations, out-patient clinics and physician practice groups
which the Company believes will represent a growing percentage of the available
market. Based upon input from new clients, the Company believes that references
from its existing client base represent a key component of its sales and
marketing efforts.
Leverage Technology Leadership. The Company's proprietary software, which
operates within an open architecture environment, and the Company's
technological expertise enable it to create customized systems tailored to
specific client requirements and changing industry standards. The Company
intends to continue to incorporate advances in technology to improve the
efficiency of its operations, reduce costs, expand the breadth and functionality
of its services and enhance its competitive position.
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<PAGE>
Item 1. BUSINESS - Continued
Capitalize on Emerging Technologies. The Company is initiating
relationships with developers and end-users of emerging technologies, such as
voice-recognition, data mining and outcomes analysis and Internet based
telecommunications to create value added services for its clients and to
participate in the development of the computer based patient record. During
1997, the Company formed a strategic alliance with Lernout & Hauspie Speech
Products to develop and market a clinical workstation which integrates voice
recognition, structured input and free-form dictation. Also during 1997, the
Company and Synthesys Technologies, Inc. executed a co-marketing agreement to
market Synthesys' data mining and outcomes analysis software to the Company's
customer base.
Pursue Strategic Acquisitions. The Company intends to pursue acquisitions
of other transcription companies which expand its client base, management team,
network of qualified transcriptionists or geographic presence, as well as
acquisitions, joint ventures and other relationships which expand its
technological expertise. As the largest pubicly traded company engaged primarily
in providing medical transcription services, the Company believes that it can
capitalize on consolidation opportunities within the fragmented medical
transcription industry. In 1996 and 1997, respectively, the Company completed
five and five acquisitions of small regional medical transcription companies.
The MedQuist Integrated System
The Company integrates proprietary software with sophisticated digital
dictation equipment, a healthcare provider's host system, a network of more than
2,800 transcriptionists and an experienced management team to provide customized
solutions for hospitals and other healthcare providers. Through its outsourced
transcription and data management services, the Company captures and stores
free-form medical dictation, professionally transcribes such dictation into
accurate reports, and electronically receives, reviews and distributes final
reports to a client by up-loading them into the client's computer system for
placement into a patient's medical record. Authorized individuals at multiple
locations can access this electronic information when needed for administrative,
billing and patient care purposes. The Company believes that the transcription
and management of free-form dictation are key components in the increasing
implementation of electronic medical record systems.
The following are the key characteristics of the Company's electronic
transcription and document management system:
Customization/Open-Architecture. MTS operates in an open architecture
environment providing flexibility to address individual client needs. The
Company is capable of modifying MTS to interface with existing or legacy
systems. The Company's technical staff works closely with its clients, both
before and after installation, to develop system modifications and refinements.
For example, MTS allows database abstracting and can generate reports which
clients can use for administrative, management or direct delivery of patient
care purposes (i.e., outcomes analysis studies).
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<PAGE>
Item 1. BUSINESS - Continued
Fast, Accurate and Reliable Reports. The Company believes that due to its
large number (more than 2,800) of trained transcriptionists and its ability to
allocate work among them efficiently, it is able to reduce the production
turnaround times for transcribed medical reports. MTS allows a match of client
turnaround requirements and transcriptionist availability that an in-house staff
or smaller organization generally cannot provide. MTS also provides editing and
electronic review capabilities, such as specific reference to pages or clauses
to alert clients to potential deficiencies, that increase accuracy and
reliability. The quality of its transcriptionists and the capabilities of MTS
enable the Company to deliver its services on a cost-effective basis.
Distribution/Routing System. MTS speeds the distribution of transcribed
reports within the client's healthcare organization. MTS enables the Company to
exchange patient data with the client, using either the HL-7 format or another
interface protocol selected by the client. As a result, completed reports are
uploaded directly into the client's computer system. Once received at the client
host computer, authorized healthcare professionals throughout the client's
organization can access the report.
Tracking System. DTS enables a client and individual healthcare providers
to review the status of particular patient data and transcribed reports at any
point in time and to advise the Company whether the production of a particular
report requires acceleration. Through DTS, the client and the Company are able
to monitor the Company's on-time performance, especially with respect to
critical reports requiring turnaround times of less than 24 hours. Healthcare
providers also use DTS as an integral management tool to monitor physician
timeliness in their dictation, review and sign-off process.
Technology Development
The Company continually evaluates emerging technologies and applies them as
appropriate to make its services more reliable, efficient and cost-effective,
and to assist its clients in meeting their transcription and document management
needs. The Company modifies MTS to interface with existing or legacy systems.
The Company works directly with its clients, both before and after
implementation of its systems, to create customized solutions. For example, the
Company partners with its clients to customize MTS to enable electronic data
exchange in accordance with the HL-7 format, or other interface protocols, to
link the various components of the client's healthcare network.
The Company has also made technological enhancements to MTS to increase the
speed and accuracy of its transcriptionists. Completed projects include the
development of keys and keystroke combinations which translate into commonly
used, often misspelled, medical and technical terms. Additional improvements in
the MTS online spellcheck and editing systems are currently under development,
as are enhancements to the Company's electronic signature capability, the
Company's use of facsimile servers to facilitate the distribution of transcribed
reports to multiple locations, and the conversion of ASCII text into HTML
documents for transmission over computer networks. During 1997, the Company
formed a strategic alliance with Lernout & Hauspie Speech Products to develop
and market a clinical workstation which integrates voice recognition, structured
input and free-form dictation. Also during 1997, the Company and Synthesys
Technologies, Inc. executed a co-marketing agreement to market Synthesys' data
mining and outcomes analysis software to the Company's customer base.
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<PAGE>
Item 1. BUSINESS - Continued
Clients
The Company's diversified client base includes more than 800 hospitals and
other healthcare organizations and physician practice groups. A majority of the
Company's largest clients are hospitals, including large metropolitan hospitals
and major teaching hospitals. Additional clients include health maintenance
organizations and out-patient clinics. The Company's clients are located in 42
states and the District of Columbia. The following table sets forth certain
information relating to the Company's client profile and their contribution to
the Company's revenue for 1997 and 1996:
Percentage of Revenues
Type of Client 1997 1996
- -------------- ---- ----
Hospital Medical Records Departments............. 68.0% 69.7%
Other Hospital Departments....................... 21.8% 20.9%
HMOs, Out-Patient Clinics and Other
Healthcare Providers........................... 8.4% 8.5%
Physician Practice Groups........................ 1.8% 0.9%
Sales and Marketing
All office managers and operational vice presidents, as well as the
Company's senior management, including the Chief Executive Officer, have sales
responsibilities. Based on input from new clients, the Company believes that,
historically, new clients have utilized its services in large part due to
recommendations and references by its existing national client base, and that
references from its existing client base will continue to be a key component of
its marketing and sales strategy. In addition to its traditional transcription
services to hospital medical record departments, the Company's target markets
include patient care departments, such as radiology, emergency rooms, oncology,
pathology, pediatrics and cardiology, health maintenance organizations,
physician practice groups and out-patient clinics.
When performing sales and marketing responsibilities, the Company's
employees utilize a consultative sales and marketing approach by establishing a
working relationship with its clients through a series of direct meetings with
the chief financial officer, health information manager, chief information
officer and other key individuals at the client's organization. In this manner,
the Company obtains information concerning the particular needs of a client and
educates the client as to how the Company's services can be customized to meet
those needs. As part of its marketing efforts, the Company also advertises in
national healthcare trade publications (including those sponsored by the
American Health Information Management Association), and participates in
industry conventions.
Competition
The Company currently competes in a highly fragmented industry which is
predominately populated by small, regional or local companies, with a limited
number of national companies. According to the Medical Transcription Industry
Alliance, there are over 1,500 companies providing medical transcription
services in the United States. The Company believes that it competes for clients
on the basis of price, ability to customize services and the reliability,
accuracy and turnaround time of transcribed reports. In addition to competition,
the market available to the Company is limited by healthcare organizations which
maintain in-house transcription departments.
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<PAGE>
Item 1. BUSINESS - Continued
Employees
As of March 1, 1998, the Company employed 857 persons, of whom 42 are
administrative, 29 are branch office managers, 59 are technical support, 366 are
clerical and other support personnel, and 361 are transcriptionists. In
addition, 2,517 persons provide transcription services to the Company from their
homes. The Company compensates its transcriptionists under a production
incentive-based compensation structure based upon their performance (including
accuracy, speed and output). The Company believes that its ability to engage
at-home transcriptionists enables it to compete effectively for the limited
number of skilled transcriptionists. By being able to work out of their homes,
qualified transcriptionists can make their own hours, eliminate commuting costs
and time and have the benefits of flexible work hours. Additionally, many of the
Company's transcriptionists are working parents with children and the ability to
work at home permits them to reduce child care costs.
The Company treats its at-home transcriptionists as independent contractors
for state tax, benefits and unemployment purposes and statutory employees for
social security and federal income tax purposes. A successful challenge to the
Company's position or a change in applicable law could result in the incurrence
of liability for withholding taxes, disability payments, unemployment payments,
interest and penalties by the Company.
The Company utilizes a quality control program for training its
transcriptionists to permit greater accuracy of transcribed reports. The Company
has hired a national recruiter for screening and testing applicants for
positions as transcriptionists and maintains relationships with transcriptionist
schools to develop applicant pools. Screening procedures include testing
applicants' skills to determine whether they meet the Company's standards.
None of the Company's employees are represented by a labor union. The
Company considers its relations with its employees and at-home transcriptionsts
to be good.
Government Regulation
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the outsourcing arrangements of healthcare
providers. Federal and state legislators have proposed programs to reform the
United States healthcare system and other proposals are in the development
stage. In general, these programs and proposals tend to emphasize managed care,
seek to lower reimbursement rates and otherwise attempt to control the
environment in which providers operate.
In providing its services, the Company is subject to certain statutory,
regulatory and common law requirements regarding the confidentiality of such
medical information. The Company requires its personnel to agree to keep all
medical information confidential and monitors compliance with applicable
confidentiality requirements.
Federal and state regulators are making increasing efforts to investigate
claims of false billing for government reimbursement and have secured
substantial payments from healthcare providers to resolve these claims. Because
these claims often result from a lack of appropriate documentation to support
billing, these government investigational efforts may stimulate a need for more
comprehensive transcription
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<PAGE>
Item 1. BUSINESS - Continued
services. Additionally, healthcare accreditation organizations and
governmental authorities have begun to require more efficient transcription of
patient medical records as part of the requirements for a hospital or other
healthcare organization to receive and maintain its accreditation.
It presently cannot be determined if any additional healthcare legislation
or self-regulatory proposals (whether relating to reimbursement, accreditation,
billing practices, confidentiality, the healthcare industry in general or
otherwise) will be introduced, the form that any such legislation or proposals
would take, whether such legislation or proposals would be enacted or adopted
and, if enacted or adopted, what effect, if any, such legislation or proposals
would have on the healthcare industry in general and the Company in particular.
Intellectual Property
The Company considers its MTS and DTS trademarks and its corporate names
MedQuist and Transcriptions, Ltd. to be important to the operation of its
business and the marketing of its services. The Company has been issued a
registered trademark for the corporate names "MedQuist" and "Transcriptions,
Ltd.". No registered trademark has been issued for MTS or DTS. The Company
regards the software underlying its services as proprietary, and relies
primarily on a combination of contract, copyright and trademark law, trade
secrets, confidentiality agreements and contractual provisions to protect its
proprietary rights. The Company has no patents or patent applications pending,
and relies on existing trade secrets and copyright laws to afford it protection
against unauthorized use. The Company is not aware that any of its software,
trademarks or other proprietary rights infringe the proprietary rights of third
parties.
Year 2000 Compliance
The company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two-digit year value to 00. The issue is
whether computer systems will properly recognize 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. The company
relies on its systems in operating and monitoring all aspects of its business.
The company also relies on the external systems of its customers, suppliers and
other organizations with which it does business. Management is in the process of
assessing its internal and external systems to assure the company is prepared
for the year 2000. Management does not anticipate that the company 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 the
company's efforts to identify year 2000 issues. However, despite the company's
efforts thus far to address year 2000 compliance, the company cannot guarantee
that all internal or external systems will be compliant, or that its business
will not be materially adversely affected by any such non-compliance.
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<PAGE>
Item 2. PROPERTIES
The Company does not own any real property. The Company leases office and
other space for 38 service centers in 26 states. The Company's typical service
center ranges in size from 1,000 to 7,000 square feet and is leased for a term
ranging from three to five years. The Company's executive offices comprise
14,000 square feet and has 2 years remaining on its lease. The Company believes
that there is adequate office space available to it should it need to move or
expand and that minimal leasehold improvements are required in order to open a
new location.
Item 3. LEGAL PROCEEDINGS
Although the Company from time to time in the course of the operation of
its business is subject to various legal proceedings, the Company is not
currently a party to any material pending legal proceeding nor, to the knowledge
of the Company, is any material legal proceeding currently threatened.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters during the fourth quarter of the
year covered by this report to a vote of the security holders through the
solicitation of proxies or otherwise.
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<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Since May 24, 1996 the Common Stock has been traded on the Nasdaq National
Market under the symbol "MEDQ". From September 20, 1994 until May 24, 1996, the
Common Stock was traded on the American Stock Exchange under the symbol "MBS."
The following table sets forth, for the last two fiscal years and for the first
quarter of 1998 through the date set forth below, the high and low reported
closing sale prices for the Common Stock for the period during which the Common
Stock has been traded on the American Stock Exchange and the range of high and
low bid quotations for the period in which the Common Stock was quoted in the
Nasdaq National Market. The bid quotations for the Nasdaq National Market
reflect inter-dealer prices, do not include retail mark-ups, mark-downs or
commissions and may not necessarily reflect actual transactions.
High Low
---- ---
1996
First Quarter.............................. 8.67 5.58
Second Quarter............................. 13.83 8.08
Third Quarter.............................. 14.83 8.33
Fourth Quarter............................. 16.67 11.00
1997
First Quarter.............................. 17.67 14.50
Second Quarter............................. 20.25 12.67
Third Quarter.............................. 23.38 19.75
Fourth Quarter............................. 34.75 22.00
1998
First Quarter.............................. 38.88 30.38
The above noted bid quotations reflect a three for two stock split effected
on September 9, 1997.
On March 23, 1998 the closing sale price for the Common Stock, as reported
on the Nasdaq National Market, was $38.38 per share, and there were 90 record
holders of the Common Stock and the Company estimates there were approximately
1,959 beneficial holders.
DIVIDEND POLICY
To date, the Company has not paid any dividends on its capital stock. The
Company currently intends to retain any future earnings to fund operations and
the continued development of its business and, therefore, does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. Future
cash dividends, if any, will be determined by the Board of Directors, and will
be based upon the Company's earnings, capital requirements, financial condition
and other factors deemed relevant by the Board of Directors. The Company's
senior lender restricts the payment of any dividends.
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<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below reflects selected
consolidated financial data of the Company for the periods indicated, after
giving retroactive effect of the Company's discontinued operations. The selected
consolidated financial data for each of the five years ended December 31, 1997
have been derived from the consolidated financial statements of the Company
which have been audited by Arthur Andersen LLP, independent public accountants.
This data should be read in conjunction with the consolidated financial
statements of the company and the notes thereto, and Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this Report.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
(In thousands, except per share data)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues(1) ......................... $ 84,590 $ 61,480 $ 45,127 $ 24,841 $ --
Costs and expenses:
Cost of revenues .................. 62,282 45,591 33,711 18,677 --
Selling, general and administrative 4,620 3,579 4,325 2,798 1,688
Depreciation ...................... 3,568 2,468 1,862 639 60
Amortization of intangible assets . 1,517 1,176 496 264 12
-------- -------- -------- -------- --------
Total operating expenses ....... 71,987 52,814 40,394 22,378 1,760
-------- -------- -------- -------- --------
Operating income (loss) ............. 12,603 8,666 4,733 2,463 (1,760)
Interest expense .................... 173 1,649 3,695 2,738 1,426
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes .... 12,430 7,017 1,038 (275) (3,186)
Income tax provision (benefit) ...... 4,799 2,833 431 (109) (1,290)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations(1) ..................... 7,631 4,184 607 (166) (1,896)
Discontinued operations (2) ......... -- -- (1,729) 1,612 3,746
Extraordinary item (3) .............. -- -- (545) -- --
-------- -------- -------- -------- --------
Net income (loss) ................... 7,631 4,184 (1,667) 1,446 1,850
Inducement deduction(4) ............. -- (707) -- -- --
-------- -------- -------- -------- --------
Net income (loss) available to
common shareholders ............... $ 7,631 $ 3,477 $ (1,667) $ 1,446 $ 1,850
======== ======== ======== ======== ========
Basic income (loss) per
common share (5)(6):
Continuing operations (1) ........ $ 0.73 $ 0.52 $ 0.17 $ (0.05) $ (0.44)
Discontinued operations(2) ....... -- -- (0.49) 0.48 0.88
Extraordinary item (3) ........... -- -- (0.16) -- --
Inducement deduction (4) ......... -- (0.09) -- -- --
-------- -------- -------- -------- --------
$ 0.73 $ 0.43 $ (0.48) $ 0.43 $ 0.44
======== ======== ======== ======== ========
Diluted income (loss) per
common share (5)(6):
Continuing operations (1) ....... $ 0.68 $ 0.47 $ 0.16 $ (0.05) $ (0.44)
Discontinued operations(2) ...... -- -- (0.46) 0.48 0.88
Extraordinary item (3) .......... -- -- (0.15) -- --
Inducement deduction (4) ........ -- (0.08) -- -- --
-------- -------- -------- -------- --------
$ 0.68 $ 0.39 $ (0.45) $ 0.43 $ 0.44
======== ======== ======== ======== ========
</TABLE>
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<PAGE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
(In thousands)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital ..................... $22,723 $18,355 $ 4,926 $ 776 $ 1,108
Total assets ........................ 90,805 74,341 58,095 51,403 25,041
Long-term debt, net of
current portion ................... 1,404 1,719 15,956 30,415 12,395
Shareholders' equity ................ 76,317 65,695 10,420 10,692 9,071
</TABLE>
- -------
(1) Transcriptions, Ltd. was acquired by the Company effective May 1, 1994. All
prior businesses have been treated as discontinued operations. See (2)
below.
(2) On November 14, 1995, the Company executed a letter of intent to sell its
receivables management business. The operations and net assets of the
Company's receivables management business and previously divested
businesses have been accounted for as discontinued operations. Discontinued
operations are presented net of tax and include a gain on disposal of
$1,749 in 1993 and a loss on disposal of $3,180 in 1995. See Note 3 of
Notes to Consolidated Financial Statements.
(3) Represents the loss on early extinguishment of debt, net of income taxes.
(4) Represents issuance of 64 shares of common stock to induce a warrant holder
to exercise. The Company has recorded a $707 non-recurring deduction from
net earnings available to common shareholders. See Note 8 of Notes to
Consolidated Financial Statements.
(5) In February 1997, the FASB issued Statement 128, "Earnings Per Share" (SFAS
128), which provides changes in the calculation of earnings per share for
financial statements issued for periods ending after December 15, 1997.
This statement also requires restatement of all prior-period EPS data
presented. Therefore, the income per share computations for all years
presented reflect the adoption of SFAS 128. See note 1 of Notes to
Consolidated Financial Statements.
(6) On September 9, 1997, the Company effected a three for two stock split for
all shares of common stock. All share data presented herein has been
retroactively adjusted to reflect the split. See Note 1 of Notes to
Consolidated Financial Statements.
-13-
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company is a leading national provider of electronic transcription and
document management services to the healthcare industry. As a result of
acquisition and divestiture activity from 1992 through 1995, the Company's
operations have changed considerably and the Company's financial statements
reflect its previously divested businesses as discontinued operations. The
Company's continuing operations relate only to its transcription business.
Fees for transcription related services are based primarily on contracted
rates, and revenue is recognized upon the rendering of services and delivery of
reports. Cost of revenues consists of all direct costs associated with providing
transcription related services, including payroll, telecommunications, software
customization, repairs and maintenance, rent and other direct costs. Selling,
general and administrative expenses include costs associated with the Company's
senior executive management and with marketing and sales, finance, legal and
other administrative functions.
In May 1996, the Company consummated a secondary public offering of is
common stock, selling 3.3 million shares at a price of $11.33. In June 1996, the
underwriters exercised their over-allotment for an additional 461,000 shares. A
portion of the net proceeds from the offering was used to pay in full the cash
portion of the deferred purchase price payable to related parties in connection
with the acquisition of Transcriptions, Ltd. and to repay in full borrowings
outstanding under the Company's senior credit facility with certain lenders. The
remaining net proceeds were used by the Company for general corporate purposes.
Simultaneous with the closing of the secondary offering, the Company issued
1.4 million shares of common stock to a warrant holder. The warrant holder
exercised its warrants to purchase preferred stock by canceling the $7.0 million
principal amount of a senior subordinated note and simultaneously converting
such preferred stock into common stock. In addition, the Company issued 63,750
additional shares of common stock to induce the warrant holder to exercise. As a
result of this issuance, the Company has recorded a $707,000 or $0.08 per
diluted share non-recurring deduction from net earnings 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 113,000 shares of common stock, at an
exercise price of $4.49 per share. These warrants were exercised on June 12,
1997 by the agent bank for proceeds to the company of $508,000.
-14-
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Results of Continuing Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of revenues:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues ............................................ 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues .................................. 73.6 74.2 74.7
Selling, general and administrative ............... 5.5 5.8 9.6
Depreciation ...................................... 4.2 4.0 4.1
Amortization of intangible assets ................. 1.8 1.9 1.1
----- ----- -----
Operating income .................................... 14.9 14.1 10.5
Interest expense .................................... 0.2 2.7 8.2
----- ----- -----
Income from continuing operations before
income taxes....................................... 14.7 11.4 2.3
Income tax provision ................................ 5.7 4.6 1.0
----- ----- -----
Income from continuing operations ................... 9.0 6.8 1.3
===== ===== =====
</TABLE>
-15-
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Revenues increased 37.6% from $61.5 million in 1996 to $84.6
million in 1997. The $23.1 million increase over 1996 is composed of $15.1
million from internally generated growth and $8.0 million of revenues from
acquisitions.
Cost of Revenues. Cost of revenues increased 36.6% from $45.6 million in
1996 to $62.3 million in 1997 directly related to the increase in revenues. As a
percentage of revenues, cost of revenues decreased from 74.2% in 1996 to 73.6%
in 1997, primarily related to a decrease in telecommunication costs.
Selling, General and Administrative. Selling, general and administrative
expense increased 27.8% from $3.6 million in 1996 to $4.6 million in 1997. As a
percentage of revenues, selling, general and administrative expenses decreased
from 5.8% in 1996 to 5.5% in 1997. The decrease in selling, general and
administrative costs as a percentage of revenue is primarily due to the ability
of the Company to leverage its overhead expenses.
Depreciation. Depreciation increased 44.0% from $2.5 million in 1996 to
$3.6 million in 1997. As a percentage of revenues, depreciation increased to
4.2% in 1997 compared to 4.0% in 1996. The increase in depreciation is primarily
due to additional capital expenditures made in 1997 to upgrade and increase
capacity of digital voice recording systems.
Amortization. Amortization of intangible assets was $1.2 million in 1996 as
compared to $1.5 million in 1997. The increase in 1997 is attributable to the
amortization of intangible assets associated with the Company's five
acquisitions completed in 1996 and five acquisitions completed in 1997. As a
percentage of revenue, amortization remained relatively consistent at 1.8% in
1997 as compared to 1.9% in 1996.
Interest. Interest expense decreased from $1.6 million in 1996 to $173,000
in 1997. The decrease in 1997 was related to the Company's senior term loans,
borrowings under the Revolving credit facility and the cash portion of the
deferred purchase price being paid in full on May 30, 1996 with a portion of the
proceeds from the Company's 1996 equity offering. Additionally, in 1996 the
Company had recorded $640,000 related to non-cash imputed interest expense
associated with the fixing of the deferred purchase price for Transcriptions,
Ltd. which did not exist in 1997.
-16-
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Revenues increased 36.4% from $45.1 million in 1995 to $61.5
million in 1996. The $16.4 million increase over 1995 is composed of $11.1
million from internally generated growth and $5.3 million of revenues from
acquisitions.
Cost of Revenues. Cost of revenues increased 35.3% from $33.7 million in
1995 to $45.6 million in 1996 directly related to the increase in revenues. As a
percentage of revenues, cost of revenues decreased from 74.7% in 1995 to 74.2%
in 1996, primarily related to a decrease in wage related expenses, partially
offset by an increase in telecommunication costs.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 16.3% from $4.3 million in 1995 to $3.6 million in 1996. The
decrease is primarily attributed to a $697,000 non-recurring charge in 1995
related to retirement and severance costs. As a percentage of revenues, selling,
general and administrative expenses decreased from 9.6% in 1995 to 5.8% in 1996.
Depreciation. Depreciation increased 31.6% from $1.9 million in 1995 to
$2.5 million in 1996. The aggregate increase in 1996 reflects continued capital
purchases to support the increased revenue base. As a percentage of revenues,
depreciation remained relatively consistent at 4.0% in 1996 compared to 4.1% in
1995.
Amortization. Amortization of intangible assets was $1.2 million in 1996 as
compared to $496,000 in 1995. The increase in 1996 is attributable to the
increase in intangible assets associated with the fixing of the deferred
purchase price for Transcriptions, Ltd., which the Company began to amortize
effective December 29, 1995, and the impact of the intangible assets associated
with the Company's five acquisitions completed in 1996
Interest. Interest expense decreased from $3.7 million in 1995 to $1.6
million in 1996. The decrease in 1996 was due to the prepayment of approximately
$16.7 million of debt with the net proceeds from the sale of the receivables
management business in December 1995, partially offset by an increase of
$640,000 related to the non-cash imputed interest associated with the fixing of
the debt portion of the deferred purchase price for Transcriptions, Ltd. in
December 1995. On May 30, 1996 the Company's senior term loans, borrowings under
the revolver and the debt portion of the deferred purchase price were paid in
full with a portion of the proceeds from the Company's 3.8 million share equity
offering.
-17-
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Extraordinary Item
During 1995, the Company recorded an extraordinary loss on the early
extinguishment of debt of $545,000. The extraordinary loss is the result of the
write off of certain deferred financing costs incurred in May 1994.
Inducement of Preferred Stock Conversion
Simultaneous with the closing of the Company's 1996 equity offering, a
warrant holder exercised its warrants to purchase 1.4 million shares of
convertible preferred stock by applying the $7.0 million principal amount of a
senior subordinated note against the exercise price. The preferred stock was
simultaneously converted into common stock. The Company issued 63,750 shares of
common stock to induce the warrant holder to exercise. As a result of this
issuance, the Company recorded a $707,000 or $0.08 per share non-recurring
deduction from net income available to common shareholders.
Liquidity and Capital Resources
At December 31, 1997, the Company had working capital of $22.7 million,
including $12.3 million of cash and cash equivalents, which includes a
restricted certificate of deposit of $1.3 million used to repay a note in
January 1998. During 1997, the Company's operating activities provided cash of
$11.3 million and during 1996 operating activities provided $5.0 million. The
increase in cash provided by operating activities is primarily related to
increases in net income and accrued expenses.
During 1997, the Company purchased $4.6 million of capital equipment and
completed the acquisition of five transcription businesses for approximately
$3.7 million in cash and $3.3 million in subordinated promissory notes. The
increase in capital equipment purchases of $1.4 million over 1996 is primarily
due to the overall growth of the company. These expenditures were financed
primarily through cash flows from operations and the issuance of subordinated
notes payable to the sellers. In January 1998, the Company paid in full the $3.3
million in subordinated promissory notes issued in connection with the 1997
acquisitions.
During 1997, option and warrant holders exercised 266,000 and 113,000
options and warrants to purchase common stock respectively. The exercises
generated $1.8 million in cash used for general corporate purposes.
On April 23, 1997, the Company amended the borrowing facility with Chase
Manhatten Bank (the "Chase Facility"). The Chase Facility provides for a
$10 million senior unsecured revolving credit facility expiring 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 Chase
Facility also allows for the Company to finance up to 100% of any acquisitions
of companies that are in the business of providing transcriptions-related
services. The financing of these acquisitions may be carved out of the revolving
credit facility and amortized over five year periods (20 consecutive quarters).
Each acquisition term loan that is created would permanently reduce the
remaining revolving credit commitment by a like amount.
-18-
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
In addition to acquisitions, the revolver can be used for working capital
and general corporate purposes. To the extent any amounts under the revolver are
repaid, other than acquisition term loans, the Company may reborrow such
amounts. The Chase Facility includes certain financial and other covenants
applicable to the Company, including limitations on capital expenditures and
dividends.
Effective December 29, 1995 the Company and the former owner of
Transcriptions, Ltd., who include the Company's current Chief Executive Officer
and Chief Operating Officer, amended the Transcriptions purchase agreement to
fix the amount of the deferred purchase price (see Note 2 of Notes to
Consolidated Financial Statements). The amendment required the Company to pay
$18.4 million in cash and issue 1.3 million shares of Common Stock (valued at
$4.55 million for financial reporting purposes) on August 31, 1996. In May 1996,
the Company paid the cash portion of the subordinated payable and the common
stock was issued in August 1996.
The Company believes that cash flow generated from the Company's operations
and its borrowing capacity under the Chase Facility should be sufficient to meet
its working capital and capital expenditure requirements. Additional funds may
be required in connection with any future acquisitions, if any.
Year 2000 Compliance
The company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two-digit year value to 00. The issue is
whether computer systems will properly recognize 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. The company
relies on its systems in operating and monitoring all aspects of its business.
The company also relies on the external systems of its customers, suppliers and
other organizations with which it does business. Management is in the process of
assessing its internal and external systems to assure the company is prepared
for the year 2000. Management does not anticipate that the company 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 the
company's efforts to identify year 2000 issues. However, despite the company's
efforts thus far to address year 2000 compliance, the company cannot guarantee
that all internal or external systems will be compliant, or that its business
will not be materially adversely affected by any such non-compliance.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements. The information called for by
this Item is set forth on Pages F-1 through F-20.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
-19-
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission in connection with the
1998 Annual Meeting.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission in connection with the
1998 Annual Meeting.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission in connection with the
1998 Annual Meeting.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement to be filed with the Commission in connection with the
1998 Annual Meeting.
-20-
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company
[incorporated] by reference to Exhibit 1 of the Company's Current
Report on Form 8-K filed August 15, 1997.
3.2 By-Laws of the Company incorporated by reference to Exhibit 3.2 of
the Company's 1993 Annual Report on Form 10-K (the "1993 10-K").
3.3 Certificate of Designation of Terms of Preferred Stock
[incorporated by reference to Exhibit 3.3 of the Company's 1992 Annual
Report on Form 10-K (the "1992 10-K").
4.1 Specimen Stock Certificate incorporated by reference to Exhibit
4.1 of the Company's Registration Statement (No. 333-3050) on Form S-1
(the "1996 Registration Statement").
*10.1 Agreement between the Company and Richard J. Censits, dated
January 29, 1996 [incorporated by reference to Exhibit 10.1 of the
1996 Registration Statement].
*10.2 Incentive Stock Option Plan of the Company, dated January 1988
[incorporated by reference to Exhibit 10.2 of the Company's
Registration Statement (No. 33-95968) on Form S-1 (the "1992
Registration Statement").
*10.3 Stock Option Plan of the Company, dated January 1992, as amended
[incorporated by reference to Exhibit 10.3 of the 1996 Registration
Statement].
*10.4 Nonstatutory Stock Option Plan for Non-Employee Directors of the
Company, dated January 1992 [incorporated by reference to Exhibit 10.4
of the 1992 Registration Statement].
*10.5 Employment Agreement by and between the Company and John R.
Emery, [incorporated by reference to Exhibit 10.5 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996
(the "1996 10-K")].
*10.6 Employment Agreement by and between the Company and David A.
Cohen, dated May 1, 1994 ("Cohen Employment Agreement") [incorporate
by reference to Exhibit 10.33 of the Company's Form 10-Q for the
three-month period ended June 30, 1994 (the "6/30/94 10-Q").
*10.7 Amendment to Cohen Employment Agreement, dated March 1, 1996
[incorporated by reference to Exhibit 10.7 of the 1996 Registration
Statement].
*10.8 Employment Agreement by and between the Company and John A.
Donohoe, dated May 27, 1994 ("Donohoe Employment Agreement")
[incorporated by reference to Exhibit 10.8 of the 1996 Registration
Statement].
* Management contract or compensatory plan or arrangement.
-21-
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K - Continued
Exhibit No. Description
- ----------- -----------
*10.9 Amendment to Donohoe Employment Agreement, dated March 1, 1996
[incorporated by reference to Exhibit 10.9 of the 1996 Registration
Statement].
*10.10 Employment Agreement by and between the Company and Ronald F.
Scarpone, dated May 27, 1994, as amended March 1, 1996 [incorporated
by reference to Exhibit 10.10 of the 1996 Registration Statement].
*10.11 Employment Agreement by and between the Company and James R.
Emshoff, dated August 25, 1996 [incorporated by reference to Exhibit
10.37 of the Company's Form 10-Q for the three-month period ended
September 30, 1996 (the "9/30/95 10-Q").
10.13 Amended and Restated Senior Subordinated Loan Agreement by and
between the Company and Heller, dated as of December 29, 1996
[incorporated by reference to Exhibit 10.13 of the 1996 Registration
Statement].
10.14 Warrant Purchase Agreement by and between the Company and
Heller, dated as of December 14, 1992 [incorporated by reference to
Exhibit 3 of the Company's Current Report on Form 8-K filed December
24, 1992 (the "12/24/92 8-K").
10.15 Registration Rights Agreement between the Company and Heller,
dated as of December 14, 1992 [incorporated by reference to Exhibit 6
of the 12/24/92 8-K].
10.16 Warrant to Purchase Class A Convertible Preferred Stock issued
to Heller, dated as of May 27, 1994 (the "Class A Warrant")
[incorporated by reference to Exhibit 10.27.7 of the 6/30/94 10-Q].
10.17 Warrant to Purchase Class B Convertible Preferred Stock issued
to Heller, dated as of May 27, 1994 (the "Class B Warrant")
[incorporated by reference to Exhibit 10.27.8 of the 6/30/94 10-Q].
10.18 Amendment to Class A Warrant, dated as of December 29, 1996
[incorporated by reference to Exhibit 10.18 of the 1996 Registration
Statement].
10.19 Amendment to Class B Warrant, dated as of December 29, 1996
[incorporated by reference to Exhibit 10.19 of the 1996 Registration
Statement].
10.20 Asset Purchase Agreement among the Company, Transcriptions, Ltd.
and its affiliates and subsidiaries, dated January 26, 1994 (the
"Transcriptions Agreement") [incorporated by reference to Exhibit
10.30 of the 1993 10-K].
* Management contract or compensatory plan or arrangement.
-22-
<PAGE>
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K - Continued
Exhibit No. Description
- ----------- -----------
10.21 Amendment to the Transcriptions Agreement, dated September 30,
1996, [incorporated by reference to Exhibit 10.30.1 of the 9/30/95
10-Q].
10.22 Amendment to the Transcriptions Agreement, dated November 1,
1996 [incorporated by reference to Exhibit 10.30.2 of the 9/30/95
10-Q].
10.23 Registration Rights Agreement among the Company, David A. Cohen
and Edward Forstein, dated September 30, 1996, [incorporated by
reference to Exhibit 10.30.4 of the 9/30/95 10-Q].
10.24 Amended and Restated Credit Agreement among the Company,
Transcriptions, Ltd., the Guarantors named therein, the Lenders named
therein and Chemical Bank as agent, dated December 29, 1996
[incorporated by reference to Exhibit 10.24 of the 1996 Registration
Statement].
10.26 Asset Purchase Agreement among the Company, MedQuist CCI, L.P.,
and Medaphis Hospital Services Corporation, dated December 31, 1996
[incorporated by reference to Exhibit 2 of the Company's Current
Report on Form 8-K filed on January 12, 1996 (the "1/12/96 8-K")].
10.27 Stock Purchase Agreement among the Company, MedQuist Receivables
Management Company and Medaphis Hospital Services Corporation
[incorporated by reference to Exhibit 3 of the 1/12/96 8-K].
10.28 Form of Employee Stock Purchase Plan [incorporated by reference
to Exhibit 10.33 of the 1996 Registration Statement].
10.29 Agreement among the Company, Heller and Heller Financial, Inc.,
dated March 29, 1996 [incorporated by reference to Exhibit 10.29 of
the 1996 Registration Statement].
10.30 Amendment and Assignment of Registration Rights Agreement among
Heller Financial, Inc., Heller and the Company, dated May 27, 1994
[incorporated by reference to Exhibit 10.30 of the 1996 Registration
Statement].
10.31 Second Amendment to Registration Rights Agreement between Heller
and the Company, dated December 29, 1996 [incorporated by reference to
Exhibit 10.31 of the 1996 Registration Statement].
22.1 Subsidiaries [incorporated by reference to Exhibit 22.1 of the
1996 Registration Statement].
23.1 Consent of Arthur Andersen LLP, filed herewith.
24.1 Powers of Attorney (included on signature page)
27.1 Financial Data Schedule, Restated 1996
27.2 Financial Data Schedule, Restated 1997
-23-
<PAGE>
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K - Continued
(b) Financial Statements and Financial Statement Schedule
1. The consolidated financial statements of the Company and its subsidiaries
filed as part of this Report are listed on the attached Index to
Consolidated Financial Statements. See page F-1.
2. The Schedule to the consolidated financial statements of the Company and
its subsidiaries filed as part of this Report is listed in the attached
Index to Consolidated Financial Statements. See page F-1.
(c) Reports on Form 8-K
During the fourth quarter of 1997, the Company filed no Reports on Form
8-K.
-24-
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
FINANCIAL STATEMENT SCHEDULE:
II. Valuation and Qualifying Accounts F-20
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MedQuist Inc.:
We have audited the accompanying consolidated balance sheets of MedQuist Inc. (a
New Jersey corporation) and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MedQuist Inc. and subsidiaries
as of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 2, 1998
F-2
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31
--------------------
1997 1996
------ ------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $12,334 $ 8,878
Accounts receivable, net of allowance of $439 and $318 19,822 14,239
Deferred income taxes 693 237
Prepaid expenses and other 132 123
------- -------
Total current assets 32,981 23,477
Property and equipment, net 9,783 8,105
Intangible assets, net 47,489 42,436
Other 552 323
------- -------
$90,805 $74,341
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 3,773 $ 314
Accounts payable 1,095 1,034
Accrued payroll 2,815 1,913
Accrued expenses 2,575 1,861
------- -------
Total current liabilities 10,258 5,122
------- -------
Long-term debt 1,404 1,719
------- -------
Other long-term liabilities 544 631
------- -------
Deferred income taxes 2,282 1,174
------- -------
Commitments and contingencies (Note 11) Shareholders' equity:
Common stock, no par value, 30,000 shares authorized, 10,674 and
10,321 shares issued and outstanding -- --
Additional paid-in capital 59,428 56,437
Retained earnings 16,889 9,258
------- -------
Total shareholders' equity 76,317 65,695
------- -------
$90,805 $74,341
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues $ 84,590 $ 61,480 $ 45,127
-------- -------- --------
Costs and expenses:
Cost of revenues 62,282 45,591 33,711
Selling, general and administrative 4,620 3,579 4,325
Depreciation 3,568 2,468 1,862
Amortization of intangible assets 1,517 1,176 496
-------- -------- --------
Total operating expenses 71,987 52,814 40,394
-------- -------- --------
Operating income 12,603 8,666 4,733
Interest expense 173 1,649 3,695
-------- -------- --------
Income from continuing operations
before income taxes 12,430 7,017 1,038
Income tax provision 4,799 2,833 431
-------- -------- --------
Income from continuing operations 7,631 4,184 607
Discontinued operations, net of income taxes:
Income from operations -- -- 1,451
Loss on disposal -- -- (3,180)
-------- -------- --------
Income (loss) before extraordinary item 7,631 4,184 (1,122)
Loss on early extinguishment of debt, net of
income tax benefit -- -- (545)
-------- -------- --------
Net income (loss) 7,631 4,184 (1,667)
Inducement of warrant exercise -- (707) --
-------- -------- --------
Net income (loss) available to common shareholders $ 7,631 $ 3,477 $ (1,667)
======== ======== ========
Basic income (loss) per common share (Note 1):
Income from continuing operations $ 0.73 $ 0.52 $ 0.17
Discontinued operations -- -- (0.49)
Extraordinary item -- -- (0.16)
Inducement of warrant exercise -- (0.09) --
-------- -------- --------
$ 0.73 $ 0.43 $ (0.48)
======== ======== ========
Diluted income (loss) per common share (Note 1):
Income from continuing operations $ 0.68 $ 0.47 $ 0.16
Discontinued operations -- -- (0.46)
Extraordinary item -- -- (0.15)
Inducement of warrant exercise -- (0.08) --
-------- -------- --------
$ 0.68 $ 0.39 $ (0.45)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-in Retained
Shares Amount Capital Earnings Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 3,375 $ -- $ 3,244 $ 7,448 $ 10,692
Net loss -- -- -- (1,667) (1,667)
Exercise of Common stock options,
including tax benefit 260 -- 1,210 -- 1,210
Issuance of Common stock in connection with
business acquisition 35 -- 185 -- 185
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1995 3,670 -- 4,639 5,781 10,420
Net income -- -- -- 4,184 4,184
Exercise of Common stock options,
including tax benefit 49 -- 336 -- 336
Issuance of Common stock in connection with
business acquisitions 1,334 -- 5,040 -- 5,040
Sale of Common stock, net of expenses 3,760 -- 39,442 -- 39,442
Exercise of warrants, including
inducement charge 1,508 -- 6,980 (707) 6,273
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1996 10,321 -- 56,437 9,258 65,695
Net income -- -- -- 7,631 7,631
Exercise of Common stock options,
including tax benefit 266 -- 2,369 -- 2,369
Sale of Common stock, net of expenses 15 -- 219 -- 219
Purchase and retirement of Common stock, at cost
(41) -- (676) -- (676)
Exercise of warrant, including
tax benefit 113 -- 1,079 -- 1,079
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 10,674 $ -- $ 59,428 $ 16,889 $ 76,317
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 7,631 $ 4,184 $ (1,667)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 5,085 3,644 4,005
Amortization of debt discounts -- 704 131
Loss on disposal of discontinued operations -- -- 4,286
Loss on early extinguishment of debt -- -- 545
Deferred income tax provision (benefit) 310 1,294 (355)
Changes in assets and liabilities, excluding
effects of acquisitions and divestitures--
Accounts receivable, net (3,950) (4,106) (2,377)
Prepaid expenses and other 219 690 706
Other assets (213) 182 (128)
Accounts payable (96) (1,206) 1,127
Accrued payroll 590 684 (326)
Accrued expenses 1,815 (1,024) 282
Other long-term liabilities (87) (79) (91)
-------- -------- --------
Net cash provided by operating activities 11,304 4,967 6,138
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment (4,636) (3,211) (3,448)
Acquisitions, net of cash acquired (3,707) (4,810) (7)
Proceeds from divestiture -- -- 16,723
-------- -------- --------
Net cash provided by (used in)
investing activities (8,343) (8,021) 13,268
-------- -------- --------
FINANCING ACTIVITIES:
Repayments of long-term debt and subordinated payable (825) (29,548) (19,019)
Proceeds from exercise of Common stock options 1,269 226 796
Net proceeds from issuance of Common stock 219 39,442 --
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 495 10,120 (18,401)
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,456 7,066 1,005
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 8,878 1,812 807
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,334 $ 8,878 $ 1,812
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per-share amounts)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Background
MedQuist Inc. 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).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
MedQuist Inc. and its subsidiaries (the "Company"). All material intercompany
balances and transactions have been eliminated.
Common Stock Split
On September 9, 1997, the Company effected a 3-for-2 stock split for all
shares of Common stock. All share data in the accompanying financial statements
has been retroactively adjusted to reflect the stock split.
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 $121, $239 and $317 for the
years ended December 31, 1997, 1996 and 1995, respectively.
F-7
<PAGE>
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 expensed as incurred. Additions and betterments are
capitalized. Gains or losses on the disposition of property and equipment are
charged to operations.
Intangible Assets
Intangible assets consist primarily of the excess of cost over the net
asset value of acquired businesses and customer lists and are being amortized
over 20 to 40 years and 20 years, respectively. 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 related
undiscounted cash flows in measuring whether the intangible asset should be
written down to fair value. 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 deferred revenue, accrued interest,
deferred telephone credits and accrued professional fees. At December 31, 1997
and 1996, deferred revenue was $496 and $492, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
$148, $102 and $162 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Statements of Cash Flow Information
For the years ended December 31, 1997, 1996 and 1995, the Company paid
interest of $174, $674 and $3,155, respectively, and income taxes of $2,495,
$1,675 and $478, respectively. Capital lease obligations of $174, $191 and $531
were incurred on equipment leases entered into in 1997, 1996 and 1995,
respectively.
F-8
<PAGE>
The following table displays the net noncash assets and liabilities that
were consolidated as a result of the Company's business acquisitions (see Note
2):
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Noncash assets (liabilities):
Accounts receivable $ 1,633 $ 364 $ 169
Prepaid expenses and other 243 59 19
Property and equipment 613 446 213
Intangible assets 6,588 6,389 23,183
Accounts payable and accrued
expenses (1,781) (335) (299)
Long-term debt (252) (305) (379)
------- ------- --------
Net noncash assets acquired 7,044 6,618 22,906
Less-Seller notes and payables (3,337) (1,318) (22,714)
Common stock issued -- (490) (185)
------- ------- --------
Net cash paid for business
acquisitions $ 3,707 $ 4,810 $ 7
======= ======= ========
</TABLE>
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. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.
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.
F-9
<PAGE>
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
----------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ----------------------------
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 $ 7,631 10,503 $ 0.73 $ 4,184 8,057 $ 0.52 $ 607 3,485 $ 0.17
Effect of dilutive
securities -- 775 (0.05) -- 946 (0.05) -- 276 (0.01)
------- ------ -------- ------- ------- -------- ------- ------- ---------
Diluted income from
continuing
operations $ 7,631 11,278 $ 0.68 $ 4,184 9,003 $ 0.47 $ 607 3,761 $ 0.16
======= ====== ======= ======= ======= ======= ======= ======= =========
</TABLE>
In 1997, 270 Common stock options were excluded from the diluted
computation because their effect would be anti-dilutive.
New Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This statement establishes standards for disclosing
information about an entity's capital structure. The Company has complied with
the disclosure requirements of this statement.
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 1,292 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>
The following unaudited pro forma summary presents the results of operations of
the Company as if the Transcriptions acquisition, including the payment of the
deferred purchase price which causes additional amortization and interest
expense, had occurred on January 1, 1995. The pro forma information does not
purport to be indicative of the results that would have been attained if the
operations had actually been combined during the period presented.
Year Ended
December 31,
1995
------------
Revenues $45,127
Loss from continuing operations (701)
Basic and diluted loss per share from continuing operations (0.20)
Shares used in computing loss per share 3,485
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.
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 years
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
-----------------
1997 1996
------- -------
Furniture, equipment and software $17,453 $12,410
Leasehold improvements 239 88
------- -------
17,692 12,498
Less -- Accumulated depreciation
and amortization (7,909) (4,393)
------- -------
$ 9,783 $ 8,105
======= =======
F-11
<PAGE>
5. INTANGIBLE ASSETS:
December 31
-----------------
1997 1996
Excess of cost over net asset value of
acquired businesses $34,187 $34,162
Customer lists 16,519 9,972
Deferred financing costs 100 84
------- -------
50,806 44,218
Less -- Accumulated amortization (3,317) (1,782)
------- -------
$47,489 $42,436
======= =======
6. LONG-TERM DEBT:
<TABLE>
<CAPTION>
December 31
----------------
1997 1996
---- ----
<S> <C> <C>
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 --
Subordinated 5% promissory note, repaid in 1997 -- 30
Capital lease obligations 552 715
------- ------
5,177 2,033
Less -- Current portion (3,773) (314)
------- ------
$ 1,404 $1,719
======= ======
</TABLE>
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.
F-12
<PAGE>
In addition to acquisitions, the revolver can be used for working capital
and general corporate purposes. To the extent any amounts under the revolver are
repaid, other than acquisition term loans, the Company may reborrow such
amounts. The 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, 1996 and 1995, the Company incurred
interest expense of $49 and $498 on the revolving credit facility, at a weighted
average interest rate of 9.78% and 8.96%. The highest outstanding borrowings
under the revolver during 1996 and 1995 were $2,534 and $7,332, respectively.
In December 1995, the Company restructured its prior credit facility. In
connection with the restructuring, the Company expensed, 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 86 shares of Common stock at a conversion price of $14.95 per
share.
Long-term debt maturities as of December 31, 1997, are as follows:
1998 $3,806
1999 127
2000 8
2001 8
2002 1
2003 and thereafter 1,288
------
5,238
Less -- Interest on capital lease obligations (61)
------
$5,177
======
7. SUBORDINATED PAYABLE TO RELATED PARTIES:
Effective December 29, 1995, the Company and the former owners of
Transcriptions, who include the Company's current Chief Executive Officer and
Chief Operating Officer, amended the Transcriptions purchase agreement to fix
the amount of the deferred purchase price (see Note 2). The amendment provided
for the Company to pay $18,375 in cash and issue 1,292 shares of Common stock
(valued at $4,550 for financial reporting purposes) on August 31, 1996. In May
1996, the Company repaid the cash portion of the payable, and the Common stock
was issued in August 1996.
F-13
<PAGE>
8. SHAREHOLDERS' EQUITY:
On September 9, 1997, the Company effected a 3-for-2 stock split for all
shares of Common stock.
In May 1996, the Company consummated a secondary public offering of its
Common stock, selling 3,300 shares at a price of $11.33 per share. In June 1996,
the underwriters exercised their overallotment option for an additional 461
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 866 shares of Class A
and 534 shares of Class B Preferred Stock at an exercise price of $5.00 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 $4.85, 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 1,444 shares of Common
stock. As an inducement for the holder to exercise the warrants and convert the
Preferred stock, the Company issued the holder 64 additional shares of Common
stock. This inducement, valued at $707 or $0.08 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 113 shares of Common stock at an
exercise price of $4.49 per share. These warrants were exercised on June 12,
1997 by the agent bank for proceeds to the Company of $508.
9. STOCK OPTION PLANS:
The Company has three stock option plans that provide the granting of
options to purchase an aggregate of 2,930 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 a period determined by the committee.
F-14
<PAGE>
Information with respect to the Company's options follows:
<TABLE>
<CAPTION>
Option Price Aggregate
Shares Per Share Proceeds
------ -------------------- ---------
<S> <C> <C> <C> <C> <C>
Outstanding, December 31, 1994 750 $ 1.33 - $ 4.50 $ 2,510
Granted 459 4.83 - 6.33 2,594
Exercised (260) 1.33 - 4.83 (796)
Canceled (68) 1.33 - 5.00 (259)
----- -------------------- -------
Outstanding, December 31, 1995 881 1.33 - 6.33 4,049
Granted 413 5.59 - 13.09 3,798
Exercised (49) 2.27 - 10.25 (226)
Canceled (45) 6.33 (285)
----- --------------------- -------
Outstanding, December 31, 1996 1,200 2.27 - 13.09 7,336
Granted 419 12.83 - 28.75 10,163
Exercised (266) 2.27 - 12.83 (1,269)
Canceled (39) 9.00 - 16.83 (393)
----- -------------------- -------
Outstanding, December 31, 1997 1,314 $2.27 - $28.75 $15,837
===== ==================== =======
</TABLE>
At December 31, 1997, there were 604 exercisable options at an aggregate
exercise price of $3,342 and 312 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
Remaining Weighted Weighted
Exercise Number Contractual Average Number Average
Prices Outstanding Life Exercise Price Exercisable Exercise Price
------ ----------- ---- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.27 - $ 7.67 682 6.15 $ 4.79 568 $ 4.66
$10.50 - $17.58 362 8.92 13.30 21 13.04
$27.63 - $28.75 270 9.97 28.69 15 27.63
----- ---- ------ --- ------
1,314 7.70 $12.05 604 $ 5.53
===== ==== ====== === ======
</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
F-15
<PAGE>
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:
Year Ended December 31
--------------------------
1997 1996 1995
------ ------ ------
Net income (loss):
As reported $7,631 $3,477 $(1,667)
Pro forma 6,414 2,574 (1,991)
Basic income (loss) per share:
As reported 0.73 0.43 (0.48)
Pro forma 0.61 0.32 (0.57)
Diluted income (loss) per share:
As reported 0.68 0.39 (0.45)
Pro forma 0.57 0.29 (0.53)
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.
10. INCOME TAXES:
The income tax provision (benefit) consists of the following:
Year Ended December 31
--------------------------
1997 1996 1995
---- ---- ----
Current:
State $ 652 $ 71 $ 181
Federal 3,837 1,468 161
------ ------ -----
4,489 1,539 342
Deferred 310 1,294 (355)
------ ------ -----
$4,799 $2,833 $ (13)
====== ====== =====
F-16
<PAGE>
Year Ended December 31
---------------------------
1997 1996 1995
---- ---- ----
Continuing operations $4,799 $2,833 $ 431
Discontinued operations:
Income from operations -- -- 796
Loss on disposal -- -- (959)
Extraordinary item -- -- (281)
------ ------ -----
$4,799 $2,833 $ (13)
====== ====== =====
A reconciliation of the statutory federal income tax rate to the effective
continuing operations income tax rate is as follows:
Year Ended December 31
-----------------------
1997 1996 1995
------ ------ ----
Statutory federal income tax rate 35.0% 34.0% 34.0%
State income taxes, net of federal benefit 3.0 3.3 6.5
Other 0.6 3.1 1.0
---- ---- ----
38.6% 40.4% 41.5%
==== ==== ====
The tax effected temporary differences that give rise to deferred income
taxes are as follows:
December 31
-----------------
1997 1996
------ -----
Deferred tax asset:
Allowance for doubtful accounts $ 162 $ 113
Vacation accrual 125 --
Other 406 124
------- -------
$ 693 $ 237
======= =======
Deferred tax liability:
Accumulated depreciation $ (999) $ (953)
Accumulated amortization (1,220) (546)
Deferred compensation 210 224
Other (273) 101
------- -------
$(2,282) $(1,174)
======= =======
F-17
<PAGE>
11. COMMITMENTS AND CONTINGENCIES:
Rent expense for operating leases was $1,609, $1,279 and $732 for the years
ended December 31, 1997, 1996 and 1995, 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 $1,654
1999 1,029
2000 568
2001 273
2002 36
------
$3,560
======
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 $544 and $631 at December 31, 1997 and 1996, 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 adopted a severance plan for certain executive officers
that provides for one-time payments in the event of a change in control, as
defined. No liabilities are currently required to be recorded with respect to
this plan.
In the normal course of business, the Company is a party to various claims
and legal proceedings. Although the ultimate outcome of these matters is
presently not determinable, management of the Company, after consultation with
legal counsel, does not believe that the resolution of these matters will have a
material effect upon the Company's financial position or results of operations.
12. QUARTERLY FINANCIAL DATA (UNAUDITED):
Year Ended December 31, 1997:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $18,621 $20,189 $21,897 $23,883
Income before income taxes 2,681 2,913 3,244 3,592
Net income 1,635 1,792 1,995 2,209
Basic net income per share 0.16 0.17 0.19 0.21
Diluted net income per share 0.15 0.16 0.18 0.19
</TABLE>
F-18
<PAGE>
Year Ended December 31, 1996:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $13,978 $14,373 $15,511 $17,618
Income before income taxes 925 1,414 2,201 2,477
Net income 546 836 1,311 1,491
Basic net income per share 0.11 0.13 0.13 0.15
Diluted net income per share 0.09 0.11 0.12 0.13
</TABLE>
F-19
<PAGE>
SCHEDULE II
MEDQUIST INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Balance, Charged to Charged to
Beginning Costs and Other Balance,
Description of Year Expenses Accounts Deductions End of Year
----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowances for doubtful accounts:
1997 $ 318 $ 273 $ 20 $ (172) $ 439
1996 550 (a) 44 (272) (a) (4) 318
1995 316 243 487 (496) 550 (a)
</TABLE>
- ----------------
(a) Includes amounts related to discontinued operations.
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereto duly authorized, in the City of Marlton, State of New
Jersey, on March 28, 1997.
MedQuist Inc.
By /s/ David A. Cohen
--------------------------------
David A. Cohen, President,
Chief Executive Officer,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons as of March
25, 1998.
Each person below, in so signing, also makes, constitutes and appoints
David A. Cohen his true and lawful attorney-in-fact, with full power and
substitution and resubstitution, in his name, place and stead to execute and
cause to be filed with the Securities and Exchange Commission any or all
amendments to this Report.
<TABLE>
<S> <C> <C>
/s/David A. Cohen President, Chief Executive Officer and March 19, 1998
- ------------------------------------- Chairman of the Board
David A. Cohen
/s/William T. Carson, Jr. Director March 23, 1998
- -------------------------------------
William T. Carson, Jr.
/s/John T. Casey Director March 20, 1998
- -------------------------------------
John T. Casey
/s/Richard J. Censits Director March 20, 1998
- -------------------------------------
Richard J. Censits
/s/James F. Conway Director March 24, 1998
- -------------------------------------
James F. Conway
/s/James R. Emshoff Director March 21, 1998
- -------------------------------------
James R. Emshoff
/s/Terrence J. Mulligan Director March 22, 1998
- --------------------------------------
Terrence J. Mulligan
/s/A. Fred Ruttenberg Director March 23, 1998
- -------------------------------------
A. Fred Ruttenberg
/s/R. Timothy Stack Director March 20, 1998
- --------------------------------------
R. Timothy Stack
/s/John H. Underwood Director March 24, 1998
- -------------------------------------
John H. Underwood
/s/John R. Emery Vice President, Treasurer and Chief March 23, 1998
- -------------------------------------- Financial Officer
John R. Emery, Vice President, Treasurer
and Chief Financial Officer
</TABLE>
24
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MedQuist Inc.:
As independent public accounts, we hereby consent to the incorporation of our
report included in this Form 10-K into the Company's previously filed Form S-8
Registration Statements File Nos. 333-09541, 333-09543
/s/ Arthur Andersen LLP
-----------------------------------
Philadelphia, PA
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<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-END> JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> $11,273 $10,232 $ 8,878
<SECURITIES> 0 0 0
<RECEIVABLES> 11,972 13,226 14,557
<ALLOWANCES> 245 244 318
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 24,675 24,955 23,477
<PP&E> 10,760 11,784 12,498
<DEPRECIATION> 3,504 4,000 4,393
<TOTAL-ASSETS> 69,017 73,650 74,341
<CURRENT-LIABILITIES> 4,958 6,510 5,122
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 57,634 64,078 65,695
<TOTAL-LIABILITY-AND-EQUITY> 69,017 73,650 74,341
<SALES> 0 0 0
<TOTAL-REVENUES> 28,351 43,862 61,480
<CGS> 0 0 0
<TOTAL-COSTS> 21,117 32,607 45,591
<OTHER-EXPENSES> 3,406 5,163 7,223
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 1,489 1,552 1,649
<INCOME-PRETAX> 2,399 4,540 7,017
<INCOME-TAX> 957 1,848 2,833
<INCOME-CONTINUING> 1,382 2,692 4,184
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,382 2,692 3,477
<EPS-PRIMARY> 0.24 0.37 0.43
<EPS-DILUTED> 0.20 0.33 0.39
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<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-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> $10,070 $ 8,908 $13,300 $12,334
<SECURITIES> 0 0 0 0
<RECEIVABLES> 15,543 16,854 16,711 20,261
<ALLOWANCES> 317 447 378 439
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 25,836 26,081 30,071 32,981
<PP&E> 13,285 15,050 16,114 17,692
<DEPRECIATION> 5,035 6,334 6,903 7,909
<TOTAL-ASSETS> 76,569 79,204 85,335 90,805
<CURRENT-LIABILITIES> 6,169 6,356 9,800 10,258
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 0 0 0 0
<OTHER-SE> 66,994 69,527 72,327 76,317
<TOTAL-LIABILITY-AND-EQUITY> 76,569 79,204 85,334 90,805
<SALES> 0 0 0 0
<TOTAL-REVENUES> 18,621 38,810 60,707 84,590
<CGS> 0 0 0 0
<TOTAL-COSTS> 3,714 28,598 44,674 62,282
<OTHER-EXPENSES> 2,163 4,497 7,045 9,705
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 63 121 150 173
<INCOME-PRETAX> 2,681 5,594 8,838 12,430
<INCOME-TAX> 1,046 2,167 3,416 4,799
<INCOME-CONTINUING> 1,635 3,427 5,422 7,631
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 1,635 3,427 5,422 7,631
<EPS-PRIMARY> 0.16 0.33 0.52 0.73
<EPS-DILUTED> 0.15 0.31 0.48 0.68
</TABLE>
