SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q/A
(Amendment No.1)
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(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period Commission file number
ended March 31, 1998 0-19941
MedQuist Inc.
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(Exact name of registrant as specified in its charter)
New Jersey 22-2531298
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Greentree Centre, Suite 311, Marlton, NJ 08053
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(Address of principal executive offices) (Zip Code)
(609) 596-8877
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No ___
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 10,999,841 shares of
common stock, no par value, as of April 28, 1998.
<PAGE>
MedQuist Inc.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I. FINANCIAL INFORMATION
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PAGE NO.
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Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 1998 (Unaudited)
and December 31, 1997 1
Consolidated Statements of Income for the three months
ended March 31, 1998 and 1997 (Unaudited) 2
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 (Unaudited) 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Special Note Concerning Forward Looking Statements 9
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURE 11
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<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $13,609 $12,334
Accounts receivable, net of allowance of $433 and $439 19,770 19,822
Deferred Income Taxes 693 693
Prepaid expenses and other current assets 146 132
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Total current assets 34,218 32,981
Property and equipment - net 10,024 9,783
Intangible assets - net 48,132 47,489
Other assets 545 552
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$92,919 $90,805
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 429 $ 3,773
Accounts payable 1,073 1,095
Accrued payroll 3,813 2,815
Accrued expenses 3,427 2,575
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Total current liabilities 8,742 10,258
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Long-term debt 52 1,404
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Other liabilities 520 544
------- -------
Deferred income taxes 2,282 2,282
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Shareholders' equity:
Common stock, no par value, 30,000 shares authorized,
10,986 and 10,674 issued and outstanding -- --
Additional paid-in capital 61,790 59,428
Retained earnings 19,533 16,889
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Total shareholders' equity 81,323 76,317
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$92,919 $90,805
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Amounts in thousands, except per share amounts)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
---- ----
Revenues $27,396 $18,621
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Costs and expenses:
Cost of revenues 20,211 13,714
Selling, general and administrative 1.357 1,059
Depreciation 1,075 754
Amortization of intangible assets 440 350
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Total operating expenses 23,083 15,877
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Operating income 4,313 2,744
Interest expense 14 63
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Income before income taxes 4,299 2,681
Income tax provision 1,655 1,046
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Net income $ 2,644 $ 1,635
======= =======
Basic Income Per Common Share $ 0.24 $ 0.16
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Diluted Income Per Common Share $ 0.23 $ 0.15
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See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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1998 1997
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<S> <C> <C>
Operating activities:
Net income $ 2,644 $ 1,635
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,515 1,109
Changes in assets and liabilities net of effect of acquisition:
Accounts receivable, net 52 (987)
Prepaid expenses and other current assets (14) (179)
Other assets 6 --
Accounts payable (22) (34)
Accrued payroll 1,092 578
Accrued expenses 859 556
Other liabilities (17) (24)
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Net cash provided (used in) by operating activities 6,115 2,654
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Investing activities:
Purchases of property and equipment, net (1,233) (881)
Acquisitions, net of cash acquired (1,101) (56)
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Net cash used in investing activities (2,334) (937)
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Financing activities:
Repayments of long-term debt (3,319) --
Repayments of obligations under capital leases (89) (78)
Net proceeds from issuance of common stock -- 20
Proceed from the exercise of common stock options 902 --
Repurchase of common stock -- (467)
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Net cash used in financing activities (2,506) (525)
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Net increase in cash and cash equivalents 1,275 1,192
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Cash and cash equivalents, beginning of period 12,334 8,878
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Cash and cash equivalents, end of period $ 13,609 $ 10,070
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest $ 59 $ 62
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Income taxes $ 818 $ 102
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</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
MedQuist Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Three Month Period Ended March 31, 1998
(Unaudited - dollar amounts in thousands)
Note 1. Basis of Presentation
The information set forth in these statements is unaudited. The information
reflects all adjustments, consisting only of normal recurring adjustments, that,
in the opinion of management, are necessary to present a fair statement of
operations of MedQuist Inc. (the "Company"), and its consolidated subsidiaries
for the periods indicated. Results of operations for the interim periods ended
March 31, 1998 are not necessarily indicative of the results of operations for
the full year.
Certain information in footnote disclosures normally included in financial
statements have been condensed or omitted in accordance with the rules and
regulations of the Securities and Exchange Commission.
On September 9, 1997, the Company effected a three for two stock split. All
share data presented herein has been adjusted to reflect the stock split.
Note 2. Acquisitions
During 1997, the Company completed five 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.
During 1998, the Company completed one acquisition. The acquisition has
been accounted for using the purchase method. Pro forma information is not
presented as this acquisition is not material to the Company.
Note 3. Income Per Common Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This statement establishes new standards for computing and presenting
earnings per share and requires the restatement of prior year amounts. The
Company adopted SFAS No. 128 effective December 31, 1997.
Basic income per share is calculated by dividing net income by the weighted
average number of shares of Common stock outstanding for the period. Diluted
income per share is calculated by dividing net income by the weighted average
number of shares of Common stock outstanding for the period, adjusted for the
dilutive effect of Common stock equivalents, which consist of stock options,
using the treasury stock method.
The table below sets forth the reconciliation of the numerators and
denominators of the basic and diluted income per share computations for income
from continuing operations:
4
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<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------
1998 1997
-------------------------------- -------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic $2,644 10,871 $ 0.24 $1,635 10,340 $ 0.16
Effect of dilutive
Securities -- 614 (0.01) -- 791 (0.01)
------ ------ ------ ------ ------ ------
Diluted $2,644 11,485 $ 0.23 $1,635 11,131 $ 0.15
====== ====== ====== ====== ====== ======
</TABLE>
Note 4. New Accounting Pronouncement
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes 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.
Note 5. Shareholders' Equity
On September 9, 1997, the Company effected a three for two stock split for
all shares of common stock.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company is a leading national provider of electronic transcription and
healthcare information solutions.
Fees for transcription related services are based primarily on contracted
rates, and revenue is recognized upon the rendering of services and delivery of
reports. Cost of revenues consists of all direct costs associated with providing
transcription related services, including payroll, telecommunications, software
customization, repairs and maintenance, rent and other direct costs. Selling,
general and administrative expenses include costs associated with the Company's
senior executive management, marketing and sales, finance, legal and other
administrative functions.
Results of Operations
The following table sets forth for the periods indicated, certain financial
data in the Company's Unaudited Consolidated Statements of Operations as a
percentage of net revenues:
Three Months Ended
March 31,
-------------------
1998 1997
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Revenues.................................... 100.0% 100.0%
------ ------
Costs and expenses:
Cost of revenues.......................... 73.8 73.6
Selling, general and administrative....... 5.0 5.7
Depreciation.............................. 3.9 4.1
Amortization of intangible assets......... 1.6 1.9
------ ------
Operating income............................ 15.7 14.7
Interest expense............................ 0.1 0.3
------ ------
Income before income taxes.................. 15.6 14.4
Income tax provision........................ 6.0 5.6
------ ------
Net income ................................. 9.6% 8.8%
====== ======
6
<PAGE>
Three Months Ended March 31, 1998 and 1997
Revenues. Revenues increased 47.1% to $27.4 million for the three months
ended March 31, 1998 from $18.6 million in the comparable 1997 period. The $8.8
million increase reflected approximately $6.0 million of additional revenues
generated from new and existing clients, and $2.8 million of revenues from the
Company's 1997 and 1998 medical transcription acquisitions.
Cost of Revenues. Cost of revenues increased from $13.7 million in the
three months ended March 31, 1997 to $20.2 million in the comparable 1998
period. As a percentage of revenues, cost of revenues increased slightly from
73.6% in the first quarter of 1997 to 73.8% for the comparable 1998 period. The
percentage increase in cost of revenues primarily resulted from the impact of a
1997 acquisition with a higher level of direct costs than the Company's base
business.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $1.4 million for the three months ended March 31, 1998
from $1.1 million in the comparable 1997 period. As a percentage of revenues,
selling, general and administrative expenses decreased from 5.7% in the first
quarter of 1997 to 5.0% in the comparable 1998 period. The decrease in selling,
general and administrative expenses is due to the ability of the Company to
leverage its overhead expenses.
Depreciation. Depreciation expense increased from $754,000 for the three
months ended March 31, 1997 to $1.1 million for the comparable 1998 period. As a
percentage of revenue, depreciation remained relatively consistent at 3.9% for
the three months ended March 31, 1998 compared to 4.1% for the comparable period
in 1997.
Amortization. Amortization of intangible assets was $440,000 for the three
months ended March 31, 1998 as compared to $350,000 for the comparable 1997
period. The increase is attributable to the amortization of intangible assets
associated with the Company's five acquisitions completed in 1997 and one
acquisition completed in 1998. As a percentage of revenue, amortization
decreased from 1.9% for the three months ended March 31, 1997 as compared to
1.6% in the same period for 1998.
Interest. Interest expense decreased from $63,000 for the three months
ended March 31, 1997 to $14,000 for the comparable 1998 period.
7
<PAGE>
Liquidity and Capital Resources
At March 31, 1998, the Company had working capital of $25.5 million,
including $13.6 million of cash and cash equivalents. During the three months
ended March 31, 1998, the Company's operating activities provided cash of $6.1
million as compared to $2.7 million during the comparative prior year three
month period. The increase in cash provided by operating activities was
primarily related to increases in net income and less of an increase in accounts
receivable in 1998.
During the three months ended March 31, 1998, the Company purchased $1.2
million of capital equipment and completed the acquisition of one medical
transcription business. These expenditures were financed through cash flows from
operations.
In January 1998, the Company paid in full $3.3 million in subordinated
promissory notes issued in connection with certain of the 1997 acquisitions.
For the three months ended March 31, 1998 option holders exercised
223,000 options to purchase common stock. The exercises generated $902,000 in
cash proceeds.
On April 23, 1997, the Company amended its borrowing facility with Chase
Manhattan 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.
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.
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 current working capital and capital expenditure requirements. Additional
funds may be required in connection with future acquisitions, if any.
8
<PAGE>
Year 2000 Compliance
The company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two-digit year value to 00. The issue is
whether computer systems will properly recognize data sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The company
relies on its systems in operating and monitoring all aspects of its business.
The company also relies on the external systems of its customers, suppliers and
other organizations with which it does business. 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.
Special Note Concerning Forward Looking Statements
Other than the historical Financial Information and related Notes contained
in Part I, Item 1 hereof, this Report, including, without limitation,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in any such forward-looking statements as a result of various risks,
including, without limitation, the dependence on a single line of business;
rapid technological change; inability to expand into new markets; inability to
make and successfully integrate acquisitions; inability to attract and retain
key personnel and transcriptionists; the effects of regulatory changes in the
healthcare industry; the potential for significant fluctuations in operating
results; and the potential volatility of the Company's common stock.
9
<PAGE>
Part II - Other Information
<TABLE>
<S> <C> <C>
Item 1. - Legal Proceedings - Not Applicable
Item 2. - Changes in Securities and Use of Proceeds - Not Applicable
Item 3. - Default upon Senior Securities - Not Applicable
Item 4. - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. - Other Information - Not Applicable
Item 6. - Exhibits and Reports on Form 8-K
a) Exhibits:
Financial Data Schedule 27.0
b) Reports on Form 8-K - Not Applicable
</TABLE>
10
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MedQuist Inc.
Registrant
Date:
--------------------------
By: /s/ John R. Emery
-------------------------------
John R. Emery
Chief Financial Officer
11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.$
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1,000
<CASH> $13,609
<SECURITIES> 0
<RECEIVABLES> 20,203
<ALLOWANCES> 433
<INVENTORY> 0
<CURRENT-ASSETS> 34,218
<PP&E> 18,895
<DEPRECIATION> 8,961
<TOTAL-ASSETS> 92,919
<CURRENT-LIABILITIES> 8,742
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 81,323
<TOTAL-LIABILITY-AND-EQUITY> 92,919
<SALES> 0
<TOTAL-REVENUES> 27,396
<CGS> 0
<TOTAL-COSTS> 20,211
<OTHER-EXPENSES> 2,872
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 4,299
<INCOME-TAX> 1,655
<INCOME-CONTINUING> 2,644
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,644
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.23
</TABLE>
