As Filed with the Securities and Exchange Commission on December 24, 1998
-----------------
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MEDQUIST INC.
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2531298
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Five Greentree Centre
Suite 311
Marlton, New Jersey 08053
(609) 596-8877
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(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
--------------------
John M. Suender
Senior Vice President, General Counsel and Secretary
MedQuist Inc.
Five Greentree Centre
Suite 311
Marlton, New Jersey 08503
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(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
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Approximate date of commencement of proposed sale
of the securities to the public:
As soon as practicable after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
<PAGE>
If any of the securities registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box, and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title Of Each Class Proposed Maximum Proposed
Of Securities To Amount To Be Offering Price Maximum Amount Of
Be Registered Registered Per Unit Offering Price Registration Fee
<S> <C> <C> <C> <C>
Common Stock, no 800,000(1) $30.47 $24,376,000(2) $6,776.53
par value
</TABLE>
(1) This Registration Statement covers shares owned by a certain selling
shareholder which shares may be offered from time to time by the
selling shareholder.
(2) Based upon the average of the bid and asked price of the Common Stock
on the Nasdaq National Market on December 17, 1998, estimated solely
for the purpose of calculating the registration fee in accordance with
Rule 457(c) under the Securities Act of 1933, as amended.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
The information contained in this prospectus is not complete and may be changed.
We may not sell these securities until the Registration Statement filed with the
Securities Exchange Commission is effective. This prospectus is not an offer to
sell these securities and it is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 24, 1998
PROSPECTUS
[MEDQUIST LOGO]
800,000 Shares
Common Stock
The shareholder of MedQuist Inc. listed in this prospectus under the title
"Selling Shareholder" is offering and selling 800,000 shares of MedQuist common
stock pursuant to this prospectus. MedQuist will not receive any proceeds from
such sale of its common stock.
Prospective purchasers should consider the "Risk Factors" beginning on page 4.
The selling shareholder may sell his MedQuist common stock in one or more
transactions on the Nasdaq National Market at market prices prevailing at the
time of sale or in private transactions at negotiated prices.
MedQuist common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "MEDQ."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
The date of this prospectus is December ___, 1998.
<PAGE>
Table of Contents
Page
----
Where You Can Find More Information......................................1
Selected Supplemental Financial Data.....................................2
Forward-Looking Statements...............................................3
The Company..............................................................3
Risk Factors.............................................................4
Use of Proceeds..........................................................9
Selling Shareholders.....................................................9
Plan of Distribution.....................................................9
Legal Matters...........................................................10
Experts.................................................................11
Index to Financial Statements..........................................F-1
You should rely only on the information incorporated by reference or
provided in this prospectus. MedQuist has not authorized anyone else to provide
you with different information. The selling shareholders will not make an offer
of these shares in any state where the offer is not permitted. You should not
assume that the information in this prospectus is accurate as of any date other
than the date on the front page of this prospectus.
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
MedQuist Inc., a New Jersey corporation ("MedQuist"), files annual,
quarterly and special reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). You may read and copy any
reports, statements and other information MedQuist files with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. MedQuist's SEC filings are also available on
the SEC's Internet site (http://www.sec.gov).
In addition, you may read reports, proxy statements and other information
MedQuist files at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
MedQuist has filed a registration statement on Form S-3 (the "Registration
Statement") to register the shares of MedQuist common stock offered under this
prospectus. This prospectus is a part of that Registration Statement and
constitutes a prospectus of MedQuist. As allowed by SEC rules, this prospectus
does not contain all the information you can find in the Registration Statement
or the exhibits to the Registration Statement.
The SEC also allows MedQuist to "incorporate by reference" the information
it files with the SEC, which means MedQuist can disclose information to you by
referring you to another document filed separately with the SEC. Information
incorporated by reference is deemed to be part of this prospectus. Later
information filed by MedQuist with the SEC updates and supersedes this
prospectus.
This prospectus incorporates important business and financial information
about MedQuist that is not included in or delivered with this prospectus. Copies
of any such information are available without charge to any person to whom this
prospectus is delivered, upon written or oral request. Written requests for such
documents should be directed to the Corporate Secretary, MedQuist Inc., Five
Greentree Centre, Suite 311, Marlton, New Jersey, 08053, and telephone requests
may be directed to the Corporate Secretary at (609) 596-8877.
The following documents previously filed by MedQuist with the SEC pursuant
to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are
incorporated herein by this reference:
<TABLE>
<CAPTION>
SEC Filings Period
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<S> <C>
Annual Report on Form 10-K (including those portions of Year ended December 31, 1997
MedQuist's proxy statement for its 1998 annual meeting
of shareholders incorporated by reference therein)
Quarterly Reports on Form 10-Q (as amended) Quarters ended March 31, 1998,
June 30, 1998 and September 30, 1998
Current Reports on Form 8-K Filed on May 13, 1998, June 12, 1998,
June 29, 1998, September 29, 1998
and December 15, 1998
Registration Statement on Form 8-A filed pursuant to Filed on March 11, 1992
Section 12(g) of the Exchange Act
</TABLE>
All documents filed by MedQuist pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this prospectus and prior to
the termination of the offering will be deemed to be incorporated by reference
in this prospectus and to be a part of this prospectus from the date any such
document is filed.
1
<PAGE>
SELECTED SUPPLEMENTAL FINANCIAL DATA
(In thousands, except per share data)
The following data is supplemental to reflect the retroactive restatement of the
Company's financial statements for its November 30, 1998 acquisition of TL of
Florida and its December 10, 1998 acquisition of MRC, both of which will be
accounted for as pooling of interests and does not include (i) the estimated
transaction costs of $9,500 related to the TLF and MRC acquisitions or (ii) the
estimated costs associated with known bonus and severance arrangements with
former MRC employees of approximately $1,600, which will be charged to expense
in the quarter ended December 31, 1998. The Company derived this information
from the audited supplemental financial statements for the years ended December
31, 1995, 1996 and 1997 and from the unaudited supplemental financial statements
for the years ended December 31, 1993 and 1994 and for the nine months ended
September 30, 1997 and 1998. Operating results for the nine months ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1998. This information is only
a summary and you should read it in conjunction with MedQuist's supplemental
financial statements and related notes included elsewhere in this Prospectus and
other information MedQuist has filed with the SEC. See "Where You Can Find More
Information."
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
----------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operation Data(1):
Revenues .................................. $ 29,738 $ 59,228 $ 109,657 $ 152,109 $ 216,158 $ 158,182 $ 199,790
Costs and expenses:
Costs of revenues ...................... 24,404 46,873 86,265 118,359 168,596 123,112 154,041
Selling, general and administrative .... 5,635 6,184 9,144 12,527 15,001 10,692 12,831
Depreciation ........................... 3,205 2,581 5,752 7,372 10,339 7,454 9,470
Amortization ........................... 12 264 896 3,150 5,652 4,090 2,794
Nonrecurring merger costs .............. -- -- 347 644 2,075 -- 2,182
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses .... 33,256 55,902 102,404 142,052 201,663 145,348 181,318
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss) ................ (3,518) 3,326 7,253 10,057 14,495 12,834 18,472
Interest expense (income), net ......... 1,689 2,648 4,252 2,049 469 362 (211)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes .................. (5,207) 678 3,001 8,008 14,026 12,472 18,683
Income tax provision (benefit) (2) ..... (1,290) (529) 640 2,720 5,293 4,573 6,935
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations (2) ....................... (3,917) 1,207 2,361 5,288 8,733 7,899 11,748
Discontinued operations (3) ............ 3,746 1,612 (1,729) -- -- -- --
Extraordinary item (4) ................. -- -- (545) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income(loss) ....................... (171) 2,819 87 5,288 8,733 7,899 11,748
Inducement deduction (5) ............... -- -- -- (707) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) available to common
shareholders ......................... $ (171) $ 2,819 $ 87 $ 4,581 $ 8,733 $ 7,899 $ 11,748
========= ========= ========= ========= ========= ========= =========
Basic income (loss) per commons share:
Continuing operations (1)(2) ......... $ (0.33) $ .12 $ 0.23 $ 0.22 $ 0.28 $ 0.25 $ 0.36
Discontinued operations (3) .......... .32 0.17 (0.17) -- -- -- --
Extraordinary item (4) ............... -- -- (0.05) -- -- -- --
Inducement deduction (5) ............. -- -- -- (0.03) -- -- --
--------- --------- --------- --------- --------- --------- ---------
$ (0.01) $ (0.29) $ 0.01 $ (0.19) $ 0.28 $ 0.25 $ 0.36
========= ========= ========= ========= ========= ========= =========
Diluted income (loss) per common share:
Continuing operations (1)(2) ......... $ (0.33) $ 0.12 $ 0.22 $ 0.20 $ 0.26 $ 0.24 $ 0.34
Discontinued operations (3) .......... 0.32 0.17 (0.16) -- -- -- --
Extraordinary item (4) ............... -- -- (0.05) -- -- -- --
Inducement deduction (5) ............. -- -- -- (0.03) -- -- --
--------- --------- --------- --------- --------- --------- ---------
$ (0.01) $ (0.29) $ 0.01 $ (0.17) $ 0.26 $ 0.24 $ 0.34
========= ========= ========= ========= ========= ========= =========
Balance Sheet Data:
Working capital ...................... $ 10,499 $ 6,453 $ 13,142 $ 33,483 $ 36,302 $ 31,157 $ 45,714
Total assets ......................... 49,742 85,811 91,191 158,551 173,467 163,987 190,799
Long-term debt, net of current
portion............................. 13,480 39,577 23,342 9,964 7,589 8,515 4,982
Shareholder' equity .................. 8,884 12,096 13,065 120,710 131,373 77,061 151,282
Income (loss) reported from continuing
operations before income taxes, as
presented .............................. $ (5,207) $ 678 $ 3,001 $ 8,008 $ 14,026 $ 12,47 $ 18,683
Income tax provision (benefit) ............ (1,045) (40) 1,312 3,357 5,975 5,132 7,405
------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations .. $ (4,162) $ 718 $ 1,689 $ 4,651 $ 8,051 $ 7,340 $ 11,278
======= ========= ========= ========= ========= ========= =========
Income (loss) from continuing operations
per share:
Basic ................................. (0.36) 0.07 0.16 0.19 0.25 0.23 0.34
Diluted ............................... (0.36) 0.07 0.16 0.18 0.24 0.23 0.33
</TABLE>
(1) Transcriptions, Ltd. was acquired by MedQuist effective May 1, 1994. All
prior businesses of MedQuist have been treated as a discontinued
operations.
(2) Signal and TL of Florida were "S" Corporations prior to their mergers with
MedQuist, and accordingly, the supplemental statements of operations data
does not include a provision for income taxes on their income. The
following information sets forth a pro forma presentation of the
supplemental income tax provision (benefit), income (loss) from continuing
operations and income (loss) from continuing operations per share assuming
Signal and TL of Florida were "C" corporations for all periods presented.
(3) On November 14, 1995, MedQuist executed a letter of intent to sell its
receivables management business. The operations and net assets of its
receivables management business and previously divested businesses have
been accounted for as discontinued operations. Discontinuing operations are
presented net of tax and include a gain on disposal of $1,749 in 1993 and a
loss on disposal of $3,180 in 1995. See Note 3 of Notes to Supplemental
Consolidated Financial Statements.
(4) Represents the loss on early extinguishment of debt, net of income taxes.
(5) Represents issuance of 128 shares of MedQuist Common Stock to induce a
warrant holder to exercise. MedQuist recorded a $707 non-recurring
deduction from net income available to common shareholders. See Note 8 of
Notes to Supplemental Consolidated Financial Statements.
2
<PAGE>
Forward-Looking Statements
Some of the information in this prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
language such as "will likely result," "may," "are expected to," "is
anticipated," "estimate," "projected," "intends to" or other similar words.
MedQuist's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements.
Such statements are subject to certain risks and uncertainties, including but
not limited to the risks described below. See "Risk Factors." When considering
such forward-looking statements, you should keep in mind these risk factors and
other cautionary statements in this prospectus. You should not place undue
reliance on any forward-looking statement which speaks only as of the date made.
The Company
Background
MedQuist is a leading national provider of electronic transcription and
information management solutions to the healthcare industry. Through its
proprietary software, open architecture environment and network of more than
6,000 trained transcriptionists, MedQuist converts free-form medical dictation
into electronically formatted patient records which health care providers use in
connection with patient care and for other administrative purposes. MedQuist's
customized outsourcing services enable clients to improve the accuracy of
transcribed medical reports, reduce report turnaround times, shorten billing
cycles and reduce overhead and other administrative costs.
MedQuist was incorporated in New Jersey in 1984 and reorganized in 1987 as
a group of out-patient healthcare businesses affiliated with a non-profit health
care provider. By the end of 1995, MedQuist had divested all of its non-medical
transcription businesses. Since May 1994, MedQuist has acquired 18 medical
transcription companies.
Address and Telephone Number of MedQuist
MedQuist's executive offices are located at Five Greentree Centre, Suite
311, Marlton, New Jersey 08053 and the telephone number for MedQuist is (609)
596-8877.
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<PAGE>
Risk Factors
In considering whether to acquire MedQuist common stock, you should
consider carefully the risks associated with the ownership of MedQuist common
stock. These risks are described in detail below.
Risks Associated with Acquisitions Generally. Since May 1994, MedQuist has made
18 acquisitions of medical transcription companies. MedQuist's continued growth
strategy anticipates additional acquisitions. The success or failure of such a
strategy will depend on many factors, including MedQuist's ability to identify
suitable acquisition candidates, the purchase price, the availability and terms
of financing, and management's ability to integrate effectively the acquired
businesses or technologies into MedQuist's operations. In addition, MedQuist may
be required to incur additional indebtedness or other liabilities, which could
have a material adverse effect on MedQuist's liquidity and capital resources, or
issue shares of its capital stock, which could result in dilution to its
shareholders. MedQuist cannot assure that it will be successful in its efforts
to identify suitable acquisition candidates, finance such acquisitions,
negotiate terms favorable to MedQuist for such acquisitions, or to consummate
any such acquisitions or, if any such acquisitions are consummated, to integrate
the acquired businesses into MedQuist's operations. In addition, MedQuist cannot
assure that a given acquisition, if consummated, will not have a material
adverse effect on MedQuist's business, financial condition and results of
operations.
Dependence on Key Personnel. MedQuist's success is dependent, in part, upon
its ability to attract and retain its key managerial personnel. The loss of
services of certain of MedQuist's executive officers for any reason or the
inability of MedQuist to attract additional management personnel could have a
material adverse effect upon MedQuist's business, financial condition or results
of operations. MedQuist does not have key-man insurance on any of its executive
officers.
Rapid Technological Change. The health care information services industry
is characterized by rapid technological change, evolving customer needs and
emerging technical standards. The introduction of competing services or products
incorporating new technologies, such as voice recognition capabilities or other
alternative means of data entry and the emergence of new technical standards
could render some or all of MedQuist's services unmarketable. MedQuist believes
that its future success is dependent in part on its ability to enhance its
current services and develop new services that keep pace with technological
developments and emerging technical standards, and that address the increasingly
sophisticated needs of its customers. MedQuist cannot assure that it will be
successful in developing and marketing enhancements to its existing services or
new services that respond to technological developments, emerging technical
standards, or evolving customer needs, on a timely basis or at all, or that any
such enhancements or new services, if developed and introduced, will achieve
market acceptance. The failure of MedQuist to develop and introduce service
enhancements and new services in a timely and cost-effective manner in response
to changing technologies or customer requirements, could have a material adverse
effect on MedQuist's business, financial condition and results of operations.
Ability to Attract and Retain Qualified Transcriptionists. MedQuist's
success is also dependent, in part, upon its ability to attract and retain
qualified transcriptionists, who can provide the accuracy and turnaround time
required by MedQuist's customers. Competition for transcriptionists is intense.
MedQuist cannot assure that it will be successful in attracting and retaining
the personnel necessary to conduct its business successfully. The inability of
MedQuist to attract, hire, assimilate and retain such personnel could have a
material adverse effect upon MedQuist's business, financial condition and
results of operations.
Risks Associated with an At-Home Workforce. MedQuist treats certain of its
at-home transcriptionists as independent contractors for state tax, benefits and
unemployment purposes and as statutory employees for federal income tax and
social security tax purposes. In addition, it treats at-home transcriptionists
over whom it exercises control, as employees for state tax, benefits,
unemployment, federal income tax and social security tax purposes. MedQuist's
position regarding treatment of independent contractors may be disputed by
federal and
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<PAGE>
state officials, which, if successful, could result in the incurrence of
additional employment costs and penalties by MedQuist, and could have a material
adverse effect on MedQuist's business, financial condition and results of
operations. In addition, any failure by MedQuist to supervise and monitor the
at-home employee workforce, or to enforce its policies and procedures with
respect to, among other things, confidential information, health and safety,
wage and hour, or other governmental regulations, could have a material adverse
effect on MedQuist's business, financial condition and results of operations.
Potential for Significant Fluctuations in Quarterly Operating Results.
MedQuist may, in the future, experience significant quarter to quarter
fluctuations in its results of operations. Such fluctuations may result in
volatility in the price of MedQuist common stock. Quarterly results of
operations may fluctuate as a result of a variety of factors, including demand
for MedQuist's services, the timing of introduction of new services and service
enhancements by MedQuist or its competitors, market acceptance of new services,
the size and timing of individual customer contracts, changes in customer
budgets, the size and timing of acquisitions, the integration of acquired
businesses into MedQuist's operations, the number and timing of new hires,
competitive conditions in the industry and general economic conditions. Further,
MedQuist's contracts generally involve a significant commitment and may require
time-consuming authorization procedures within the customer's organization. For
these and other reasons, the sales cycles for MedQuist's services are typically
lengthy and subject to a number of factors outside of MedQuist's control. As a
result, MedQuist's revenues are difficult to forecast. Accordingly, MedQuist
believes that period to period comparisons of results of operations are not
necessarily meaningful and that you should not rely upon such comparisons as an
indication of future results of operations. In addition, MedQuist's
transcription business has grown in recent periods as a result of both internal
growth and acquisitions, and MedQuist cannot assure that it can maintain the
rate of growth in revenues and profits recently achieved by its transcription
business in the future. Because of the foregoing factors, it is possible that in
future quarters MedQuist's operating results may be below the expectations of
public market analysts and investors. Such an event could have a material
adverse effect on the price of MedQuist common stock.
Potential Volatility of Stock Price. The market price of MedQuist common
stock has been, and may in the future be, volatile. Factors such as health care
reform measures, acquisitions and operating results, technological innovations
or new products or services by MedQuist or its competitors, government
regulation, health care legislation, fluctuations in MedQuist's operating
results and general market and economic conditions could cause the market price
of MedQuist common stock to fluctuate substantially. In addition, the stock
market in general has experienced extreme price and volume fluctuations which
has resulted in substantial volatility of health care service companies that has
often been unrelated to the operating performance of these companies. These or
other factors may adversely affect the market price of MedQuist common stock.
Dependence on Single Line of Business. MedQuist anticipates that it will
derive its future revenues solely from providing electronic transcription
services to hospitals and other health care organizations on an outsourced
basis. MedQuist's future success will depend in part on the continued market
acceptance of its transcription services and the continued trend towards
outsourcing of transcription services to third-party providers such as MedQuist.
A reduction in demand or increase in competition in the market for its
transcription services, or decline in sales of its transcription services, could
have a material adverse effect on MedQuist's business, financial condition and
results of operations.
Changes in the Health Care Industry. The health care industry is subject to
changing political, economic and regulatory influences that may affect the
outsourcing arrangements of health care providers. Many federal and state
legislators from time to time announce proposed programs to reform the United
States health care system at both the federal and state level. These programs
may contain proposals to increase governmental involvement in health care, lower
reimbursement rates and otherwise change the environment in which providers
operate. Health care providers may react to these proposals and the uncertainty
surrounding such proposals by curtailing outsourcing arrangements or deferring
decisions regarding the use of outsourced services. In response to this
environment, many health care providers are consolidating to create larger
health care delivery organizations. This consolidation reduces the number of
potential customers for MedQuist's
5
<PAGE>
services, and the increased bargaining power of these organizations could lead
to reductions in the amounts paid for MedQuist's services. The impact of these
developments in the health care industry is difficult to predict and could have
a material adverse effect on MedQuist's business, operating results and
financial condition.
Inability to Expand Into New Markets. To date, MedQuist's services have
been purchased primarily by the medical records departments of hospitals.
However, health care services are increasingly being provided at sites other
than hospitals, such as outpatient clinics and physician practice groups.
MedQuist intends to attempt to increase its limited presence in these alternate
site markets. In addition, MedQuist intends to market its services to direct
patient care departments within hospitals. Because MedQuist has limited
experience in non-hospital markets and in direct patient care departments within
hospitals, it may find that significant modifications to its services are
necessary before they become useful to a customer or that it may have to adjust
its pricing downward. Further, because MedQuist intends to market its services
to more departments within hospitals and to hospital related clinics and
physician practice groups, purchases of MedQuist's services by these new clients
will require approval by different managers at the customer as opposed to the
medical records department managers by whom MedQuist is better known. MedQuist's
business, operating results and financial condition may be materially and
adversely affected if such efforts are not successful.
Competition. The transcription services industry remains highly fragmented
and primarily consists of small, local or regional companies. The Medical
Transcription Industry Alliance estimates that there are over 1,500 medical
transcription service companies in the United States. As a result, MedQuist
competes with a large number of third party transcription companies that offer
services that are similar to MedQuist's services and that target the same
customers and qualified transcriptionists as MedQuist. MedQuist believes that
its ability to compete depends upon many factors within and outside of its
control, including the timing and market acceptance of new services and service
enhancements developed by MedQuist and its competitors, service quality,
performance, price, reliability, customer service and support and ability to
attract qualified transcriptionists.
In addition, MedQuist anticipates increasing competition from other
companies that were not traditionally in the medical transcription business. For
example, IDX Systems Corporation ("IDX") recently announced the acquisition of
EDIX Transcription, one of MedQuist's larger competitors. IDX is a provider of
health care information services and stated that it acquired EDIX because of
perceived synergies of the medical transcription business (data input) and
health information management businesses and is an example of an existing
company that could become a competitor. Such potential competitors could have
substantially greater financial, technical and marketing resources than
MedQuist. As a result, such potential competitors, if they were to enter the
medical transcription business, may be able to respond more quickly to evolving
technological developments, changing customer needs or emerging technical
standards or to devote greater resources to the development, promotion or sale
of their services.
MedQuist also competes with several other substantial national companies
including Transcend Services, Inc., Rodeer Systems, Inc., and a subsidiary of
Harris Corp. ("Harris"). Harris is a multi-billion dollar entity and has
substantially greater financial resources than MedQuist. MedQuist's services
also compete with the in-house transcription staffs of potential customers.
While MedQuist believes that its growth and earnings have significantly
benefitted from the outsourcing by health care providers of non-patient care
functions, including transcription services, the current trend could change
direction and cause such health care providers to bring all or some of those
services in-house.
In addition, competition may increase due to consolidation of transcription
companies. Current and potential competitors may establish cooperative
relationships with third parties to increase the ability of their services to
address the needs of MedQuist's current and prospective customers. Increased
competition may result in price reductions for MedQuist's services, reduced
operating margins and the inability of MedQuist to increase its market share,
any of which would have a material adverse effect on MedQuist's business,
financial condition and results of operations. MedQuist cannot assure that it
will be able to compete successfully against
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current or future competitors or that competitive pressures will not have a
material adverse effect on MedQuist's business, financial condition and results
of operations.
Dependence on Proprietary Rights; Risks of Infringement. MedQuist's success
is dependent upon its proprietary technology. MedQuist regards the software
underlying its services as proprietary, and relies primarily on a combination of
contract, copyright and trademark law, trade secrets, confidentiality agreements
and contractual provisions to protect its proprietary rights. MedQuist has no
patents or patent applications pending, and existing trade secrets and copyright
laws afford only limited protection. Despite MedQuist's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of
MedQuist's software or to obtain and use information that MedQuist regards as
proprietary. Policing unauthorized use of MedQuist's software is difficult.
MedQuist cannot assure that its efforts to maintain the confidentiality of its
trade secrets and proprietary information will effectively prevent disclosure of
MedQuist's confidential information or provide meaningful protection for
MedQuist's confidential information if there is unauthorized use or disclosure,
or that MedQuist's trade secrets or proprietary information will not be
independently developed by MedQuist's competitors. MedQuist cannot assure that
its copyrights will provide competitive advantages for MedQuist's products or
that they will not be challenged or circumvented by MedQuist's competitors.
Litigation may be necessary to defend against claims of infringement, to enforce
copyrights of MedQuist, or to protect trade secrets and could result in
substantial cost to, and diversion of efforts by, MedQuist. MedQuist cannot
assure that it would prevail in any such litigation.
MedQuist is not aware that any of its software, trademarks, or other
proprietary rights infringe the proprietary rights of third parties. However,
MedQuist cannot assure that third parties will not assert infringement claims
against MedQuist in the future. Any such claims, with or without merit, can be
time-consuming and expensive to defend or require MedQuist to enter into royalty
or licensing agreements or cease the infringing activities. The failure to
obtain such royalty agreements, if required, and MedQuist's involvement in such
litigation, could have a material adverse effect on MedQuist's business, results
of operations and financial condition.
Confidentiality Requirements. The medical information transcribed by
MedQuist is extremely sensitive. In providing its services, MedQuist is subject
to certain contractual, statutory, regulatory and common law requirements
regarding the confidentiality of such medical information. MedQuist requires its
personnel to agree to keep all medical information confidential and monitors
compliance with applicable confidentiality requirements. Failure to comply with
such confidentiality requirements could result in material liability to
MedQuist.
Year 2000. There are numerous issues associated with the programming code
in existing computer systems as the year 2000 approaches. The "year 2000
problem" is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two-digit year value to 00. The
significant issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. MedQuist relies on its systems in operating and monitoring all
aspects of its business. MedQuist also relies heavily on the external systems of
its customers, suppliers and other organizations with which it does business.
MedQuist management is in the process of assessing its internal and external
systems to assure MedQuist is prepared for the year 2000. Management does not
anticipate that MedQuist will incur significant expenses or be required to
invest heavily in computer systems improvements to be year 2000 compliant.
However, significant uncertainty exists concerning the potential costs and
effects associated with any year 2000 compliance. To date, no material issue has
been identified as they relate to MedQuist's efforts to identify year 2000
issues.
However, despite MedQuist's efforts thus far to address year 2000
compliance, MedQuist cannot guarantee that all internal or external systems will
be compliant, or that its business will not be materially adversely affected by
any such non-compliance.
7
<PAGE>
Certain Anti-Takeover Provisions. The New Jersey Shareholders Protection
Act prohibits MedQuist from entering into certain business combination
transactions with any shareholder of MedQuist which owns 10% or more of the
outstanding voting securities of MedQuist, except under certain limited
circumstances. In addition, MedQuist's Amended and Restated Certificate of
Incorporation gives the Board of Directors the authority without shareholder
approval to issue shares of preferred stock, in one or more series, with rights,
preferences and privileges that could adversely affect the voting power and the
other rights of the holders of the MedQuist common stock. MedQuist's Amended and
Restated Certificate of Incorporation provides for staggered terms for the
members of the Board of Directors such that no more than one-third of its
members stands for re-election in any one year. MedQuist has also entered into
certain severance arrangements which provide for payments to certain of its
officers upon a "change in control" (as defined therein) of MedQuist. Moreover,
the terms of the MedQuist 1992 Stock Option Plan provide that outstanding
options automatically vest and become exercisable upon a change in control.
These provisions and arrangements may have the effect of delaying, deferring or
making more costly a change in control of MedQuist including transactions in
which shareholders might otherwise receive a premium for their shares over the
then current market price and, therefore, could adversely effect the market
price of the MedQuist common stock.
8
<PAGE>
Use of Proceeds
All net proceeds from the sale of MedQuist common stock will go to the
selling shareholder. Accordingly, MedQuist will not receive any proceeds from
the sale of the shares by the selling shareholder.
Selling Shareholder
The following table provides certain information as of the date of this
prospectus regarding the selling shareholder's ownership of MedQuist common
stock and as adjusted to reflect the sale of the shares offered under this
prospectus. All of the shares being offered by the selling shareholder were
acquired by him as a result of MedQuist's acquisition of Transcriptions Ltd. of
Florida, Inc. The shares are being registered to permit public secondary trading
in the shares and the selling shareholder may offer the shares after resale from
time to time. See "Plan of Distribution."
<TABLE>
<CAPTION>
% of
# of Shares # of Shares # of Shares Shares
Owned Prior Being Owned Owned
to the Offered After the After the
Offering (1) for Sale Offering Offering
------------ ----------- ----------- --------
<S> <C> <C> <C> <C>
Jeffrey Krieger (2) 809,000 800,000 9,000 *
</TABLE>
- ------------------------------------------------------------
* Less than one percent of the outstanding common stock of MedQuist.
(1) Beneficial ownership is determined in accordance with the rules of the SEC,
and generally includes voting or investment power with respect to securities.
Shares of MedQuist common stock subject to options or warrants currently
exercisable or exercisable within 60 days of the date hereof are deemed
outstanding for computing the percentage ownership of the person holding such
options or warrants, but are not deemed outstanding for computing the percentage
ownership of any other person.
(2) Mr Krieger is the former president and former sole shareholder of TL of
Florida. Includes 80,000 shares of MedQuist Common Stock owned of record by MD
Oppenheim, as escrow agent.
Plan of Distribution
The selling shareholder has not advised MedQuist of any specific plans for
distributing his MedQuist common stock covered by this prospectus. The selling
shareholder or his pledgees, donees, transferees or other successors in
interest, may sell all, a portion or none of the securities offered by him
hereby from time to time. Any such sales may be in one or more transactions
(which may include block transactions) on the Nasdaq National Market, in
negotiated transactions, through put or call options transactions relating to
the shares, through short sales of shares, or a combination of such methods of
sale, at market prices prevailing at the times of such sales or at negotiated
prices. Such transactions may or may not involve brokers or dealers. The selling
shareholder has advised the Company that he has not entered into any agreements,
understandings, or arrangements with any underwriters or broker-dealers
regarding the sale of his securities, nor is there an underwriter or
coordinating broker acting in connection with the proposed sale of any shares by
the selling shareholder. Broker-dealers may receive compensation in the form of
underwriting discounts, concessions or commissions (which compensation may be in
excess of customary commissions). The selling shareholder and any broker-dealers
that participate in the distribution of the shares may be deemed to be
underwriters and any commissions received by them and
9
<PAGE>
any profit on the resale positioned by them might be deemed to be underwriting
discounts and commissions under the Securities Act.
There can be no assurance that the selling shareholder will sell any or all
of his shares of MedQuist common stock offered hereby. The Company will receive
no proceeds from any sales of MedQuist common stock hereunder by the selling
shareholder.
The Registration Statement of which this prospectus is a part has been
filed with the Commission by the Company in accordance with an agreement between
the Company and the selling shareholders, pursuant to which the Company has
agreed to pay the filing fees, costs and expenses associated with the
Registration Statement. Any commissions, discounts or other fees payable to
broker dealers in connection with the sale of the shares shall be borne by the
selling shareholder. The selling shareholder will pay his own legal and
accounting fees and any other expenses incurred by him.
In addition, any securities covered by this prospectus that qualify for
sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144
rather than pursuant to this prospectus. The selling shareholder has advised the
Company that he or his pledgees, donees, transferees or other successors in
interest may sell all or a portion of the securities covered by this prospectus
pursuant to Rule 144 under the Securities Act.
Upon the Company being notified by the selling shareholder that any
material arrangement has been entered into with a broker-dealer for the sale of
MedQuist common stock through a block trade, special offering, exchange
distribution or secondary distribution or a purchase by a broker or dealer, a
supplement to this prospectus will be filed, if required, pursuant to Rule
424(b) under the Securities Act, disclosing (i) the name of each selling
shareholder and of the participating broker-dealer(s), (ii) the number of shares
involved, (ii) the price at which such shares were sold, (iv) the commissions
paid or discounts or concessions allowed to such broker-dealer(s), where
applicable, (v) that such broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in this prospectus
and (vi) other facts material to the transaction. In addition, upon the Company
being notified by the selling shareholder that a donee or pledgee intends to
sell more than 500 shares, a supplement to this prospectus will be filed.
To comply with securities laws of certain states, if applicable, the shares
will be sold in such states only through registered or licensed brokers or
dealers. In addition, in certain states the shares may not be sold unless they
have been registered or qualified for sale in such states or an exemption from
registration or qualification is available or is complied with.
Legal Matters
John M. Suender, MedQuist's Senior Vice President and General Counsel has
given his opinion that the shares offered by the selling shareholder are legally
issued, fully paid and non-assessable. As of the date of this prospectus, Mr.
Suender beneficially owns 47,320 shares of MedQuist's common stock.
10
<PAGE>
Experts
The audited supplemental consolidated financial statements of MedQuist Inc.
and Subsidiaries included in this prospectus and the audited consolidated
financial statements of MedQuist Inc. and Subsidiaries incorporated by reference
in this prospectus and elsewhere in this Registration Statement of which this
prospectus is a part, have been audited by Arthur Andersen LLP, independent
public accounts, as indicated in their reports with respect thereto, and are
included herein and incorporated by reference, respectively, in this prospectus
in reliance upon the authority of said firm as experts in giving said reports.
The audited financial statements of The MRC Group, Inc. and Subsidiary and
Medical Records Corp. incorporated by reference in this prospectus and elsewhere
in this Registration Statement of which this prospectus is a part, have been
audited by Arthur Andersen LLP, independent public accounts, as indicated in
their reports with respect thereto, and are incorporated by reference in this
prospectus in reliance upon the authority of said firm as experts in giving said
reports.
The combined restated financial statements of Medical Records Corp. and
Affiliate, incorporated by reference in this prospectus and elsewhere in the
Registration Statement of which this prospectus is a part, have been audited by
Skoda, Minotti, Reeves & Co., independent public accounts, as indicated in their
report with respect thereto, and are incorporated by reference in this
prospectus in reliance upon the authority of said firm as experts in giving said
reports.
11
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
MEDQUIST INC. AND SUBSIDIARIES
Report of Independent Public Accountants ............................................. F-2
Supplemental Consolidated Balance Sheets, December 31, 1996 and 1997 ................. F-3
Supplemental Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997 ............................................................. F-4
Supplemental Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1996 and 1997 ................................................ F-5
Supplemental Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 ............................................................. F-6
Notes to Supplemental Consolidated Financial Statements .............................. F-7
Supplemental Consolidated Balance Sheets, December 31, 1997 and June 30, 1998
(unaudited) ..................................................................... F-25
Supplemental Unaudited Consolidated Statements of Operations for the nine months ended
September 30, 1997 and 1998 ..................................................... F-26
Supplemental Unaudited Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1998 ..................................................... F-27
Notes to Supplemental Unaudited Consolidated Financial Statements .................... F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MedQuist Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
MedQuist Inc. (a New Jersey corporation) and Subsidiaries as of December 31,
1996 and 1997, and the related supplemental consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. The supplemental consolidated statements
give retroactive effect to the Company's mergers with The MRC Group, Inc. on
December 10, 1998 and Transcriptions Ltd. of Florida, Inc. on November 30, 1998,
which have been accounted for as pooling-of-interests, as described in Note 1.
These supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
MedQuist Inc. and its subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, after giving retroactive effect to the
mergers with The MRC Group, Inc. on December 10, 1998 and Transcriptions Ltd. of
Florida, Inc. on November 30, 1998 as described in Note 1, all in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
December 22, 1998
F-2
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31
---------------------
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 14,940 $ 14,489
Short-term investments ................................................ 3,002 4,003
Accounts receivable, net of allowance of $1,032 and $1,298 ............ 32,315 41,819
Deferred income taxes ................................................. 3,022 2,871
Prepaid expenses and other ............................................ 665 307
-------- --------
Total current assets ................................... 53,944 63,489
Property and equipment, net .............................................. 21,298 25,442
Intangible assets, net ................................................... 79,531 82,382
Other .................................................................... 3,778 2,154
-------- --------
$158,551 $173,467
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ..................................... $ 4,391 $ 6,792
Accounts payable ...................................................... 4,976 5,777
Accrued payroll ....................................................... 5,663 7,175
Accrued expenses ...................................................... 5,431 7,443
-------- --------
Total current liabilities .............................. 20,461 27,187
-------- --------
Long-term debt ........................................................... 9,964 7,589
Other long-term liabilities .............................................. 1,219 1,130
Deferred income taxes .................................................... 6,197 6,188
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock, no par value, 60,000 shares authorized, 31,428 and 32,138
shares issued and outstanding ....................................... -- --
Additional paid-in capital ............................................ 115,978 119,008
Retained earnings ..................................................... 4,732 12,365
-------- --------
Total shareholders' equity ............................. 120,710 131,373
-------- --------
$158,551 $173,467
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1995 1996 1997
--------- ---------- ---------
<S> <C> <C> <C>
Revenues ............................................ $ 109,657 $ 152,109 $ 216,158
Costs and expenses:
Cost of revenues ................................. 86,265 118,359 168,596
Selling, general and administrative .............. 9,144 12,527 15,001
Depreciation ..................................... 5,752 7,372 10,339
Amortization ..................................... 896 3,150 5,652
Restructuring charges ............................ 347 644 2,075
--------- --------- ---------
Total operating expenses .......... 102,404 142,052 201,663
Operating income .................................... 7,253 10,057 14,495
Interest expense, net ............................... 4,252 2,049 469
--------- --------- ---------
Income from continuing operations before income taxes 3,001 8,008 14,026
Income tax provision ................................ 640 2,720 5,293
--------- --------- ---------
Income from continuing operations ................... 2,361 5,288 8,733
Discontinued operations, net of income taxes:
Income from operations ......................... 1,451 -- --
Loss on disposal ............................... (3,180) -- --
--------- --------- ---------
Income before extraordinary item .................... 632 5,288 8,733
Loss on early extinguishment of debt, net of
income tax benefit ............................... (545) -- --
--------- --------- ---------
Net income .......................................... 87 5,288 8,733
Inducement of warrant exercise ...................... -- (707) --
--------- --------- ---------
Net income available to common shareholders ......... $ 87 $ 4,581 $ 8,733
========= ========= =========
Basic income per common share (Note 1):
Income from continuing operations ................ $ 0.23 $ 0.22 $ 0.28
Discontinued operations .......................... (0.17) -- --
Extraordinary item ............................... (0.05) -- --
Inducement of warrant exercise ................... -- (0.03) --
--------- --------- ---------
$ 0.01 $ 0.19 $ 0.28
========= ========= =========
Diluted income per common share (Note 1):
Income from continuing operations ................ $ 0.22 $ 0.20 $ 0.26
Discontinued operations .......................... (0.16) -- --
Extraordinary item ............................... (0.05) -- --
Inducement of warrant exercise ................... -- (0.03) --
--------- --------- ---------
$ 0.01 $ 0.17 $ 0.26
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 ........................ 10,419 $ -- $ 9,860 $ 2,490 $ 12,350
Net income ..................................... -- -- -- 87 87
Exercise of Common stock options,
including tax benefit ........................ 556 -- 1,506 -- 1,506
Merger costs ................................... -- -- (51) -- (51)
Distributions .................................. -- -- -- (1,498) (1,498)
Issuance of Common stock in connection with
business acquisition ......................... 70 -- 185 -- 185
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1995 ........................ 11,045 -- 11,500 1,079 12,579
Net income ..................................... -- -- -- 5,288 5,288
Exercise of Common stock options,
including tax benefit ........................ 98 -- 336 -- 336
Issuance of Common stock in connection with
business acquisitions ........................ 4,773 -- 10,751 -- 10,751
Sale of Common stock, net of expenses .......... 12,532 -- 86,707 -- 86,707
Distributions .................................. -- -- -- (928) (928)
Exercise of warrants, including
inducement charge ............................ 3,016 -- 6,980 (707) 6,273
Purchase and retirement of Common stock, at cost
(36) -- (296) -- (296)
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 ........................ 31,428 -- 115,978 4,732 120,710
Net income ..................................... -- -- -- 8,733 8,733
Exercise of Common stock options,
including tax benefit ........................ 533 -- 2,377 -- 2,377
Sale of Common stock, net of expenses .......... 33 -- 251 -- 251
Distributions .................................. -- -- -- (1,100) (1,100)
Purchase and retirement of Common stock, at cost
(82) -- (676) -- (676)
Exercise of warrant, including
tax benefit .................................. 226 -- 1,078 -- 1,078
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ........................ 32,138 $ -- $ 119,008 $ 12,365 $ 131,373
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................. $ 87 $ 4,581 $ 8,733
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization .......................... 8,295 10,522 15,991
Amortization of debt discounts ......................... 131 704 --
Loss on disposal of discontinued operations ............ 4,286 -- --
Loss on early extinguishment of debt ................... 545 -- --
Deferred income tax provision (benefit) ................ (146) 1,813 (200)
Loss (gain) on disposal of property .................... (1) -- 223
Changes in assets and liabilities, excluding
effects of acquisitions and divestitures--
Accounts receivable, net ........................... (908) (5,571) (7,230)
Prepaid expenses and other ......................... 452 1,403 631
Other assets ....................................... (26) 182 (362)
Accounts payable ................................... 303 (1,983) 543
Accrued payroll .................................... (244) 773 817
Accrued expenses ................................... (123) (1,605) 2,358
Other long-term liabilities ........................ (91) (79) (87)
-------- -------- --------
Net cash provided by operating activities .......... 12,560 10,740 21,417
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment ........................ (7,065) (6,509) (13,716)
Acquisitions, net of cash acquired ......................... (1,825) (26,205) (5,628)
Proceeds from divestiture .................................. 16,723 -- --
Sale (purchase) of investments ............................. 2,400 (5,893) 973
-------- -------- --------
Net cash provided by (used in)investing activities.. 10,233 (38,607) (18,371)
-------- -------- --------
FINANCING ACTIVITIES:
Repayments of long-term debt and subordinated payable ...... (24,485) (38,728) (3,757)
Proceeds from issuance of long-term debt ................... 5,000 7,057 --
Borrowing under line of credit ............................. 265 64 --
Merger costs ............................................... (51) -- --
Distributions .............................................. (1,506) (973) (1,100)
Proceeds from exercise of Common stock options ............. 296 226 1,277
Net proceeds from issuance of Common stock ................. 796 68,714 251
Purchase and retirement of Common stock, at cost ........... -- (296) (676)
Deferred financing costs ................................... (178) -- --
Proceeds from exercise of warrants ......................... -- -- 508
-------- -------- --------
Net cash provided by (used in) financing activities (19,863) 36,064 (3,497)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......... 2,930 8,197 (451)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR .................................................... 3,813 6,743 14,940
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR ........................ $ 6,743 $ 14,940 $ 14,489
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background
MedQuist Inc. (the "Company" or "MedQuist") is a leading national provider of
electronic transcription and document management services to the health care
industry in the United States. MedQuist 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, the Company discontinued its receivables management
business. The operations and net assets of the receivables management business
and the outpatient businesses, which together formed one business segment, have
been accounted for as discontinued operations (see Note 3).
Basis of Presentation
On May 28, 1998, the Company consummated the acquisition of Digital Dictation,
Inc. ("DDI"). The acquisition was accounted for using the pooling-of-interests
method of accounting and the Company's historical financial statements were
retroactively restated to reflect the combination with DDI. The restated
financial statements were issued in Item 5 of the Company's June 30, 1998
quarterly report on Form 10-Q.
On August 18, 1998, the Company consummated the acquisition of Signal
Transcription Network, Inc. ("Signal"). The acquisition was accounted for using
the pooling-of-interests method of accounting and the Company's historical
financial statements were retroactively restated to reflect the Combination with
Signal. The restated financial statements were issued in Item 5 of the Company's
September 30, 1998 quarterly report on Form 10-Q.
On November 30, 1998 and December 10, 1998, the Company consummated the
acquisitions of Transcriptions Ltd. of Florida, Inc. ("TLF") and The MRC Group,
Inc. ("MRC"), respectively, which will be accounted for using the
pooling-of-interests method. Accounting Principles Board Opinion No. 16
precludes the restatement of financial statements for a pooling-of-interests
transaction prior to the issuance of financial statements covering a period
encompassed by the transaction. Accordingly, the accompanying consolidated
financial statements set forth a supplemental presentation of the Company's
financial statements, retroactively restated to reflect the combinations with
TLF and MRC (see Note 11). The accompanying supplemental consolidated financial
statements do not include the estimated transaction costs related to the TLF and
MRC acquisitions of $9,500, and costs associated with known bonus and severance
arrangements with former MRC employees of approximately $1,600, which will be
charged to expense in the quarter ended December 31, 1998. In addition, the
Company expects to record a restructuring charge in the quarter ended December
31, 1998 for certain costs associated with combining the companies, primarily
severance and duplicate facility leases.
F-7
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Pro Forma Presentation for Signal and TLF Income Taxes
Prior to their mergers with the Company, Signal and TLF were taxed as "S"
Corporations. Accordingly, no tax provision is included in the accompanying
supplemental financial statements related to Signal and TLF's income. The
following pro forma presentation sets forth the Company's supplemental income
tax provision, income from continuing operations and income from continuing
operations per share as if Signal and TLF had been taxed as "C" Corporations for
all periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Income from continuing operations before income
taxes, as reported ................................. $ 3,001 $ 8,008 $14,026
Pro forma income tax provision ....................... 1,312 3,357 5,975
------- ------- -------
Pro forma income from continuing operations .......... $ 1,689 $ 4,651 $ 8,051
======= ======= =======
Pro forma income per share from continuing operations:
Basic ........................................... $ 0.16 $ 0.19 $ 0.25
Diluted ......................................... $ 0.16 $ 0.18 $ 0.24
</TABLE>
Common Stock Splits
On September 9, 1997, the Company effected a three-for-two stock split for all
shares of Common stock. Further, on June 15, 1998, the Company effected a
two-for-one stock split for all shares of Common stock. All share data in the
accompanying financial statements has been retroactively adjusted to reflect
both stock splits.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported assets and liabilities and contingency disclosures at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Fees for transcription-related services are based primarily on contracted rates,
and revenue is recognized upon the rendering of services and delivery of
records.
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.
F-8
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Investments
Investments held by the Company consist primarily of investments in
high-quality, fixed-income bonds with varying maturities and rates. At December
31, 1996 and 1997, these investments totaled $5,975 and $4,003, respectively,
and are included in short-term investments and long-term other assets in the
accompanying supplemental consolidated balance sheets. In accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," debt securities that the Company has
both the intent and ability to hold to maturity are carried at amortized cost.
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 two to seven years for furniture, equipment and
software, and the lease term for leasehold improvements. Repairs and maintenance
costs are charged to expense as incurred. Additions and betterments are
capitalized. Gains or losses on disposals are charged to operations. Certain
internally developed software costs totaling $171, have been capitalized in 1997
in accordance with the AICPA's Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which was
early adopted by DDI prior to its merger with the Company. These costs include
$142 of salaries and fringe benefits for software developers and $29 of
telecommunications and outside consultant costs. Such costs will be amortized,
beginning in 1998, using the straight-line method over the estimated useful life
of five years.
Intangible Assets
Intangible assets consist primarily of the excess of cost over the net asset
value of acquired businesses, customer lists, non-compete agreements and
employee bases. The excess of cost over the net asset value related to the May
1994 acquisition of Transcriptions, Ltd. (see Note 2) is being amortized over 40
years. The excess of cost over the net asset value related to other acquisitions
is being amortized over 20-30 years. Customer lists and employee bases are being
amortized over 10-20 years and five years, respectively. Non-compete agreements
are amortized over their terms, ranging from 1.5 years to four years. Subsequent
to its acquisitions, the Company continually evaluates whether later events and
circumstances have occurred that indicate that the remaining estimated useful
life of intangible assets may warrant revision or that the remaining balance may
not be recoverable. When factors indicate that intangible assets should be
evaluated for possible impairment, the Company uses an estimate of the related
undiscounted cash flows in measuring whether the intangible asset should be
written down to fair value. Measurement of the amount of the impairment will be
based on appraisal, market value of similar assets or estimated discounted
future cash flows resulting from the use and ultimate disposition of the assets.
As of December 31, 1997, management believes that no revision to the remaining
useful lives or write-down of intangible assets is required.
Preferred Stock Investment
During 1997, MRC invested $1,200 for an approximate 10% preferred stock equity
interest in Articulate Systems, Inc. The investment has been accounted for under
the cost method of accounting and is included in long-term other assets in the
accompanying supplemental consolidated balance sheets.
F-9
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
MRC Restructuring Charges
In 1995, MRC's board of directors approved a management plan to close certain
client service centers (CSC's) in order to reduce costs and improve operating
efficiencies. The cost of implementing the plan totaled approximately $347 and
was primarily related to long-term non-cancelable leases. The charge was
recognized in 1995 in accordance with the criteria set forth in EITF 94-3;
Liability Recognition For Costs to Exit An Activity (Including Certain Costs
Incurred In A Restructuring) and is reflected in the consolidated statement of
operations as restructuring charges.
In 1996, MRC's board of directors approved a separate management plan to close
and or merge several redundant CSC's as well as certain corporate offices in
order to reduce costs and improve operating efficiencies. The plan was
essentially completed during 1997 and included the cost of exiting certain
facilities, primarily related to non-cancelable leases, and employee severance
costs. Costs associated with the plan of approximately $644 have been recognized
in 1996 in accordance with EITF 94-3 and are reflected in the supplemental
consolidated statement of operations as restructuring charges.
In 1997, MRC's board of directors approved a separate management plan to close
and/or merge several redundant CSC's in order to further reduce costs and
improve operating efficiencies. The plan anticipated completion during 1998 and
included the cost of exiting certain facilities, primarily related to
non-cancelable leases and the disposition of fixed assets, and employee
severance costs. Costs associated with the plan of approximately $2,075 have
been recognized in 1997 in accordance with EITF 94-3 and are reflected in the
supplemental consolidated statement of operations as restructuring charges.
Included in this amount is approximately $705 for the disposal of assets and
approximately $800 in severance and employee contract buy outs. The balance is
primarily related to non-cancelable lease costs. The severance costs are
attributable to eight individuals from various levels of operational and senior
management.
As of December 31, 1996 and 1997, approximately $870 and $1,733 of these
activities had not been completed and are included in accrued expenses in the
supplemental consolidated balance sheets. All other costs have been paid or
charged to the accrual.
Advertising Costs
The Company charges advertising costs to expense as incurred. Advertising
expense was $191, $329 and $678 for the years ended December 31, 1995, 1996 and
1997, respectively.
Research and Development Costs
Research and development costs are expenses as incurred. There were no research
and development costs in 1995. Total research and development costs were
approximately $450 and $550 for the years ended December 31, 1996 and 1997,
respectively.
F-10
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Statements of Cash Flow Information
For the years ended December 31, 1995, 1996 and 1997, the Company paid interest
of $3,841, $1,404 and $1,027, respectively, and income taxes of $521, $1,700 and
$3,162, respectively. Capital lease obligations of $612, $191 and $174 were
incurred on equipment leases entered into in 1995, 1996 and 1997, respectively.
In 1996, $500 of debt was exchanged for shares of capital stock.
The following table displays the net noncash financing activities resulting from
the Company's business acquisitions accounted for under the purchase method (see
Note 2):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Noncash net assets acquired ............... $ 24,724 $ 35,724 $ 8,965
Less- Seller notes and payables ........... (22,714) (3,318) (3,337)
Common stock issued ....................... (185) (6,201) --
-------- -------- --------
Net cash paid for business acquisitions $ 1,825 $ 26,205 $ 5,628
======== ======== ========
</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. 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 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-11
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The table below sets forth the reconciliation of the numerators and denominators
of the basic and diluted income per share computations for income from
continuing operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------------------------
1995 1996 1997
--------------------------------- -------------------------------- ---------------------------------
PER PER PER
SHARE SHARE 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 ...... $2,361 10,289 $ 0.23 $5,288 24,138 $ 0.22 $8,733 31,726 $ 0.28
Effect of
dilutive
securities ...... -- 552 (0.01) -- 1,906 (0.02) -- 1,632 (0.02)
------ ------ ----- ------ ------ ------ ------ ------ ------
Diluted income
from continuing
operations ...... $2,361 10,841 $ 0.22 $5,288 26,044 $ 0.20 $8,733 33,358 $ 0.26
====== ====== ===== ====== ====== ======= ====== ====== ======
</TABLE>
For the years ended December 31, 1995, 1996 and 1997, 645, 1,288 and 1,961
Common stock options and warrants were excluded from the diluted computation
because their effect would be anti-dilutive.
New Accounting Pronouncement
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. Management believes that SFAS
No. 131 will have no effect on the Company's financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. ACQUISITIONS
Effective May 1, 1994, the Company purchased substantially all of the assets of
Transcriptions, Ltd. and affiliates ("Transcriptions"), as well as assumed
certain liabilities, as defined, for $16,930 in cash, including acquisition
costs of $322, plus the payment of Transcriptions' interest bearing debt of
$5,816, plus a deferred purchase price based on future operating results.
Effective December 29, 1995, and in connection with the sale of the receivables
management division (see Note 3), the Company fixed the deferred purchase price
by agreeing to pay the former owners of Transcriptions $18,375 in cash and issue
2,584 shares of Common stock (valued at $4,550 for financial reporting purposes)
on August 31, 1996.
F-12
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
2. ACQUISITIONS -- (CONTINUED)
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.
In July 1996, MRC acquired all of the outstanding capital stock of Medical
Records Corp. The former shareholders of Medical Records Corp. received total
consideration of approximately $27,000, consisting of cash, notes and shares of
Common stock. The acquisition was accounted for as a purchase, and the results
of Medical Records Corp. are included in the accompanying supplemental
consolidated financial statements from the date of the acquisition. In
connection with the acquisition, MRC assumed certain acquisition-related
liabilities from Medical Records Corp. The cost of the acquisition has been
allocated on the basis of the estimated fair market value of the assets acquired
and liabilities assumed. The allocation resulted in goodwill and other
intangible assets of approximately $33,015, which are being amortized over lives
of 1.5 to 30 years.
The following unaudited pro forma summary presents the results of operations of
the Company as if the payment of the Transcriptions deferred purchase price,
which causes additional amortization and interest expense, and the Medical
Records Corp. acquisition had occurred on January 1, 1995.
YEAR ENDED DECEMBER 31
------------------------
1995 1996
---- ----
Revenues ..................................... $ 152,259 $ 179,683
Income (loss) from continuing operations ..... (4,053) 726
Basic and diluted income (loss) per share from
continuing operations ................... (.39) .03
From 1995 through 1997, the Company completed several smaller acquisitions
accounted for using the purchase method. Pro forma information is not presented
as these acquisitions are not material to the Company.
Certain of the acquisitions provide for additional consideration to be paid if
net future billings to defined customers exceed specified contractual levels.
These provisions expire in 2000 and 2001, and are generally payable on a
quarterly basis. When the contingency is resolved and additional consideration
is due, the Company accounts for the payment as additional purchase price and
amortizes the additional amount paid over the remaining life of the asset.
In 1998, the Company completed certain acquisitions accounted for under the
pooling-of-interests method (see Note 11).
3. DISCONTINUED OPERATIONS
In December 1995, the Company sold its receivables management business for total
consideration of $17,330. The accompanying financial statements reflect the
receivables management business as discontinued operations. For the year ended
December 31, 1995, the discontinued operation generated revenue of $18,767 and
net income of $1,451. The 1995 divestiture generated an after-tax loss of
$3,180, which includes net income of $113 related to operations from the
November 14, 1995 measurement date through the December 29, 1995 disposal date.
F-13
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
4. PROPERTY AND EQUIPMENT
DECEMBER 31
-----------------------
1996 1997
---- ----
Furniture, equipment and software ............. $ 37,098 $ 46,608
Leasehold improvements ........................ 911 1,341
-------- --------
38,009 47,949
Less- Accumulated depreciation and amortization (16,711) (22,507)
-------- --------
$ 21,298 $ 25,442
======== ========
In 1995, MRC evaluated the remaining estimated useful lives of certain
equipment, including dictation equipment and related software. As a result, the
remaining lives of these assets were shortened, which resulted in an increase in
depreciation expense of $741 in 1995.
5. INTANGIBLE ASSETS
DECEMBER 31
----------------------
1996 1997
-------- --------
Excess of cost over net asset value of
acquired businesses ................ $ 62,940 $ 64,600
Customer lists ....................... 14,880 21,552
Non-compete agreements ............... 3,305 3,405
Employee base ........................ 2,439 2,514
Other ................................ 122 137
-------- --------
83,686 92,208
Less- Accumulated amortization ....... (4,155) (9,826)
-------- --------
$ 79,531 $ 82,382
======== ========
F-14
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1997
-------- --------
<S> <C> <C>
Line of credit ................................................. $ 329 $ 132
Note payable to bank ........................................... 6,650 5,250
Note payable to former shareholders' of
Medical Records Corp. ...................................... 2,000 2,000
Subordinated convertible 6% promissory note, due September 2003,
converted in January 1998 .................................. 1,288 1,288
Promissory notes, repaid in January 1998 ....................... 979 3,797
Capital lease obligations ...................................... 2,910 1,786
Other .......................................................... 199 128
-------- --------
14,355 14,381
Less- current portion .......................................... (4,391) (6,792)
-------- --------
$ 9,964 $ 7,589
======== ========
</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.
In addition to acquisitions, the revolver can be used for working capital and
general corporate purposes. To the extent any amounts under the revolver are
repaid, other than acquisition term loans, the Company may reborrow such
amounts. The credit facility requires the Company to maintain certain financial
and non-financial covenants, including limitations on capital expenditures and
dividends.
For the year ended December 31, 1997, the Company did not incur any interest
expense on the revolving credit facility as there were no borrowings on this
credit facility during the year. For the years ended December 31, 1995 and 1996,
the Company incurred interest expense of $498 and $49 on the revolving credit
facility, at a weighted average interest rate of 8.96% and 9.78%. The highest
outstanding borrowings under the revolver during 1995 and 1996 were $7,332 and
$2,534, respectively.
In connection with the acquisition of Medical Records Corp., MRC entered into a
note agreement with a bank. The note was for $7,000 with an interest rate of
LIBOR plus 1.65%, which totals approximately 7.3% at December 31, 1997. The note
is secured by substantially all of MRC's assets. The agreement requires the
payment of interest quarterly along with equal monthly principal payments of
$117 through September 2001. The note requires the maintenance of certain
financial covenants, including a minimum net income covenant.
F-15
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
6. LONG-TERM DEBT -- (CONTINUED)
In connection with the acquisition of Medical Records Corp., MRC issued seven
year, 8% unsecured notes to former shareholders of Medical Records Corp. for
$2,000. The notes require the payment of interest quarterly, with annual
principal payments of $500 beginning in July 2000.
In December 1995, MedQuist restructured its prior credit facility. In connection
with the restructuring, the Company charged to expense, as an extraordinary
item, the related deferred financing costs of $826, increasing the 1995 net loss
by $545.
In January 1998, the subordinated convertible 6% promissory note was converted
into 172 shares of Common stock at a conversion price of $7.48 per share.
Long-term debt maturities as of December 31, 1997, are as follows:
1998 ................................. $ 6,792
1999 ................................. 1,736
2000 ................................. 1,972
2001 ................................. 1,585
2002 ................................. 508
2003 and thereafter .................. 1,788
----------
$ 14,381
==========
7. SHAREHOLDERS' EQUITY
On September 9, 1997, the Company effected a three-for-two stock split for all
shares of Common stock. Further, on June 15, 1998, the Company effected a
two-for-one stock split for all shares of Common stock.
In May 1996, MedQuist consummated a secondary public offering of its Common
stock, selling 6,600 shares at a price of $5.67 per share. In June 1996, the
underwriters exercised their overallotment option for an additional 922 shares.
After deducting the underwriters' discount and offering expenses, the net
proceeds to the Company were $39,442.
In connection with the 1992 issuance of a senior subordinated note, the Company
sold to the holder for $1,100 warrants to purchase 1,732 shares of Class A and
1,068 shares of Class B Preferred Stock at an exercise price of $2.50 per share.
Each share of Class A and Class B Preferred Stock was convertible into one share
of Common stock. During 1994, the holder was issued additional warrants and all
warrant exercise prices were reset at $2.43, in accordance with the antidilution
provisions of the original warrant agreement. Simultaneous with the closing of
the secondary stock offering, the Company and the holder agreed that the holder
would exercise the warrants by tendering the $7,000 principal amount of the
senior subordinated notes and simultaneously converting the shares of Preferred
stock received upon such exercise into 2,888 shares of Common stock. As an
inducement for the holder to exercise the warrants and convert the Preferred
stock, the Company issued the holder 128 additional shares of Common stock. This
inducement, valued at $707 or $0.04 per diluted share, has been recorded as a
deduction from the net income available to common shareholders in 1996.
F-16
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
7. SHAREHOLDERS' EQUITY
In connection with the Company's May 1994 credit agreement, the Company issued
the agent bank warrants to purchase 226 shares of Common stock at an exercise
price of $2.25 per share. These warrants were exercised on June 12, 1997 by the
agent bank for proceeds to the Company of $508.
In connection with the sale of equity securities to certain investors in 1992
and 1993, warrants to purchase Common stock were issued by MRC to these
investors. The warrants were fully vested and exercisable at the date of
issuance and have terms which permit conversion into Common stock at specified
prices during periods ranging from four to five years. The fair value of the
warrants at the date of grant was de minimis and therefore no compensation
expense has been recorded in the accompanying financial statements. At December
31, 1996 and 1997, warrants to purchase 194 shares at a weighted average
exercise price of $12.69 were outstanding. All of the warrants outstanding at
December 31, 1997 are exercisable. The warrants were exercised in 1998.
8. STOCK OPTION PLANS
MedQuist has three stock option plans that provide for the granting of options
to purchase an aggregate of 5,860 shares of Common stock to eligible employees
(including officers) and nonemployee directors of the Company. Options granted
may be at fair market value of the Common stock or at a price determined by a
committee of the Company's board of directors. The stock options vest and are
exercisable over periods determined by the committee.
Information with respect to MedQuist's options is as follows:
OPTION PRICE AGGREGATE
SHARES PER SHARE PROCEEDS
------ ------------- --------
Outstanding, December 31, 1994 1,500 $0.67 -$ 2.25 $ 2,510
Granted ................... 918 2.42 - 3.17 2,594
Exercised ................. (520) 0.67 - 2.42 (796)
Canceled .................. (136) 0.67 - 2.25 (259)
------ ------------- --------
Outstanding, December 31, 1995 1,762 0.67 - 3.17 4,049
Granted ................... 961 2.80 - 6.94 4,509
Exercised ................. (98) 1.14 - 5.13 (226)
Canceled .................. (90) 3.17 (285)
------ ------------- --------
Outstanding, December 31, 1996 2,535 1.14 - 6.94 8,047
Granted ................... 918 5.21 - 16.52 10,988
Exercised ................. (533) 1.14 - 10.41 (1,277)
Canceled .................. (94) 4.37 - 16.52 (481)
------ ------------- --------
Outstanding, December 31, 1997 2,826 $1.14 -$16.52 $ 17,277
===== ========
At December 31, 1997, there were 1,255 exercisable options at an aggregate
exercise price of $3,664 and 624 additional options available for grant under
the plans.
F-17
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
8. STOCK OPTION PLANS -- (CONTINUED)
The options outstanding and exercisable by exercise price at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUSTANDING LIFE PRICE EXERCISABLE PRICE
---------------- ---------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.14 - $ 3.83 1,365 6.15 $ 2.40 1,135 $ 2.33
5.13 - 11.31 894 8.72 6.54 90 6.68
13.82 - 16.52 567 9.96 14.41 30 13.81
------ ----- ------- ----- ------
2,826 7.73 $ 6.11 1,255 $ 2.92
====== ===== ======= ===== ======
</TABLE>
MRC has reserved 1,291 shares of Common stock for issuance under its Amended and
Restated 1992 Employee Stock Option Plan (the "Plan"). The options have been
granted at amounts equal to or in excess of the fair market value of MRC's
Common stock as determined by the board of directors. The options vest over
periods ranging from the date of grant to five years as determined by the board
of directors at the date of grant. As of December 31, 1997, the Company had 774
shares outstanding under the Plan and 480 shares available for grant.
The board of directors also has issued options in addition to those issued under
the Plan. The number of shares that may be granted under this arrangement has
not been limited. These options have been granted at amounts equal to or in
excess of fair market value of MRC's Common stock as determined by the board of
directors. The options vest over periods ranging from the date of grant to ten
years as determined by the board of directors at the date of grant. As of
December 31, 1997, the board of directors had granted 647 shares under this
arrangement.
F-18
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
8. STOCK OPTION PLANS -- (CONTINUED)
Information with respect to MRC's options is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
------ ------------ --------
<S> <C> <C> <C>
Outstanding, December 31, 1994 653 $ 8.19 - $13.56 $ 12.76
Granted ................................ 659 8.19 - 12.45 8.70
Forfeited/canceled ..................... (631) 12.45 - 13.56 12.47
Exercised ............................. (36) 8.19 8.19
------- ---------------- ----------
Outstanding, December 31, 1995 ............ 645 8.19 - 12.45 8.64
Granted ................................ 709 8.31 - 10.48 10.09
Forfeited/canceled ..................... (66) 8.31 - 12.45 8.44
------- ---------------- ----------
Outstanding, December 31, 1996 ............ 1,288 8.19 - 12.45 9.45
Granted ................................ 232 10.48 10.48
Forfeited/canceled ..................... (99) 8.31 - 12.45 9.59
------- ---------------- -----------
Outstanding, December 31, 1997 ............ 1,421 $ 8.19 - $12.45 $ 9.37
====== ================= ==========
Options exercisable at December 31, 1997 .. 741 $ 8.19 - $12.45 $ 9.10
====== ================ ==========
</TABLE>
The weighted average grant date fair value of MRC options granted during 1995,
1996 and 1997 was $8.70, $10.09 and $10.48, respectively. The weighted average
remaining contractual life of the MRC stock options outstanding at December 31,
1997 was 8.05 years.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and the related interpretations in accounting for
its stock option plans. Had compensation cost for the Company's Common stock
options been determined based upon the fair value of the options at the date of
grant, as prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income (loss) available to common shareholders
would have been the following pro forma amounts:
YEAR ENDED DECEMBER 31
-----------------------------------
1995 1996 1997
------ -------- --------
Net income (loss):
As reported ..................... $ 87 $ 4,581 $ 8,733
Pro Forma ....................... (758) (1,893) (6,656)
Basic net income (loss) per share:
As reported ..................... .01 .19 .28
Pro forma ....................... (.07) (.08) (.21)
Diluted net income (loss) per share:
As reported ..................... .01 .17 .26
Pro forma ....................... (.07) (.08) (.21)
F-19
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
8. STOCK OPTION PLANS -- (CONTINUED)
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
expected lives of five to ten years. The above pro forma amounts may not be
indicative of future amounts because option grants prior to January 1, 1995 have
not been included and because future option grants are expected.
9. INCOME TAXES
The income tax provision consists of the following:
YEAR ENDED DECEMBER 31
-------------------------------------
1995 1996 1997
------- ------- -------
Current:
State and local....... $ 181 $ 79 $ 1,176
Federal .............. 161 1,536 4,317
------- ------- -------
342 1,615 5,493
Deferred ................. (146) 1,105 (200)
------- ------- -------
$ 196 $ 2,720 $ 5,293
======= ======= =======
YEAR ENDED DECEMBER 31
--------------------------------------
1995 1996 1997
------- ------- -------
Continuing operations .... $ 640 $ 2,720 $ 5,293
Discontinued operations:
Income from operations 796 -- --
Loss on disposal ..... (959) -- --
Extraordinary item ....... (281) -- --
------- ------- -------
$ 196 $ 2,720 $ 5,293
======= ======= =======
F-20
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
9. INCOME TAXES -- (CONTINUED)
A reconciliation of the statutory federal income tax rate to the effective
continuing operations income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate .................. 34.0 % 34.0 % 35.0 %
State income taxes, net of federal benefit ......... 6.5 % 3.0 % 3.0 %
Impact of Signal and TLF "S" Corporation status .... (22.2)% (8.0)% (4.9)%
Other .............................................. 3.0 % 5.0 % 4.6 %
---- ---- ----
21.3 % 34.0 % 37.7 %
==== ==== ====
</TABLE>
Signal and TLF were taxed as an "S" Corporation prior to their mergers with
MedQuist. Accordingly, the former Signal and TLF shareholders were taxed
individually on their companies' taxable income. Therefore, no tax provision is
included in the accompanying supplemental financial statements related to Signal
and TLF's net income (see Note 1).
The tax effected temporary differences that give rise to deferred income taxes
are as follows:
DECEMBER 31
--------------------
1996 1997
------- -------
Deferred tax asset:
Restructuring accruals .... $ 119 $ 602
Carryforwards ............. 2,005 338
Accruals and reserves ..... 1,570 2,237
------- -------
$ 3,694 $ 3,177
======= =======
Deferred tax liability:
Accumulated depreciation ... $(1,522) $(1,475)
Accumulated amortization ... (3,970) (3,518)
Deferred compensation ...... 224 210
Other ...................... (1,601) (1,711)
------- -------
$(6,869) $(6,494)
======== =======
MRC has a net operating loss carryforward of approximately $441 at December 31,
1997 that expires through 2011. MRC also has alternative minimum tax credit
carryforwards of $162 at December 31, 1997. It is expected that these
carryforwards will be utilized in 1998 prior to MRC's merger with MedQuist.
At December 31, 1997, the tax bases of Signal's net assets approximated their
reported amount for financial statement purposes. However, Signal and the
Company have elected to treat their merger as an asset purchase for income tax
purposes. Accordingly, the Company recorded a deferred tax asset and an increase
in additional paid-in capital of approximately $4,600 in the quarter ended
September 30, 1998, which represents the tax effect of goodwill that will be
recorded for income tax purposes.
F-21
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
10. COMMITMENTS AND CONTINGENCIES
Rent expense for operating leases was $2,433, $5,053 and $4,599 for the years
ended December 31, 1995, 1996 and 1997, respectively. Minimum annual rental
commitments for noncancelable operating leases having terms in excess of one
year as of December 31, 1997, are as follows:
1998 .......................... $ 4,921
1999 .......................... 3,899
2000 .......................... 2,733
2001 .......................... 1,588
2002 .......................... 682
2003 and thereafter ........... 230
--------
$ 14,053
The Company has an employment agreement, as amended, with a former Chief
Executive Officer who is currently a director of the Company. The agreement
entitles this individual to receive retirement benefits of $75 per year for life
plus certain other benefits, as defined. Included in other long-term liabilities
is $631 and $544 at December 31, 1996 and 1997, respectively, related to these
retirement benefits. The employment agreement also requires the Company to loan
the former Chief Executive Officer's estate the necessary funds to exercise any
options owned by the individual at the time of his death.
The Company has a severance plan for certain executive officers that provides
for one-time payments in the event of a change in control, as defined. No
liabilities are currently required to be recorded with respect to this plan.
In the normal course of business, the Company is a party to various claims and
legal proceedings. Although the ultimate outcome of these matters is presently
not determinable, management of the Company, after consultation with legal
counsel, does not believe that the resolution of these matters will have a
material effect upon the Company's financial position or results of operations.
11. ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1997
On May 28, 1998, the Company completed the acquisition of approximately 94% of
the outstanding capital stock of DDI and on July 31, 1998 acquired the remaining
shares. The Company issued 912 shares in exchange for all DDI shares. The
acquisition was accounted for using the pooling-of-interests method of
accounting. Accordingly, the Company's historical financial statements were
retroactively restated to reflect the combination with DDI.
On August 18, 1998, the Company completed the acquisition of Signal, which was
accounted for using the pooling-of-interests method. The Company issued 619
shares of its Common stock and approximately $1,500 in cash in exchange for all
Signal capital stock. The Company's historical financial statements have been
restated to reflect the combination with Signal. Signal and the Company have
elected to treat their merger as an asset purchase for income tax purposes. The
Company recorded a deferred tax asset of approximately $4,600 that was credited
directly to shareholders' equity in the quarter ended September 30, 1998 to
reflect the tax effect of goodwill that will be recorded for tax purposes (see
Note 9).
On November 30, 1998, the Company completed the acquisition of TLF, which will
be accounted for using the pooling-of-interests method. The Company issued 800
shares of its Common stock for all TLF capital stock.
F-22
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
11. ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1997 -- (CONTINUED)
Accordingly, the Company's supplemental consolidated financial statements have
been restated to reflect the combination with TLF.
On September 18, 1998 the Company signed a definitive merger agreement with MRC
and on December 10, 1998, the merger was consummated. Pursuant to the agreement,
the Company exchanged each share of MRC Common stock and each share of MRC
Preferred stock on an as-converted basis for 0.5163 shares of its Common stock.
In total, the Company issued 8,662 shares of its Common stock to the former MRC
shareholders and options to purchase an aggregate of 1,543 shares to the former
MRC option holders. The MRC merger will be accounted for as a
poling-of-interests. Accordingly, the Company's supplemental consolidated
financial statements have been restated to reflect the merger with MRC.
Revenue and net income as previously reported for the years ended December 31,
1995, 1996 and 1997, and as restated for the pooling of interests transactions
is as follows:
YEAR ENDED
DECEMBER 31, 1997
-------------------------
REVENUES NET INCOME
-------- ----------
MedQuist, as previously reported ..... $ 84,590 $ 7,631
DDI .................................. 10,026 616
Signal ............................... 9,294 1,100
TLF .................................. 4,131 712
MRC .................................. 108,117 (1,326)
-------- --------
Restated ............................. $216,158 $ 8,733
======== ========
YEAR ENDED
DECEMBER 31, 1996
-------------------------
REVENUES NET INCOME
-------- ----------
MedQuist, as previously reported ..... $ 61,480 $ 3,477
DDI .................................. 6,937 440
Signal ............................... 8,058 842
TLF .................................. 3,934 882
MRC .................................. 71,700 (1,060)
-------- --------
Restated ............................. $152,109 $ 4,581
======== ========
YEAR ENDED
DECEMBER 31, 1995
-------------------------
REVENUES NET INCOME
-------- ----------
MedQuist, as previously reported ..... $ 45,127 $ (1,667)
DDI .................................. 5,058 104
Signal ............................... 7,120 1,135
TLF .................................. 3,172 642
MRC .................................. 49,180 (127)
-------- --------
Restated ............................. $109,657 $ 87
======== ========
F-23
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
11. ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1997 -- (CONTINUED)
Prior to their mergers with the Company, Signal and TLF were taxed as "S"
Corporations. The above net income (loss) amounts do not include a "C"
Corporation income tax provision for Signal and TLF of approximately $672, $637
and $682 for the years ended December 31, 1995, 1996 and 1997, respectively.
12. QUARTERLY SUPPLEMENTAL FINANCIAL DATA (UNAUDITED)
Year Ended December 31, 1997:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues ......................... $49,914 $52,999 $55,269 $57,976
Income before income taxes ....... 3,283 4,557 4,632 1,554
Net income ....................... 2,058 2,931 2,910 834
Basic net income per share ....... 0.07 0.10 0.10 0.02
Diluted net income per share ..... 0.06 0.09 0.09 0.02
</TABLE>
F-24
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 14,489 $ 25,207
Accounts receivable, net of allowance of $1,298 and $1,821 ............ 41,819 47,494
Prepaid expenses and other current assets ............................. 7,181 3,666
-------- --------
Total current assets ................................... 63,489 76,367
Property and equipment, net .............................................. 25,442 27,184
Other assets ............................................................. 2,154 4,132
Intangible assets, net ................................................... 82,382 83,116
-------- --------
$173,467 $190,799
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ..................................... $ 6,792 $ 2,038
Accounts payable ...................................................... 5,777 4,879
Accrued expenses ...................................................... 14,618 23,736
-------- --------
Total current liabilities .............................. 27,187 30,653
Long-term debt ........................................................... 7,589 4,982
Other liabilities ........................................................ 1,130 751
Deferred income taxes .................................................... 6,188 3,131
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock, no par value, 60,000 shares authorized, 32,138 and 33,123
shares issued and outstanding ....................................... -- --
Additional paid-in capital ............................................ 119,008 127,930
Retained earnings ..................................................... 12,365 22,767
Unrealized gain on marketable securities .............................. -- 585
-------- --------
Total shareholders' equity ............................. 131,373 151,282
-------- --------
$173,467 $190,799
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL (UNAUDITED) CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
Nine Months Ended September 30,
-------------------------------
1997 1998
---- ----
Revenues ................................. $ 158,182 $ 199,790
Costs and expenses:
Cost of revenues ...................... 123,112 154,041
Selling, general and administrative ... 10,692 12,831
Depreciation .......................... 7,454 9,470
Amortization .......................... 4,090 2,794
Transaction costs ..................... -- 2,182
--------- ---------
Total operating expenses 145,348 181,318
Operating income ......................... 12,834 18,472
Interest income (expense), net ........... (362) 211
--------- ---------
Income before income taxes ............... 12,472 18,683
Income tax provision ..................... 4,573 6,935
--------- ---------
Net income ............................... $ 7,899 $ 11,748
========= =========
Basic net income per share ............... $ 0.25 $ 0.36
========= =========
Diluted net income per share ............. $ 0.24 $ 0.34
========= =========
Pro forma amounts (Note 3):
Income before income taxes, as reported $ 12,472 $ 18,683
Income tax provision .................. 5,132 7,405
--------- ---------
Net income ............................ $ 7,340 $ 11,278
========= =========
Basic net income per share ............ $ 0.23 $ 0.34
========= =========
Diluted income per share .............. $ 0.23 $ 0.33
========= =========
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL (UNAUDITED) CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ......................................................... $ 7,899 $ 11,748
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Compensation expense for stock options ................................ -- 404
Deferred tax provision ................................................ 388 (270)
Loss on disposal of property .......................................... 90 1
Depreciation and amortization ......................................... 11,544 12,264
Changes in assets and liabilities, excluding
effects of acquisitions and divestitures--
Accounts receivable, net .......................................... (4,873) (5,362)
Prepaid expenses and other current assets ......................... 78 (824)
Other assets ...................................................... 8 (110)
Accounts payable .................................................. 435 (898)
Accrued payroll ................................................... 1,807 2,533
Accrued expenses .................................................. 1,121 6,689
Other long-term liabilities ....................................... (69) (68)
-------- --------
Net cash provided by operating activities .................. 18,428 26,107
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment ....................................... (10,397) (11,203)
Acquisitions, net of cash acquired ........................................ (5,153) (5,804)
Purchases of investments .................................................. 1,202 4,610
-------- --------
Net cash used in investing activities ........................... (14,348) (12,397)
-------- --------
FINANCING ACTIVITIES:
Net borrowings on revolving line of credit ................................ (329) 60
Repayments of long-term debt .............................................. (2,114) (5,287)
Repayments of obligations under capital leases ............................ (229) (380)
Net proceeds from issuance of Common stock ................................ 1,485 --
Proceeds from exercise of Common stock options ............................ -- 1,668
Distributions ............................................................. (860) (1,014)
Repurchase and retirement of Common stock ................................. (467) --
Proceeds from the exercise of warrants .................................... -- 1,961
-------- --------
Net cash used in financing activities ............................. (2,514) (2,992)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................................... 1,566 10,718
CASH AND CASH EQUIVALENTS, BEGINNINGOF PERIOD ................................ 14,940 14,489
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................... $ 16,506 $ 25,207
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest .................................................................. $ 792 $ 467
======== ========
Income taxes .............................................................. $ 2,059 $ 5,006
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
F-27
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(IN THOUSANDS)
NOTE 1. BASIS OF PRESENTATION
The information set forth in these statements is unaudited. The information
reflects all adjustments, consisting of normal recurring adjustments that, in
the opinion of management, are necessary for a fair presentation. Results of
operations for the period ended September 30, 1998 are not necessarily
indicative of the results of operations for the full year. Certain information
in footnote disclosures normally included in financial statements have been
condensed or omitted in accordance with the rules and regulations of the
Securities and Exchange Commission.
On November 30, 1998 and December 10, 1998, the Company consummated the
acquisitions of Transcriptions Ltd. of Florida, Inc. ("TLF") and The MRC Group,
Inc. ("MRC"), respectively, which will be accounted for using the
pooling-of-interests method. Accounting Principles Board Opinion No. 16
precludes the restatement of financial statements for a pooling-of-interests
transaction prior to the issuance of financial statements covering a period
encompassed by the transaction. Accordingly, the accompanying consolidated
financial statements set forth a supplemental presentation of the Company's
financial statements retroactively restated to reflect the combinations with TLF
and MRC (see Note 3). The accompanying supplemental consolidated financial
statements do not include the estimated transaction costs related to the TLF and
MRC acquisitions of $9,500, and costs associated with known bonus and severance
arrangements with former MRC employees of approximately $1,600, which will be
charged to expense in the quarter ended December 31, 1998. In addition, the
Company expects to record a restructuring charge in the quarter ended December
31, 1998 for certain costs associated with combining the companies, primarily
severance and duplicate faculty leases.
NOTE 2. MRC RESTRUCTURING CHARGES
In 1995, 1996 and 1997, MRC's board of directors approved various management
plans which resulted in restructuring charges in the amounts of $347, $644 and
$2,075, respectively. The charges were recorded in accordance with the criteria
set forth in EITF 94-3; Liability Recognition For Costs To Exit An Activity
(Including Certain Costs Incurred In A Restructuring). During the first nine
months of 1998, non-cancelable lease costs of $196, asset disposal costs of $291
and severance costs of $110 were paid and charged against the restructuring
accrual. At September 30, 1998, the remaining accrued restructuring costs
balance in accrued liabilities is $1,136. The components of this balance include
$556 for non-cancelable lease costs, $414 for asset disposal costs and $166 for
severance and employee contract buy-outs. The Company anticipates that the
restructuring will be completed during 1998, however, certain accrued
restructuring costs will remain outstanding until all obligations are paid.
NOTE 3. ACQUISITIONS
During 1998, the Company completed three acquisitions accounted for using the
purchase method and one immaterial acquisition accounted for using the
pooling-of-interest method. Pro forma information is not presented as the
acquisitions are not material to the Company.
On May 28, 1998, the Company completed the acquisition of approximately 94% of
the outstanding capital stock of Digital Dictation, Inc. ("DDI" and on July 31,
1998 acquired the remaining shares. The Company issued 912 shares in exchange
for all DDI shares. The acquisition was accounted for using the
pooling-of-interests method of accounting. Accordingly, the Company's historical
financial statements were retroactively restated to reflect the combination with
DDI.
F-28
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED -- IN THOUSANDS)
NOTE 3. ACQUISITIONS -- (CONTINUED)
On August 18, 1998, the Company completed the acquisition of Signal
Transcriptions Network, Inc. ("Signal"), which was accounted for using the
pooling-of-interests method. The Company issued 619 shares of its Common stock
and $l.5 million in cash in exchange for all Signal capital stock. The Company's
historical financial statements have been restated to reflect the combination
with Signal. Signal and the Company have elected to treat their merger as an
asset purchase for income tax purposes. The accompanying consolidated balance
sheets include a deferred tax asset of approximately $4,600 that was credited
directly to shareholders' equity in the quarter ended September 30, 1998 to
reflect the tax effect of goodwill recorded for tax purposes in the Merger.
On November 30, 1998, the Company completed the acquisition of TLF, which will
be accounted for using the pooling-of-interests method. The Company issued 800
shares of its Common stock for all TLF capital stock. Accordingly, the Company's
supplemental consolidated financial statements have been restated to reflect the
combination with TLF.
On September 18, 1998 the Company signed a definitive merger agreement with MRC
and on December 10, 1998, the merger was consummated. Pursuant to the agreement,
the Company exchanged each share of MRC Common stock and each share of MRC
Preferred stock on an as-converted basis for 0.5163 shares of its Common stock.
In total, the Company issued 8,662 shares of its Common stock to the former MRC
shareholders and options to purchase an aggregate of 1,543 shares to the former
MRC option holders. The MRC merger will be accounted for as a
poling-of-interests. Accordingly, the Company's supplemental consolidated
financial statements have been restated to reflect the merger with MRC.
Revenues and net income as previously reported for the nine months ended
September 30, 1997 and 1998 and as restated for the pooling of interests
transactions is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
-------------------------- ----------------------------
REVENUES NET INCOME REVENUES NET INCOME
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
MedQuist, as previously reported $ 60,707 $ 5,422 $ 92,914(a) $ 8,258(a)
DDI ............................ 7,039 425 6,165(b) 253(b)
Signal ......................... 6,834 979 5,281(b) 543(b)
TLF ............................ 3,075 490 3,688 522
MRC ............................ 80,527 583 91,742 2,172
-------- -------- -------- --------
Restated ....................... $158,182 $ 7,899 $199,790 $ 11,748
======== ======== ======== ========
</TABLE>
(a) Includes DDI and Signal amounts from July 1, 1998.
(b) Reflects amounts from January 1, 1998 to June 30, 1998.
Prior to their mergers with the Company, Signal and TLF were taxed as "S"
Corporations. The above net income amounts do not include a "C" Corporation
income tax provision for Signal and TLF of approximately $559 and $470 for the
nine months ended September 30, 1997 and 1998, respectively.
F-29
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED -- IN THOUSANDS)
NOTE 4. NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." This statement established new standards for computing and presenting
earnings per share and requires the restatement of prior year amounts. The
Company adopted SFAS No. 128 effective December 31, 1997.
Basic net income per share is calculated by dividing net income by the weighted
average number of shares of Common stock outstanding for the period. Diluted net
income per share is calculated by dividing net income by the weighted average
number of shares of Common stock outstanding for the period, adjusted for the
dilutive effective of Common stock equivalents, which consist of stock options,
using the treasury stock method.
The table below sets forth the reconciliation of the numerators and denominators
of the basic and diluted net income per share computations:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------
1997 1998
--------------------------------------- ---------------------------------------
NET PER SHARE NET PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic ............ $ 7,899 31,600 $ 0.25 $11,748 32,322 $ 0.36
Effect of dilutive
securities .... -- 1,531 (0.01) -- 2,308 (0.02)
------- ------- -------- ------- ------- --------
Diluted .......... $ 7,899 33,131 $ 0.24 $11,748 34,630 $ 0.34
======= ======= ======== ======= ======= ========
</TABLE>
NOTE 5. NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of and
Enterprise and Related Information." This statement establishes new standards
for segment reporting in the financial statements and is effective for fiscal
years beginning after December 15, 1997. Management believes that SFAS No. 131
will have no effect on the Company's financial statements
NOTE 6. SHAREHOLDERS' EQUITY
On September 9, 1997, the Company effected a three-for-two stock split for all
shares of Common stock. On June 15, 1998, the Company effected a two-for-one
stock split for all shares of Common stock. All shares and per share amounts
have been restated for the stock splits.
F-30
<PAGE>
PART II
Information not Required in the Prospectus
Item 14. Other Expenses of Issuance and Distribution.
The following table shows the estimated expenses of the issuance and
distribution of the securities offered.
SEC Registration Fee...................................... $ 6,777* Legal
Fees and Expenses......................................... 2,000**
Accounting fees and expenses.............................. 2,000**
Transfer agent and registrar fees......................... 1,000**
Printing and Miscellaneous................................ 1,000**
---------
- -------
TOTAL..................................................... $ 12,777
=========
- -------------------
* Actual
** Estimated.
Item 15. Indemnification of Directors and Officers
Section 14A:3-5 of the Business Corporation Act of the State of New Jersey
("NJBCA") permits each New Jersey business corporation to indemnify its
directors, officers, employees and agents against expenses and liability for
each such person's acts taken in his or her capacity as a director, officer,
employee or agent of the corporation if such actions were taken in good faith
and in a manner which he or she reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal
proceeding, if he or she had no reasonable cause to believe his or her conduct
was unlawful. Article 10 of the Company's Bylaws provides that the Company, to
the full extent permitted by Section 14A:3-5 of the NJBCA, shall indemnify all
past and present directors or officers of the Company and may indemnify all past
or present employees or other agents of the Company. To the extent that a
director, officer, employee or agent of the Company has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to in
such Article 10, or in defense of any claim, issue, or matter therein, he or she
shall be indemnified by the Company against expenses in connection therewith.
Such expenses shall be paid by the Company in advance of the final disposition
of the action, suit or proceeding as authorized by the Company's Board of
Directors upon receipt of an undertaking to repay the advance if it is
ultimately determined that such person is not entitled to indemnification.
The Company has a policy insuring it and its directors and officers against
certain liabilities, including liabilities under the Securities Act.
Reference is made to Item 17 of this Registration Statement for additional
information regarding indemnification of directors and officers.
Item 16. Exhibits
4.1 Specimen Stock Certificate [incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-1 (No. 333-3050) filed
with the Commission on April 1, 1996 (the "Registration Statement").
5.1 Opinion of John M. Suender, Senior Vice President and General Counsel,
filed herewith.
23.1 Consent of Arthur Andersen LLP, filed herewith.
23.2 Consent of Arthur Andersen LLP, filed herewith.
23.3 Consent of Skoda, Minotti, Reeves & Co., filed herewith.
23.4 Consent of John M. Suender, Senior Vice President and General Counsel
(included in Exhibit 5.1 to this Registration Statement).
II-1
<PAGE>
24.1 Powers of Attorney. (Included on the Signature Page.)
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high and of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
clauses is contained in periodic reports filed with or furnished to the
Commission by the Company pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in this Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Marlton, State of New Jersey, on December 24, 1998.
MEDQUIST INC.
By: /s/ David A. Cohen
------------------------
David A. Cohen
Chairman and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David A. Cohen and John R. Emery, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign any and all amendments (including, without
limitation, post-effective amendments) to this Registration Statement and any
registration statement filed under Rule 462 under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on December 24,
1998 in the capacities indicated:
Signatures Title
---------- -----
/s/ David A. Cohen Chairman and Chief Executive Officer
----------------------------- (principal executive officer)
David A. Cohen
/s/ John R. Emery Senior Vice President, Treasurer and
- ------------------------------ Chief Financial Officer
John R. Emery (principal financial officer and
principal accounting officer)
/s/ John A. Donohoe, Jr. President, Chief Operating Officer
- ------------------------------ and Director
John A. Donohoe, Jr.
/s/ James R. Emshoff Director
- ------------------------------
James R. Emshoff
[EXECUTIONS CONTINUED ON FOLLOWING PAGE]
II-3
<PAGE>
/s/ William T. Carson Director
- ------------------------------
William T. Carson
/s/ Richard J. Censits Director
- ------------------------------
Richard J. Censits
/s/ John T. Casey Director
- ------------------------------
John T. Casey
/s/ A. Fred Ruttenberg Director
- ------------------------------
A. Fred Ruttenberg
/s/ John H. Underwood Director
- ------------------------------
John H. Underwood
/s/ Terrence J. Mulligan Director
- ------------------------------
Terrence J. Mulligan
/s/ R. Timothy Stack Director
- ------------------------------
R. Timothy Stack
/s/ Edward L. Samek Director
- ------------------------------
Edward L. Samek
/s/ Bruce K. Anderson Director
- ------------------------------
Bruce K. Anderson
/s/ Richard H. Stowe Director
- ------------------------------
Richard H. Stowe
II-4
EXHIBIT 5.1
December 24, 1998
MedQuist Inc.
Five Greentree Centre
Suite 311
Marlton, New Jersey 08053
Re: Registration Statement on Form S-3
Gentleman:
Reference is made to the Registration Statement on Form S-3 of MedQuist
Inc., a New Jersey Corporation (the "Company"), to which this opinion is
attached as an exhibit (the "Registration Statement"). The Registration
Statement relates to the offering and sale by a certain selling shareholder of
up to an aggregate of 800,000 shares of common stock, no par value (the
"Shares"), of the Company which are currently outstanding. Capitalized terms not
otherwise defined herein shall have the meanings ascribed to them in the
Registration Statement.
In this connection, I have examined the Registration Statement, including
the exhibits thereto, the originals or copies, certified or otherwise identified
to my satisfaction, of the Articles of Incorporation and the By-Laws of the
Company as amended to date, and such other documents and corporate records
relating to the Company as I have deemed appropriate for the purpose of
rendering the opinion expressed herein. The opinion expressed herein is based
exclusively on the applicable provisions of the New Jersey Business Corporation
Act.
On the basis of the foregoing, I am of the opinion that the Shares have
been legally issued and are fully paid and non-assessable.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to me under the caption Legal
Matters in the prospectus which is part of the Registration Statement.
Very truly yours,
John M. Suender
Senior Vice President, General Counsel
and Secretary
EXHIBIT 23.1
CONSENT OF ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on MedQuist Inc.'s supplemental consolidated financial statements
included in this registration statement and to the incorporation by reference in
this registration statement of our report dated September 18, 1998 on the
restated consolidated financial statements included in Item 5 in MedQuist Inc.'s
Form 10-Q for the period ended September 30, 1998, and to all references to our
Firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, PA
December 22, 1998
EXHIBIT 23.2
CONSENT OF ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports (i) dated March 3, 1998
(except with respect to the matters discussed in Note 11, as to which the date
is September 18, 1998), on the consolidated financial statements of The MRC
Group, Inc. and Subsidiary included on pages F-27 through F-46 of the S-4
Registration Statement of MedQuist Inc. for the years ended December 31, 1995,
1996 and 1997 and (ii) dated May 1, 1998, on the financial statements of Medical
Records Corp. included on pages F-60 through F-66 of the S-4 Registration
Statement of MedQuist Inc. for the period ended July 19, 1996, all of which are
incorporated by reference in the Form 8-K of MedQuist Inc. dated December 15,
1998 and to all references to our Firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
Cleveland, Ohio,
December 22, 1998
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated February 16, 1996
(except with respect to the matters discussed in Note 2, as to which the date is
May 26, 1998) on the combined financial statements of Medical Records Corp. and
Affiliate included on pages F-53 through F-59 of the S-4 Registration Statement
of MedQuist Inc. for the year ended December 31, 1995, all of which are
incorporated by reference in the Form 8-K of MedQuist Inc. dated December 15,
1998, and to all references to our Firm included in this registration statement.
/s/ SKODA, MINOTTI, REEVES & CO.
Mayfield Village, Ohio,
December 22, 1998
